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Thndr Claps » Thndr Thinkers💭 » Hany Genena » Is Inflation in Egypt, Imported Inflation?

Is Inflation in Egypt, Imported Inflation?

by Thndr Thinker
September 22, 2022

It is an accepted fact that inflation in Egypt is imported and not the result of high demand and therefore monetary tightening is of little value.

Therefore, it is necessary to verify the accuracy of this hypothesis:

Step by Step:
1. The M0 or Reserve money is the money issued by the central bank, mostly in the form of a printed banknote.

2. Thanks to the fractional reserve system, the M0 turns into multiples of the so-called money supply (M2) through the process of lending by banks.

Any bank that receives liquidity equal to EGP 100 from the central bank in the form of excess liquidity, can lend EGP 100 and this loan ends up as a deposit in another bank.

Since there is a mandatory reserve = 14%, the second bank can lend EGP 86 out of the EGP 100 deposited.

Lending and deposit operations will continue until the volume of deposits reaches several times the EGP 100 that was pumped from the central bank into the first bank. This multiplying is known as the money multiplier.

In Egypt, the volume of M0 reached EGP 1.2 trillion at the end of July 2022, while the M2 (not including foreign currency deposits) amounted to about EGP 5 trillion, which is about 4 times the M0.

3. The higher the rate of growth in the money supply (M2) at a pace that exceeds the growth in the volume of goods and services, the greater the risk of rising inflation rates if taking into account the stability of the money turnover or velocity of circulation, which is largely constant in Egypt.

To summarize:
1. The Central Bank injects excess liquidity (excess reserves) into banks

2. Banks lend excess liquidity and each loan creates a deposit through money multiplier

3. Deposits are a means of payment through the use of checks, transfers, or payment cards, and therefore it is a basic form of money, although it is not printed in the form of banknotes, as the Central Bank does.

4. Too much money chasing too few commodities = classic inflation caused by demand, not supply

In Egypt:
Real GDP growth is estimated at 5.5% in 2022.

The annual growth in M0 in July 2022 = 30%, which is a very high number because it equals an increase in the liquidity surplus of about 300 billion pounds.

The annual growth in the money supply (not including deposits in foreign currencies) in July 2022 = 21%, which is a high growth level, although it has not yet reflected the growth in the M0 in recent months.
So…

There may be many private companies whose activities have been affected by the shortage of dollars, and there are many individuals who have reduced the size of their spending due to the high prices.
But…

The government and many economic bodies and public companies are still financing their spending and investment at a rapid pace through the banking sector, which leads to rapid growth in 1) loans and 2) money supply, and 3) aggregate demand as the above figures show.

Therefore, given the above numbers, it is difficult to assume that the inflation shock is a completely imported shock.

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