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Egypt: Winners and losers of economic transformation

The crisis in Egypt's economy is both a risk and an opportunity. For businesses that are capable of adapting, it could be a boon

Omar El-Shenety , Sunday 4 Sep 2016
Views: 2716
Views: 2716

Economic developments overshadowed all other news in the last few weeks, whether in the form of the high dollar exchange rate, the Central Bank of Egypt’s attempts to suppress the black market, rises in prices and the formal announcement of the start of negotiations with the IMF.

The economy has become the most prominent issue in Egyptian public affairs. People do not care much about the complicated economic indicators, which in most cases they do not understand. However, what raises people’s attention is the level of prices, because rises diminish families’ purchasing power and directly impoverish them.

Perhaps this is the reason behind people’s focus, whatever their class is, on the dollar exchange rate. This is because plenty of products we consume daily are imported, and whose prices rise simultaneously with the dollar’s rise.

It is difficult to deny how hard the situation is in light of the IMF delegation's presence in Egypt in order to discuss a large loan that will help the economy pass its current crisis.

Despite the importance of the IMF agreement, which had a positive impact on the money market and the foreign exchange market, reaching this agreement is not without hardship.

For the government will be obliged to apply critical measures, such as raising the prices of public services, devaluing the Egyptian pound, imposing VAT and privatising some public companies.

This agreement will support the economy quickly, for it will provide more than $20 billion, whether from the IMF or other financial institutions.

This in turn will give the pound and the money market a kiss of life in the short run. But the combined measures accompanying the loan will lead to a big inflationary wave, higher than previous ones people are groaning about.

There is a prevalent belief that the reason for the recent price rise is the dollar and that with the loan it will be controlled and subsequently inflation will be controlled. This belief is wrong to a great extent. Because the rise in prices is due to a set of reasons including the dollar exchange rate rise.

But the obstacles hindering imports and the scarcity of the dollar have an undeniable effect on the availability of commodities, and hence their prices.

It is indisputable that the Egyptian pound will witness further devaluation coinciding with the IMF loan. The scarcity of commodities in the market will increase with imposed hindrances on imports. Therefore, despite the advantages of such an agreement, its social cost is unquestionable. Supposing the loan will control the dollar exchange rate and will end the inflationary wave is far from the truth.

The current situation, which necessitated resorting to global financial institutions and taking critical measures, dates the end of an economic stage and the beginning of another. With any transformation, the economic map is changed and there are winners and losers.

The Egyptian economy is not new to transformations, for it witnessed a huge leap from feudalism and market economy to socialism and nationalisation in the 1950s and 1960s, only to witness another leap from socialism to the "open door policy" and market economy in the 1970s. It was an incomplete leap, however.

The 1990s witnessed the completion of this leap with the privatisation programme, opening up to global markets and the increase of imported products in the basket of products consumed by the Egyptian family, and the flow of foreign investment in Egypt.

In the 1980s and the first part of the 1990s, the economy relied to a great extent on local industrialisation where the economy was able to provide most of the people’s basic needs.

But naturally the consumer’s options were limited to the extent that the people at the time were bragging about buying imported clothes. Trips to the city of Port Said to buy imported goods from the free market became a style of shopping.

The second half of the 1990s saw a signficant transformation where the Egyptian economy opened up to the global economy in a time where the word globalisation was commonly used.

With Egypt’s entry to GATT, it had to open its markets. World markets opened their doors to Egyptian products as well. Egyptian families started to be exposed to a different range of products unseen but in films, or brought by Egyptians coming from abroad. Egyptian products were thrust in a competition they were not ready for.

Transformation from domestic consumption to imports did not happen overnight. Some companies paid attention to this change and responded by changing their activity or at least diversifying it from local manufacturing only to entering trading business, especially imports.

This was manifested in some old families with a long history in the textile industry that decided to transform its age long activity from local manufacturing to importing, especially from China and Turkey. Even after nearly a decade, some of these companies stopped manufacturing and restricted themselves to importing and trade, which were more profitable and less burdensome.

On the other hand, some clung to industry without any competitive advantage and kept bleeding for years due to their inability to compete with imported goods. Others focused on building a competitive advantage in products that aim at particular markets locally and globally, relying on open markets.

The losers were those who clung to industry without a competitive advantage and turned a blind eye to open markets while the winners were those who changed quickly their activities to importing and trade or built large factories relying on bank loans and institutional investment.

In light of the current changes, a transformation is taking place once again, but this time in the opposite direction. With several import restrictions, which will increase with the passage of time, scarcity of hard currency and the rise in the dollar exchange rate, the losers will be the importers.

As for local manufacturers, they have a big opportunity for increasing their output in a market with limited supply that cannot meet demand.

This does not apply to the textile industry only, but includes many other sectors. It will be a winning activity to manufacture aimed at domestic sales in order to meet the demand gap in the market after imports declined, or manufacture aimed at export so as to benefit from the pound’s low value.

Maybe the policy of substituting imports for a domestic product isn’t a successful economic policy on the macro-economic level, where other countries’ experience in this context reveals that state-imposed restrictions on imports are met with similar ones imposed by other countries. Thus, the policy becomes a failure and isolates the economy from the world market.

However, some companies will benefit from this policy, especially those companies that move fast to seize the opportunity. As for those moaning about reduced imports, they will miss the train.

The writer is managing director of Multiples Investment Group.

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