Egyptian Economy Displays Damage From Inflationary Pressure

(Bloomberg) -- A measure of Egypt's non-oil economy dropped to the lowest in 21 months as inflationary pressures made worse by Russia's invasion of Ukraine as well as a weaker currency led to sharp decreases in output and new orders.

Companies reduced job numbers for the fifth month in a row and business confidence fell to a record in March as Egypt contends with the surging cost of energy, food and raw materials, according to a survey of purchasing managers by S&P Global.

In a glimpse at the conflict's spillover effects on Egypt, its purchasing managers' index declined to 46.5 from 48.1 in February, staying below the 50 mark that separates growth from contraction for the 16th straight month. Non-oil firms experienced the worst declines in output, new orders and stocks of purchases since the first wave of the coronavirus pandemic.

“The downturn was clearest to see in industrial sectors such as manufacturing and construction, where businesses and clients were more greatly exposed to energy and material price rises due to the war,” said David Owen, economist at S&P Global. “Wholesale & retail firms were also hit by a sharp increase in food prices.”

Egypt is a major food importer that buys most of its wheat from the two countries currently at war. Already one of the Middle East's most indebted nations, Egypt has been hit hard by record grain prices and suffered a further disruption from the conflict because Russian visitors previously made up a significant portion of its tourism market.

The most populous Arab nation has requested discussions with the International Monetary Fund on new support that may include a loan. The central bank last month allowed the pound -- which had been stable against the dollar for about two years -- to weaken by more than 15%, and raised interest rates for the first time since 2017.

While the devaluation of the pound “may provide some short term support for the economy, it will also likely accelerate cost pressures,” Owen said. “Some firms have already seen a rise in import prices which could constrain output and force a greater increase in selling charges.”