VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #3257/01 3181536
ZNR UUUUU ZZH
R 141536Z NOV 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7449
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0355

UNCLAS CAIRO 003257 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR MATHIASON AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: PGOV ECON EG
SUBJECT:  Egypt:  Inflation Update 
 
REF: Cairo 3021 
 
Sensitive but Unclassified.  Please handle accordingly. 
 
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Summary 
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¶1.  (U) Inflation dropped to 7.5% year-on-year (y/y) in October, 
down from 9.3% y/y in September.  The CBE maintained interest rates 
unchanged at a November 1 meeting, but indicated that inflation 
could reach the upper limit of CBE's "comfort zone."  This is the 
first public sign of a move toward an inflation targeting monetary 
policy.  Recent appreciation of the Egyptian pound (the pound or LE) 
against the U.S. dollar is further evidence that CBE is moving away 
from a pegged exchange rate, a necessary step for inflation 
targeting to work.  While rising international commodity prices are 
driving inflation, greater domestic demand and rising wages have 
also contributed.  Economic growth has not "trickled down" to the 
lower classes, however, and most Egyptian have only experienced the 
downside of growth:  rising prices. 
 
----------------------------- 
Inflation Declines in October 
----------------------------- 
 
¶2.  (U) Egypt's headline inflation rate dropped to 7.5% y/y in 
October, from 9.3% y/y in September, according to figures released 
by the Central Agency for Public Mobilization and Statistics 
(CAPMAS).  CAPMAS has not yet released figures for specific 
categories of the Consumer Price Index (CPI) in October, but 
analysts expect food prices will show the greatest increase, as they 
did in September.  Food prices rose 16.4% in September, due in large 
part to the effect of Ramadan (reftel), which began in mid-September 
and continued through mid-October.  A recent report by the Ministry 
of Social Solidarity indicated that prices of flour increased by 50% 
y/y in October, edible oil by 20% y/y, dairy products by 15% y/y, 
and meat/poultry by 11% y/y. 
 
---------------------------- 
CBE Maintains Interest Rates 
---------------------------- 
 
¶3.  (U) At its November 1 meeting, CBE's Monetary Policy Committee 
(MPC) kept overnight interest rates unchanged at 8.75% (deposit) and 
10.75% (lending).  A press statement after the meeting indicated the 
decision was based on a September inflation figure of 8.8% y/y, 
using the old CPI.  The statement recognized that the rate for 
September increased to 9.3% when using the new CPI introduced that 
same month.  According to CBE, current inflation is driven mainly by 
rising domestic food prices on the back of higher international 
commodity prices.  Rising food prices are driving inflation in other 
sectors, as is increased demand from higher economic growth.  Over 
the medium-term, inflationary pressure could rise above the upper 
level of CBE's "comfort zone," according to the statement.  CBE said 
it would continue to monitor economic developments, especially 
factors underlying inflation, and would not hesitate to adjust 
interest rates to ensure medium-term price stability. 
 
------------------------------------------- 
Inflation Targeting v. Pegged Exchange Rate 
------------------------------------------- 
 
¶4.  (U) This is the first public mention of a "comfort zone" for 
inflation, an indication that CBE is moving toward an inflation 
targeting monetary policy with benchmark interest rates as the 
anchor.  Recent movement in the LE/$ exchange rate is further 
evidence that CBE is moving away from a de facto pegged exchange, a 
necessary step for inflation targeting to work properly.  The pound 
has appreciated 3.8% since July (from 5.75 $/LE to 5.46 $/LE 
currently).  In a recent report on Egypt, Deutsche Bank projected 
the exchange rate would reach 5.35 $/LE by year end, calling the 
appreciation evidence of a "regime shift at CBE." 
 
