Patrick Werr: Egypt has paid the price but is yet to reap rewards

Egypt has gone through its painful reforms – adjusting its currency, trimming subsidies, implementing taxes – but it is not yet receiving the economic benefit of the measures.

A vegetables market in Cairo. Egypt’s non-oil activity fell for a 16th consecutive month and the rate of decline was among the fastest of the past four years. Khaled Elfiqi / EPA
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CAIRO // Egypt late last year fin­ally bit the economic bullet. It raised taxes with a new value added tax, raised the price of subsidised fuel and electricity and cut the official value of its currency by more than half against the dollar, among other painful steps.

So when will the economy fin­ally start to improve?

On Sunday, Markit Economics released its January purchasing managers’ index (PMI), which measures private sector non-oil business activity, and the news was not pretty. Activity in Egypt fell for a 16th consecutive month, and the rate of decline was among the fastest in the past four years.

The only months where the contraction was worse were the previous three months, when the currency crisis came to a head, and in July and August of 2013, when much of the country was under curfew following the overthrow of the president Moh­amed Morsi.

Particularly grievous last month was a decline in new export orders, a decline greater even than December’s. You’d think the world would have come rushing to buy Egypt’s goods after the price of the Egyptian pound was slashed in early November.

January was the 20th month in a row where the private sector shed jobs, according to the PMI, which is calculated from a monthly survey of several hundred companies in Egypt.

It has been clear for quite some time that 2017 was going to be an awful year, coming after burdensome fiscal and monetary reforms yet too early to reap the benefits of new gasfields and a possible rebound in tourism or a surge in exports.

Few companies in Egypt are geared for export and many of those that are need imported raw materials, which just became more expensive. New orders from abroad in response to the devaluation may not have come through yet. It will take time to readjust.

The bulk of companies cater for the domestic market and their output has crashed over the past four months as the austerity measures cut into domestic demand.

“A lot of companies are adjusting to the new norm, looking at price hikes, how to protect margins in light of cost increases and how volumes will be hit after price increases,” says Radwa El Swaify, the head of research at the investment company Pharos Holding. “They are ‘adjusting’ as much as the macro picture is.”

Another area that rightfully should be booming after the devaluation is foreign investment. The first investments would normally be coming from companies already in Egypt. But many of these were badly burned by capital controls that grew increasingly onerous over the past five years, making it harder and harder to repatriate profits. Foreign currency debts for importers doubled in terms of Egyptian pounds.

When the devaluation fin­ally did come, some companies were left exposed and took big currency losses. Even now, many companies still can’t get their money out of Egypt. You still can’t walk into a bank and buy dollars easily.

This has undermined the credibility that the government painstakingly built up in the wake of the last major devaluation in January 2003. It now needs to rebuild it. It will take some time before foreign investors are confident enough to expand their operations. They want to get their money out first before they decide to add to Egypt.

Over the course of my career here, I don’t know how many times I’ve heard Egypt’s various governments declare they have floated the pound, only for them to intervene to prevent it from weakening too much. It only took a few months for a new black market to appear after then-prime-minister Atef Obeid announced but only half-heartedly adhered to a flotation in 2003. When Ahmed Nazif’s government did float the currency in December 2004, growth shot up to more than 7 per cent.

Apart from freeing the currency, the government will have to work on securing sustainable sources of dollars.

There are other things it could do, too.

It could teach companies export procedures.

The current tourism season is lost, but the government could be developing strategies to lure high-spending tourists back to the country starting in autumn. A little bit of clever management in major tourist locations could do wonders.

The government should make it easier for new industries such as mining.

The government should abandon any mega-projects apart from infrastructure to support businesses and make life easier for people to commute. It has been doing great work on roads and electricity and on the Suez Canal free trade zone, but I cannot see any value to be gained from the new administrative capital being built outside Cairo or a new nuclear plant.

None of these are likely to bear much fruit until later this year, at least. In the meantime, people, unfortunately, will have to simply tighten their belts.

Patrick Werr has worked as a financial writer in Egypt for 26 years.

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