In conjuncture with Emirates NBD, IHS Markit released their Purchasing Managers’ Index (PMI) for the health of the non-oil private sector on Wednesday. The report found that Egypt’s non-oil private sector has seen a 12-month downturn in business activity largely due to high inflation, currency weakness, and generally high prices due to factors such as the value-added tax (VAT).
Currency weakness relative to the US dollar and a spike in inflation led to a decline in client demand both at home and abroad, which IHS links to not just issues with the Egyptian economy, but the general economic downturn gripping the global economy. IHS states that the newly introduced VAT “led to faster rises in both input and output prices. This contributed to a lack of new work and also motivated a number of companies to cut back on staff,” marking yet another month with lay-offs.
Senior economist at Emirates NBD, Jean-Paul Pigat, stated that, “The introduction of VAT appears to have played a role in curbing output and pushing inflation higher in September. While many of the economic reforms expected in Q4 will ultimately prove beneficial for long-term stability, in the near term they could result in a further deterioration in business conditions for the private sector.”
The report states that a key factor in the worsening business conditions was output that was lower than consumer demand, which was depressed after the sharp rise in prices. Export orders also declined, but at a slower pace than in August. The rise in prices also resulted in no new work or employment opportunities.
IHS and Emirates NDB found that Inflation and the VAT are the main culprits for the higher prices. Egypt’s purchasing power deteriorated as the US dollar continued to appreciate and the Egyptian pound continued to slide. Respondents to the IHS report stated that the recent introduction of VAT led to higher selling prices. The rise in prices reduced the desire for import and input buying for Egyptian consumption or manufacturing.
Job loss was substantial due to higher prices, as workers left companies or were fired from their jobs as businesses turned to cost-cutting measures. The increased difficulties in importing raw materials and labour shortages led to the 12th straight month in not meeting consumer demands and major backlog in work. Businesses who had to deal with shortages saw production times increase significantly which led some businesses to deplete pre-production items in order to meet client demand.