¶5.  (U) Most of Egypt's imported food commodities, such as wheat, 
corn and edible oil, are priced in U.S. dollars, so Egypt imports 
the inflation that comes with the rising cost of those goods.  While 
the pound's appreciation against the dollar may dampen inflation, 
food prices are likely to continue rising, as approximately 40% of 
Egypt's food imports, mostly processed foods, come from the EU.  The 
pound has recently lost value against the euro, moving from LE 
7.6/1 in July to LE8/1 currently. 
 
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Domestic Demand 
--------------- 
 
¶6.  (U) Although rising import prices are the main inflationary 
pressure in Egypt, domestic growth and higher wages have also 
contributed.  Demand pressures are particularly evident in the 
booming construction sector.  Steel and cement prices have risen 
sharply, with the latter being less susceptible to international 
pressures and more dependent on domestic demand factors.  Average 
ex-factory cement prices have risen from LE177 ($32) in 2003 to over 
LE350 ($64) per ton in 2007.  Bank credit to the private sector has 
also increased significantly, reaching 12.3% in June 2007, up from 
8.6% in June 2006.  Credit growth from the highly liquid banking 
sector is likely to continue over the next year, supporting the 
current investment boom and greater private consumption. 
 
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Wage Growth 
----------- 
 
¶7.  (U) While most analysts note that wages, particularly for the 
lower classes, are not keeping pace with inflation, there are signs 
of rising wages in some sectors.  Official wage data are unreliable, 
but anecdotal evidence suggests that wages for unskilled labor are 
rising in the construction sector.  Construction wages grew 25% over 
the past three years, a level high enough to entice Egyptian workers 
back from the Gulf, according to Minister of Housing Ahmed 
El-Maghrabi.  Speaking to the press, Maghrabi stated that wages for 
unskilled daily labor - used in both construction and agriculture - 
have risen 15% over the past year alone.  His statements were echoed 
by Hanaiya El-Itriby, Head of the Agricultural Research Center, who 
told us that agricultural labor prices are rising, as more day 
laborers are choosing to work on construction sites rather than in 
the fields.  Wages in the textile industry have also increased over 
the last few years.  According to figures released by the Ministry 
of Finance, wages in the garment industry rose from LE350 
($64)/month in 2004 to LE800 ($146)/month currently. 
 
¶8.  (U) Wages for skilled workers are also on the rise.  The GOE 
implemented a 50% increase in teachers' base salaries in June 2007 
and recently announced that journalists' wages will soon go up by LE 
200/month.  A study released in early 2007 by the Hay Group, an 
international human resources consulting firm, predicted an 18% 
increase in fixed salaries (salaries + benefits) for professionals 
and senior managers, based on the salary trends of 85 companies in 
various sectors in Egypt over the last few years.  Construction and 
petroleum/gas companies have been offering internationally 
competitive salaries to attract high-caliber employees in the last 
few years, forcing companies across the board to raise salaries to 
compete for skilled labor. 
 
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Comment 
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¶9. (SBU) While high levels of economic growth and rising wages are 
positive trends, many of the poor have yet to see the benefits of 
economic expansion.  The poor have, however experienced the downside 
of economic growth in the form of higher prices.  Inflation, 
particularly increased food prices, disproportionately affects the 
poor, who spend a higher percentage of their income on basic food 
items.  Saeed El Alfy, Head of Egypt's Consumer Protection Agency 
and a member of the NDP General Secretariat, told us that his agency 
receives thousands of calls a week, 90% of which are complaints 
about high prices.  Although his agency can do nothing to regulate 
prices, the Egyptian public still believes it is the government's 
responsibility to keep prices artificially low.  It is this 
perception that makes rationalizing subsidies, particularly food 
subsidies, such a difficult task for the government, according to El 
Alfy.  The government and the NDP have recently ratcheted up 
attention to the problem, making social issues the key subject of 
the recent NDP conference.  Despite attention to the issue, the 
government has yet to articulate a vision for improving social 
benefits, adding to the frustration of the lower classes. 
RICCIARDONE