Annual inflation in Egypt slowed to 4.2 percent in July, the lowest since November as the country continues to enjoy a raft of economic reforms it took on in 2016.
From floating the Egyptian pounds to reducing the ballooning budget deficit and phasing out unsustainable subsidies, Cairo kick-started reform programmes, as part of the conditions in accessing a $12 billion International Monetary Fund (IMF) loan after its economy suffered huge external imbalances owing to years of political tension.
But it wasn’t too long before these bold reforms paid off. Improvements have been seen in several macroeconomic indicators including inflation, GDP growth, and an exchange rate that have restored competitiveness, place the budget deficit and public debt on a declining path, boost growth, and create jobs while protecting vulnerable groups.
The rate at which goods and services are sold eased to 4.2 percent from a year earlier in July, compared with 5.6 percent in June, according to data published on Monday by the state-run statistics agency, CAPMAS. Real GDP growth for the Northern African nation has also averaged around 5 percent in the last five years, while its ballooning budget deficit which at the time was around 12 percent of its GDP.
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But some 3,048 Kilometres away is Nigeria, which for a larger part, has been battling with a twin evil of spiraling inflation and a real GDP growth crawling behind its population, largely because it has failed to take on bold reforms that would move the needle for its over $400 billion economy
Headline inflation accelerated at its fastest pace in more than two years to 12.56 percent in June from 12.4 in May, driven by a surge in food prices. Meanwhile, analysts are staking their birth of a further acceleration of commodity prices in July Ahead of an official release this week.
“If there is a lesson to learn from Egypt, it is likely that initially-difficult reforms, including FX liberalisation and the lifting of subsidies, can eventually have important economic stability results,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered, said.
“Nigeria has seen little change in its I&E FX rate in the recent past, but with some believing that the parallel market now plays an outsize role in price-setting behaviour, it has not enjoyed any related price-stability benefit. Inflation remains high” Khan said in a mail response to BusinessDay.
Although both economies are never the same in terms of size and structural framework yet Nigeria sailed a similar boat as Egypt in 2016, when it suffered a lengthy recession from the fallout of a global collapse in oil prices, the country’s biggest foreign. But unlike Egypt, it shied away from undertaking the tough reforms that would spur growth and attract the needed investment to create jobs.
Rather, the central bank turned to an unsustainable currency peg which belatedly gave way while the federal government has continued to maintain an expensive petrol subsidy that deters investment.
This has caused Nigeria years of weak growth, ballooning debt burden, and a fall in the standard of living for its timing populace.
Nigerian can learn from Egypt in the aspect of creating a conducive business environment because no matter the growth achieved, foreign investment is still very needed, said Ayodeji Ebo, MD/CEO at Lagos-based Afrinvest Securities.
“The capital controls which limit exit given dollar shortages need to be removed in order to boost investor confidence and attract foreign portfolio investment. Also, liquidity of foreign exchange is key. So, investment policies need to be revised for encouraging the medium-term investment of projects beyond four years,” Ebo said.
For Ebo, rather than adopting a free float exchange rate which helped Egypt to boost the confidence of their foreign investors, he recommended Nigeria adopt a managed float system. “This would help to immediately readjust and devalue the currency when the need arises, rather than delaying and causing a much greater devaluation of the currency as seen in the Nigerian naira,” he said.
Boboye Olaolu, a Sub-saharan economist at Lagos-based CSL Stockbrokers Limited said adopting economic policies should not be a one-side fit for all. “Nigeria can stop subsidies and also increase tariffs but it might not be able to float the naira as Egypt did because it doesn’t have enough exports and domestic production to support dollar inflows. Until it is able to solve some of the domestic problems and boost exports to get other dollar generating sources it might not be able to float the currency,” Olaolu said.
At first, after Egypt floated its currency, inflation jumped as high as 30 percent, while the poverty rate increased as the high inflation eroded consumer’s purchasing power to command more goods.
But tough times they say don’t last, and it didn’t take long before the country’s inflation rate began trending downwards, touching one of its lowest levels. This has put the Central Bank of Egypt in a comfortable position to lower the benchmark interest rate to drive growth. The key interest rate in Egypt was cut to 9.25 percent from the high of 14.75 percent in 2016.
Meanwhile, to fight spiraling inflation and keep investors stay put to its assets, the CBN has kept key interest rates high at 12.5 percent, but this has come at the expense of growth as small businesses willing to expand operations still face a high cost of borrowing
It has also tightened commercial banks’ liquidity in the form of cash reserves (CRR), preventing the excess liquidity from further pressuring inflation; and also, increased the number of items banned from accessing dollars from its official window.
Even though these moves have helped Nigeria’s apex bank in buying some time to keeping the naira stable against the dollar, the message appears to be an indelible mark that has been brought to fore after the wave of the global coronavirus pandemic has crippled businesses and slowed dollar inflows into the country.
Nigeria’s reserve has fallen to $35.6 billion from about $40 billion as at year-end, as dollar inflows continue to dry up.
The Central bank for the third time has devalued the exchange rate at its official window to $379.
The decision to adjust the exchange rate was part of an agreement reached with the IMF in order for Nigeria to access a $3.4 billion loan facility to tame down an impending recession on its economy that is set to contract by as much as 5 percent in 2020, according to IMF forecast.
While Nigeria has expressed willingness in unifying its multiple exchange rates which the IMF and the World Bank have said discourages investments, it is however not showing signs of scrapping and unsustainable fuel subsidy which gulped over N1 trillion last year; and also raised its electricity tariffs to a more reflective one.
The government believes if the N2.3 trillion Economic Sustainability Plan (ESP) if implemented judiciously, would help reduce the impact of the pandemic and quickly set the economy on a growth path of 3 percent by 2021.
2021 budget: Reps approve N13.08 trn expenditures, $40 oil price …
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