Egypt's exports down 20 percent, hit by energy and FX crunch

Ahram Online , Tuesday 13 Oct 2015

File Photo: Egypt's Ain Sokhna Port (Photo:Reuters)

Export receipts in Egypt fell to $13.9 billion from January to the end of September 2015, down from $17.2 billion in the first nine months of the previous year, according to official data released by Egypt’s Ministry of Trade and Industry on Monday.

Manufacturing exports have been hit by both energy and FX shortages, Hany Farahat, senior economist at Cairo-based CI Capital, told Ahram Online in a telephone interview.

Egypt, which has gone from being a net-exporter to a net-importer of natural gas in recent years, has been diverting most of the fuel to power plants, leaving many factories unable to operate at full capacity.

The government will work to address the issues behind the decline, including securing enough gas for factories to operate at 100 percent capacity, read the statement, quoting newly-appointed Minister of Trade and Industry Tarek Kabil.

A foreign currency crunch is also behind the decline in Egypt’s exports.

“FX shortages is another main factor, because the manufacturing sector relies on imported materials,” said Farahat.

The country is still experiencing a foreign currency shortage crisis almost four years after the uprising that toppled president Hosni Mubarak, as tourism revenues and Foreign Direct Investment have yet to recover to pre-2011 levels.

Egypt’s foreign currency reserves, which amounted to $36 billion on the eve of the revolution, reached a near critical $16.3 billion at the end of September 2015, only about a billion dollars more than what the country needs to cover three months worth of vital imports.

The Central Bank of Egypt, which has used Egypt’s foreign currency reserves to prop up the pound since the 2011 uprising, has allowed the pound to drop by 9.5 percent of its value since January 2015 to LE7.83 against the dollar and imposed new limits to curb the currency black market. However, many have suggested that the devaluation is insufficient.

“A combination of a tightly managed exchange rate and a relatively high rate of inflation has caused the price of domestically-produced goods to rise at a faster pace than those in export markets,” said Jason Tuvey, Middle East Economist at Capital Economics, in an emailed note on 10 September.

 “The pound has appreciated by around 10 percent against the euro since the middle of last year which has further dented the competitiveness of exports to the euro-zone, the destination for around a quarter of Egypt’s exports,” said Tuvey.

An IMF delegation that visited Cairo in September recommended that Egypt adopt a more flexible exchange rate.

"We consider a gradual move toward a more flexible exchange rate policy focused on achieving a market-clearing rate would serve Egypt’s interests,” said the Fund.

The Central Bank of Egypt has not set a target for the exchange rate.

New measures to curb the foreign currency black market, which flourished in the turmoil of the past years, have unintentionally stifled business activity, including exports.

In addition to capital controls in place since the 2011 revolution, the new limits imposed by the Central Bank include a $50,000 a month cap on foreign currency bank cash deposits to make it more difficult for traders to buy hard currency from the black market and deposit it in the banks.

The difficulties in obtaining hard currency to import raw materials has hit industries such as chemicals and building materials, which have seen their exports drop by 34 percent and 25 percent from January to September this year, respectively, according to official figures.

“Our exports have contracted by a quarter this year, partly because of currency restrictions, the shortage of dollars and the artificial strength of the Egyptian pound,” Walid Gamal El-Din, head of the Building Materials Exports Council, told the Financial Times’ Heba Saleh last month.

Declining global food prices has also meant that Egypt’s food exports have been facing tougher competition, and therefore a potential loss of export revenue said Farahat.

The value of Egypt’s food industry exports was down almost 11 percent to total $1.9 billion from January to September this year, while the value of agricultural exports fell to $1.7 compared to $1.9 billion in the same period of 2014.

“There is more severe competition on the international front with the decline in international commodity prices, which is affecting our competitiveness, and the Egyptian pound has not yet caught up at this moment,” said Farahat.

The FAO’s Food Price Index, a measure of the monthly change in international prices of a basket of food commodities, saw its sharpest drop in 7 years last August before rebounding slightly in September, but remaining 18.9 percent lower than a year before.

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