Egypt non-oil activity continues to contract in April amid higher inflation

Input costs rise and demand falls sharply as the North African country continues to face headwinds from the Ukraine war

A bakery at a market in Cairo. Soaring bread prices sparked by Russia's war in Ukraine have bitten into the purchasing power of Egyptian consumers. AFP

Business activity in Egypt’s non-oil economy continued to contract in April, albeit at a slower pace, as input costs rose and demand fell amid global geopolitical tensions and supply chain disruptions.

The seasonally adjusted S&P Global Egypt Purchasing Managers’ Index rose to 46.9 in April from 46.5 in March. A reading above the neutral 50 mark indicates economic expansion while one below points to contraction.

“Businesses faced a further increase in material and energy costs due to the war in Ukraine and a devaluation of the pound in late March,” S&P Global economist David Owen said. “New orders were also hit as customers reined in their spending, leading to a reduction in employment that was the most marked in exactly one year.”

Egypt, the Arab world’s most populous country, is suffering from rising import costs and energy prices which have affected foreign currency reserves amid the Russia-Ukraine conflict.

The North African country, the world's biggest wheat importer, is heavily reliant on supplies from Russia and Ukraine, which together accounted for 86 per cent of its $2.7 billion wheat imports in 2020.

To mitigate the economic shocks caused by supply chain disruptions and shore up foreign currency reserves, Egypt recently introduced a 130 billion Egyptian pound ($7.1bn) relief package, raised interest rates, let its currency weaken sharply and asked the IMF for support.

The country’s GCC allies also pledged as much as $22bn to help the country to cope with the effects of Russia's war in Ukraine.

Businesses surveyed indicated a decline in domestic orders as well as export sales due to lower demand. Input costs also rose on the back of higher energy prices and a rise in raw material prices, the survey showed.

Oil prices have risen sharply along with other commodities that are feeding into rising inflation. Oil prices rose 67 per cent last year amid strong economic recovery and have surged further following the Russia-Ukraine conflict that is threatening to disrupt global energy flows.

Brent, the benchmark for more than two thirds of the world's oil, climbed to a notch under $140 per barrel in March. MUFG Bank expects Brent to average $135 per barrel in 2022 if the war in Ukraine continues.

Egyptian firms cut their spending on materials and labour due to higher input costs, according to the survey. Businesses also reduced purchasing activity resulting in a “solid reduction” in average stock levels, while employment levels dropped at the quickest rate in a year as companies did not fill vacant positions amid cost pressures and lower demand.

“The continuation of the war in Ukraine meant that firms expect further price and supply challenges, resulting in another relatively downbeat outlook for business activity,” Mr Owen said. “The gap between input prices and output prices also signalled that firms are taking on a large part of the cost burden and delaying price rises until the demand situation has recovered.”