The Egyptian government is facing an increasingly difficult set of economic circumstances that could raise inflationary pressures and lead to further social unrest, says a report by Standard & Poor’s Ratings Services. Titled “Reliance On Central Bank Finance Could Raise Inflationary Pressures In Egypt,” the report points out that since the popular uprising of 2011, economic growth in the country has been weak and the Central Bank of Egypt (CBE) has seen a sharp drop in its foreign exchange reserves.
Domestic banks continue to be the main investor in government securities, but the government is increasingly resorting to greater financing from the CBE.
“We believe that the depreciating exchange rate, together with increasing central bank financing of the government, is likely to lift inflation in Egypt above already relatively high levels,” said Standard & Poor’s credit analyst Trevor Cullinan. “In our view, strong inflation growth through an erosion of real incomes would reduce the already low standard of living for the majority of the population. It is also likely to add to the existing high levels of political discontent. This may further reduce the government’s willingness to
implement measures to alleviate fiscal and external pressures, putting downward pressure on our sovereign ratings on Egypt.”