São Paulo – The International Monetary Fund (IMF) announced this week that it will work with Egypt to help bring down inflation, which surpassed the 30% mark per year in February. “The IMF is working to help the government and the Central Bank bring inflation under control and supports the steps the Egyptian authorities are taking to protect its poorest and most vulnerable citizens,” said the Fund’s managing director, Christine Lagarde, through a statement released after a meeting she had with the country’s president, Abdel Fattah El Sisi, on Wednesday (5).

However, Lagarde hasn’t detailed how the Fund will help the country. On Thursday (6), Gerry Rice, the IMF’s director of the Communications Department, said that the Fund will discuss with the Central Bank and the Egyptian government how to best use budget restraint and tighter monetary policy to contain demand and, thus, bring down inflation.

The price indexes in Egypt started to soar after October of last year, when annual inflation rate stood around 14%. In November, the Central Bank turned more flexible the exchange rate, observing an advice by the IMF itself, and the Egyptian pound devaluation that followed is one of the main factors of inflationary pressure. Other factors are the introduction of a value-added tax (VAT) and the elimination of subsidies on fuels, both measures also advised by the Fund.

In a report made public in January, the IMF stated that it expected the inflationary pressure applied by these measures to dissipate in time and that in the 2016/2017 fiscal year it would stand at 18%. The goal is to cut the inflation rate to one digit in the period of three years.

In its latest monetary policy report, the Egyptian Central Bank acknowledges that, despite the annual inflation having surpassed 30% in February, the inflation rate of the month declined to 2.6%, against an average of 4% in the three previous months.

The bank mentions other factors that also applied pressure on the inflation rate, such as the increase in customs tariffs, reduction in the supply of commodities such as rice and sugar, which drives prices up, and “seasonal effects that impacted the prices of fresh fruits and vegetables in February 2017.”

According to the bank, more than half of the items in the basket of goods that make up the inflation rate had a price increase in November, when the pound devalued. In February, only 19% of the items had a price increase. In this sense, the Central Bank acknowledges that the effects of the devaluation are diminishing.

Egypt signed an agreement with the IMF to get a USD 12 billion loan when facing a shortage of foreign currency in the country, thus the adoption of measures advised by the Fund.

Egypt is implementing a strong economic reform program to help the economy return to its full potential, achieve more growth and create more jobs,” said Lagarde. “We recognize the sacrifices made and the difficulties faced by many Egyptian citizens, especially due to high inflation,” she added.

*Translated by Sérgio Kakitani