Egypt’s economy weakens as long wait for reforms goes on

Reuters/Hadeer Mahmoud

• Non-oil activity contracted for 30th month in May, S&P survey found
• But headline PMI figure of 47.8 was highest since February 2022
• ‘Things will only get better’ when Cairo adopts IMF plans, analysts say

Egypt’s non-oil private sector activity contracted for the 30th consecutive month in May, but at a slower pace than the previous 15 months, according to S&P Global’s latest survey. 

Businesses told S&P’s Egypt Purchasing Managers’ Index that high inflation continued to dent sales, output and purchasing. Some of those surveyed for May’s report, issued on Monday, said client orders were recovering.

Analysts have said Egypt’s economy will not improve significantly until the government implements structural reforms – which the IMF and Gulf states have been demanding for more than a year. 

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• IMF urges Egypt to embrace flexible exchange rate

Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, told AGBI the continued contraction was not surprising given high inflation and uncertainty around the future management of the Egyptian pound.

S&P said Egypt’s PMI rose from 47.3 in April to 47.8 in May – still below the 50.0 mark that indicates growth but the highest reading since February 2022. The report also pointed to near-stabilisations in the manufacturing and services sectors.

David Owen, senior economist at S&P Global Market Intelligence, said in a note that inflationary pressures could dissipate further. “Companies signalled that input cost pressures were again much softer than at the beginning of the year, as a period of stabilisation in the Egyptian pound versus the US dollar helped to cool import markets.

“This led to another relatively soft rise in selling charges, providing some hope that consumer price inflation will fall again in May.”

The S&P survey found that sales to foreign customers decreased at the slowest rate in 2023. This may be a sign that Egypt’s weakening currency is making exports more attractive, according to James Swanston, emerging markets economist at Capital Economics.

Egypt’s headline inflation fell to 30.6 percent in April, from 32.7 percent in March. Core inflation, which strips out volatile food and energy prices, dropped from an all-time high of 40.3 percent in February to 39.5 percent in March and 38.6 percent in April. 

“As things stand, we have passed the peak of the headline inflation rate,” said Swanston of Capital Economics. “But it could be a bumpy few months.” 

Swanston pointed to the importance of the IMF reforms. “Without that credible commitment, Egypt’s economy will continue to struggle and underperform over the coming years, he said.

Since the IMF agreed an extended-fund facility for Egypt last October, the government has come under increasing pressure to implement structural reforms, support private sector growth, reduce the state’s footprint in the economy and move towards a more flexible currency policy. 

Analysts say speculation over when and how Cairo will take action is the main cause of uncertainty.

“We are waiting to see what measures the government will take,” said Abu Basha. “Things will only get better when they do what they need to do.”