Global economic activity continues to show varying paces of recovery across countries and economic sectors, as the impact of the COVID-19 pandemic continues to weigh on the outlook, according to the Central Bank of Egypt (CBE).
Prospects for global economic recovery remain contingent on the scale of distribution, as well as the efficacy of vaccines. Global economic and financial conditions are expected to remain accommodative and supportive of economic activity over the medium term, although global yield curves have steepened recently.
Meanwhile, international prices for oil, food, and other commodities have surged to post-pandemic highs, with the level of uncertainty increasing regarding their future price trajectories.
The surge in international oil prices was largely driven by supply side developments, while the increase in the prices of other commodities stemmed from both supply and demand side factors.
International food price forecasts relevant to Egypt’s consumption basket are expected to increase in 2021. This comes alongside upside risks mainly emanating from higher energy costs, according to the World Bank.
In addition, the outlook for Brent crude oil price incorporated in the domestic inflation outlook increased compared to the previous published Monetary Policy Report.
Domestically, cost-recovery for most fuel products has already been achieved. As a result, the pass-through of international oil prices to domestic inflation will be based on the quarterly review of the fuel prices as part of the price indexation mechanism.
This mechanism caps the price adjustments to domestic fuel prices to ±10% every quarter. Since the EGP 0.25/litre cut in select domestic fuel prices in April 2020, Egypt’s Fuel Automatic Pricing Committee decided to keep the announced fuel prices unchanged.
These decisions have led to achieving fiscal savings that were redirected by the government towards containing the novel coronavirus (COVID-19) pandemic and its repercussions on the Egyptian economy.
Egypt’s GDP growth is expected to lower in fiscal year (FY) 2020/21 than the previous fiscal year, reflecting the full year impact of the COVID-19 pandemic, and its related containment measures on the economy.
Given the gradual rollout of vaccines and the subsequent ease in uncertainty, a gradual recovery is expected starting from FY 2021/22. The magnitude and pace of that recovery will largely be a function of the pickup in tourism from the supply side, as well as private domestic demand.
Based on this pattern of recovery and anchored inflation expectations, in addition to projected real monetary conditions, annual headline inflation rates are expected to continue recording single digits.
It is expected that this rate will be affected by unfavourable base effects related to the normalisation of monthly inflation rates in 2021. However, it is anticipated that it will continue hovering around the inflation target’s mid-point of 7% in 2022.
Overall, risks to the above baseline inflation outlook are mainly balanced. Upside risks mainly stem from higher than projected pass through of international commodity prices to inflation.
Downside risks mainly stem from the lower than projected domestic food inflation rates in 2021 and 2022. It has also been affected by the COVID-19 pandemic and its repercussions, causing a prolonged high level of uncertainty to the global economic outlook.
