Egypt fights inflation after its currency devaluation

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Tuesday - 12 December 2017

Egyptian entrepreneurs, such as Ibrahim Soudan, were forced to scour the black market for dollars for most of last year to pay for imports as they battled a crippling foreign currency shortage. Now, though, the country’s banks are flush with greenbacks and the black market for dollars has been wiped out — the result of Cairo’s decision to float the pound in November 2016 to clinch a $12bn International Monetary Fund loan. The devaluation was one of several politically sensitive measures the government took that has earned it plaudits from the IMF and helped lure foreign investors back to the local debt market. Yet for Egyptian business people, the resolution of one problem has triggered a new set of challenges: soaring inflation and rising borrowing costs. The problems are causing some companies to put expansion plans on hold, including Riyada, Mr Soudan’s cheese manufacturer. His business has postponed plans to open a juice factory with a foreign partner, “until we know where we are heading,” he says, citing interest rate rises and the increasing costs of energy, transport and packaging material. “Everything has gone up in a frightening way,” Mr Soudan says. His is not the only business suffering. Companies that have foreign currency debt have been left exposed after the pound lost half its value following its flotation. Manufacturers who rely on Egypt Egypt fightsinflation afteritscurrency devaluation Resolution of one problem triggers a new set of challenges for the country’s businesses 12/17/2017 Egypt fights inflation after its currency devaluation https://www.ft.com/content/dc2871fe-d4f9-11e7-8c9a-d9c0a5c8d5c9 2/5 imported inputs have seen their working capital fall by as much as half. Inflation running at about 30 per cent has also hit the buying power of companies’ customers. Devaluation let in more dollars but has led to inflation and higher borrowing costs © Khaled Desouki /AFP/Getty Images “Who could have a healthy business with these rates?” says Omar al-Shenety, managing director of Multiples Group, a private equity firm and investment bank. “People are borrowing for working capital, but the risk does not justify long-term capital investment. You have to be making sustainable profits in the order of 30 to 35 per cent in order to take loans at 22 to 24 per cent.” The central bank raised its overnight lending rate in July to 19.75 per cent — its second increase this year. The IMF insists the rate rises and the reforms, which included the introduction of a value added tax and cuts to energy subsidies, were necessary. In November, the fund reached a staff-level agreement to disburse a third tranche, worth $2bn, of the $12bn loan.As part of a second review, the IMF said broad reforms, which included the flotation of the pound, were beginning to pay off in terms of“macroeconomic stabilisation and return of confidence.” The IMF believes the interest rate increases were needed to dampen expectations of inflation which the government predicts will fall to 13 per cent by next year. As foreign inflows have increased and remittances have picked up, foreign reserves have swelled from $19bn to $36.7bn at the end of October. Bankers also say they are noticing renewed interest from foreign firms to invest in the Arab world’s most populous nation. Those positives offer little comfort to Mr Soudan and others in the private sector. He says that with more than 60 per cent of his business’s inputs imported, the company’s production costs have 12/17/2017 Egypt fights inflation after its currency devaluation https://www.ft.com/content/dc2871fe-d4f9-11e7-8c9a-d9c0a5c8d5c9 3/5 spiralled. But it has not been able to pass on the increases to consumers, who are also being hit by rising living costs. “We have increased prices on average by 15 per cent because consumers’ purchasing power cannot take more, whereas the increase should have been more like 30 per cent,” Mr Soudan says. His company has been unable to take advantage of the weak pound to boost exports because traditional markets for the Egyptian food industry — Libya, Syria and Yemen — have been plagued by conflict. Business people say they want more supportive policies from the government, including measures to slash bureaucracy and tackle monopolies distorting the market. Sahar Nasr, Egypt’s minister of investment, says these problems are being addressed under a new investment law that provides tax incentives and is intended to reduce red tape. “Investors can expect reduced bureaucracy and red tape, a clear investment policy and easier access to investment opportunities,” she says. “[The law offers] greater transparency and accountability and compelling incentives to invest in lagging regions and high potential sectors.” But Angus Blair, chief operating officer of Pharos Holdings, an investment bank, says it is “imperative for interest rates to go down as quickly as possible”. “Without private sector investment, economic growth will remain below par and there won’t be an improvement in employment figures,” he says. This article has been updated since its original publication on July 30, 2017.