Egypt's textile industry would gain from re-pricing its currency

The argument is frequently made that Egypt would gain little from a currency devaluation because it has almost nothing to export – nobody wants to buy its products. Any devaluation would do little more than widen the current account deficit, the argument goes.

Yet quite to the contrary, at least one Egyptian industry, textiles, has proven that it is more than up to the task, if only given the chance.

In the decade before Egypt’s 2011 uprising, cotton textile exports increased by about 19 per cent a year on average, having surged from US$108.9 million in 2001-02 to $628.0m by 2010-11, according to central bank statistics.

Exports of ready-made clothes climbed almost as quickly, jumping by a sizzling 17.6 per cent a year, from $187.2m to $771.2m.

Alas, since the uprising this growth has come to halt, with exports of cotton textiles increasing by only 3.1 per cent annually in the four years to June 2015, and ready-made clothes by only 1.4 per cent.

Textile exports actually contracted in the two years after July 2013, when Mohammed Morsi was removed from power and a degree of political stability was restored. Many smaller companies have shut down entirely.

To be sure, the overvalued pound has not caused all the problems, says Mohamed Kassem, the chairman of the Ready Made Garments Export Council of Egypt.

The government raised the prices of electricity and natural gas in July 2014, with those paid by industry rising especially sharply. Labour and water bills also increased, and because of security concerns the government has made it harder to import many chemicals. All this has happened at a time when textile prices were falling around the world.

The biggest problem remains that the strong pound is pricing Egyptian textiles out of the export market. “The exchange rate is at the top of the list,” Mr Kassem says.

Although the Egyptian pound was devalued against the dollar several times last year, since mid-2013 it has actually strengthened against the euro, the currency of one of Egypt’s main export markets. Meanwhile, the currencies of many of Egypt’s competitors have weakened, making their products more attractive.

The exchange rate is crucial for the success of a project that Mr Kassem is pushing forward: the construction of a new textile city near Minya, 200 kilometres south of Cairo.

About 1.3 million square metres have been set aside for the city, which is to be a joint venture with the China National Textile and Apparel Council. A memorandum of understanding with the Chinese was signed last month. It is to be a completely private investment, Chinese and Egyptian.

The investors plan a textile hub to supply yarns and fabric to garment makers across Africa, where the industry is still in its infancy. They plan to focus on spinning and weaving as well as on dyeing and finishing.

They chose Minya with an eye towards its proximity to the Red Sea, for exports to Sub-Saharan Africa, the Mediterranean and North Africa. This would enable Egyptian producers to provide the speed to market crucial for garment makers.

Egypt has a strong garment industry, says Mr Kassem, but its yarns and fabric industries are not as well established.

Worldwide, the textile industry is worth $450 billion. North Africa, including Egypt, exports $10bn in textiles and Sub-Saharan Africa, $2bn. All are dependent on imported yarn and fabric. African textiles are allowed duty-free entrance into the United States through the African Growth and Opportunity Act, signed in 2000.

In the next five years, exports from the continent could exceed $20bn a year, which translates into huge demand for yarn and fabric, Mr Kassem says.

There is a ready pool of labour in Minya, plus it is part of the government’s plan to develop Upper Egypt. The traditional textile centre of Mahalla on the Nile delta was ruled out mainly for lack of land.

The investors are waiting for the government to deliver the land and provide infrastructure and training support. Eventually they plan a series of such textile cities all the way up the Nile until Aswan.

The textile city could become a significant source of foreign currency for Egypt and provide jobs in a particularly depressed part of the country. But the speed of its implementation, as well as the success of textile exporters in the rest of Egypt, will be closely tied to a currency that does not price its manufacturers out of the market.

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