VZCZCXYZ0008
RR RUEHWEB

DE RUEHEG #0361/01 0391416
ZNR UUUUU ZZH
R 081416Z FEB 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 3527
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0255

UNCLAS CAIRO 000361 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, EB/IFD 
TREASURY FOR NUGENT AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EG
SUBJECT: CENTRAL BANK MAINTAINS INTEREST RATES DESPITE RISING 
INFLATION 
 
 
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SUMMARY 
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¶1.  (U) Overall inflation in the Egyptian economy reached 12% 
year-on-year (y-o-y) in December 2006, with the greatest increase in 
food and energy prices.  The Monetary Policy Committee (MPC) of the 
Central Bank of Egypt (CBE) met February 1 and decided to maintain 
interest rates at their current level, despite rising inflation. 
GOE officials continue to attribute inflationary pressure to 
external shocks such as last year's outbreak of Avian Flu and high 
international energy prices.  All political parties in Egypt's 
parliament, and even President Mubarak, have called for GOE action 
to curb inflation and protect low-income earners.  CBE has taken 
some steps to absorb liquidity in the market, but so far, the 
banking sector has not responded as hoped.  The Ministry of Finance 
also recently reduced tariffs to curb food and product input 
prices. 
 
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INFLATION STILL RISING 
---------------------- 
 
¶2.  (U) Inflation continued to climb in December 2006, as overall 
inflation reached 12% y-o-y, a 0.2% increase over November 2006. 
Although costs for some goods and services declined in December, 
food and energy, the average Egyptian's main consumer goods, 
remained high. 
 
Following is a breakdown of basic commodity price increases: 
 
- Bread/cereals - increased 4.3% between 10-11/2006; 
 
- Vegetables - increased 2.9% between 11-12/2006 and 38.2% y-on-y to 
12/2006; 
 
- Meat - increased 24.1% y-o-y to 12/2006; 
 
- Dairy products - increased 16.1% y-o-y to 12/2006; 
 
- Fish/seafood - increased 1.4% between 11-12/2006 and    11.3% 
y-o-y to 12/2006; 
 
- Energy prices - increased 13.1% between 11-12/2006 and 11.5% y-o-y 
to 11/2006. 
 
- Poultry prices fell sharply in preliminary January 2007 figures. 
Prices of white and frozen poultry dropped 2.5% and 2.1%, 
respectively, between November 1, 2006 and January 15.  Analysts 
attribute the decline in poultry prices to new outbreaks of Avian 
Flu discouraging poultry consumption.  A similar phenomenon occurred 
in January/February 2006, after the first outbreaks of Avian Flu in 
Egypt. 
 
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MONETARY POLICY COMMITTEE MEETS 
------------------------------- 
 
¶3.  (U) The MPC met on February 1 and decided to maintain overnight 
lending and deposit rates at 8.75% and 10.75%, respectively, defying 
expectations of a rate hike to counter inflationary pressure.  In a 
press statement, CBE Deputy Governor Tarek Amer noted that the MPC 
decided not to raise interest rates because of signs that inflation 
may slow in the coming months.  The Central Bank continues to 
attribute high inflation to the pass-through effect from the Avian 
Flu outbreak and July 2006 cuts in fuel subsidies.  CBE's view is 
supported by the Minister of Finance, who told a recent meeting of 
the U.S.-Egypt Business Council that he expects inflation to subside 
in the next few months, as world energy prices decline and the 
effects of Avian Flu and subsidy cuts phase out.  Appearing before 
the People's Assembly in late January, Prime Minister Nazif repeated 
his mantra that inflation was less important than maintaining high 
economic growth rates. 
 
-------------------------------- 
STRONG CRITICISM FROM OPPOSITION 
-------------------------------- 
 
¶4.  (U) Egyptian media, along with parliamentarians from all 
parties, including the NDP, have strongly criticized the GOE for not 
taking greater action to curb inflation.    After Nazif's appearance 
before parliament, the Economic Committee of the People's Assembly 
issued a statement claiming that while economic growth was 
important, the GOE had failed to meet its commitment to prevent 
price manipulation and speculative practices.  In a February 5 
meeting with economic ministers, President Mubarak called on them to 
implement monetary and fiscal policies to curb inflation and protect 
 
low income earners. 
 
-------------------- 
STEPS TO CURB PRICES 
-------------------- 
 
¶5.  (U) Although the MPC decided to maintain current interest rates, 
the CBE has taken steps recently to absorb excess liquidity in the 
market.  In January, CBE began holding deposit auctions with rates 
as high as 10.5%.  Bank response to the auctions was weak, however, 
as the deposits could not be resold and were subject to taxes.  CBE 
has not announced any other plans to absorb excess liquidity in the 
short term.  The average bank deposit rate for December 2006 was 
6.9%, resulting in a negative real interest rate. 
 
¶6.  (U) In another attempt to lower prices, the GOE reduced tariff 
rates this week by 25%, resulting in an average tariff of 6.9%, down 
from 9%.  Tariffs on agricultural produce, refrigerators, heaters, 
televisions and ready-to-wear clothes are now less than 10%; cars 
will continue to face a 40% tariff to protect Egyptian auto 
manufacturers.  Minister of Finance YBG told the press the cuts are 
intended to not only counter inflation but to boost the 
competitiveness of Egyptian industries, which will be forced to 
compete with less-expensive imports while enjoying lower production 
costs. 
 
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COMMENT 
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¶7.  (U) Unless inflation subsides in the coming months, the GOE will 
find it increasingly difficult to maintain that external factors are 
pushing up prices.  The challenge will be to convince the public 
that the economy's healthy growth rates are benefiting, or will 
benefit, the average Egyptian.  This may be difficult unless 
economic growth begins producing more jobs for low and semi-skilled 
workers.  Growth remains concentrated in export sectors, where 
expanded production has merely maintained current jobs, rather than 
creating new employment opportunities.