Egyptian recession threat as non-oil economy shrinks

Egypt’s non-oil economy continued to shrink last month, despite the devaluation of the Egyptian pound halfway through the month, which economists expect will eventually relieve pressure on foreign currency shortages that are hurting businesses in the ­country.

Egypt’s purchasing managers’ index, produced for Emirates NBD bank by the data company Markit, in March fell to 44.5 from 48.1 a month earlier. Any score below 50 indicates that the economy is shrinking. March marks the sixth consecutive month that Egypt’s economy has shrunk, which, if confirmed by official statistics, means that the country has entered a recession.

“The deterioration in business conditions is not entirely surprising as the survey took place at a time of elevated uncertainty that coincided with the devaluation of the Egyptian pound,” said Jean-Paul Pigat, the senior economist at Emirates NBD.

“Looking ahead, we believe that the move to a more competitive exchange rate has now reduced a key source of risk, and could therefore set the stage for a broader economic recovery in the second half of 2016.”

The Egyptian government devalued the country’s currency on March 14 by 13 per cent against the US dollar, to 8.85, down from 7.73.

Most respondents to the survey blamed the slowdown in activity on uncertainty over the government’s currency policy.

The ratings agency Fitch expects that the pound will decline further, to nine pounds to the dollar by the end of the year. This will lead to higher inflation, as the cost of imported goods rises, the ratings agency said.

Between 2014 and March this year, the Egyptian government maintained the dollar peg at a rate economists believed was too high. That led to domestic shortages of foreign currency at home and the emergence of a black market.

The currency shortages posed difficulties for businesses reliant on foreign currency to import goods and materials.

“The data [suggest] that a fall in the pound will result in some short-term pain for the economy,” wrote Jason Tuvey, emerging markets economist at Capital Economics, in a research note.

“There was a steep rise in the input and purchase price components, which suggests that inflation pressures are building … Nonetheless, over a longer horizon, we think that a weaker pound should help to lay the foundations for a period of stronger growth.”

Follow The National’s Business section on Twitter

Share This Post