The Egyptian private sector is feeling the squeeze after the currency flotation on higher inflation rates and a 700 bps interest rate hike, according to a recent report published by The Financial Times newspaper.
“Despite making Egypt an attractive destination to some foreign investors, the combination of the float, inflation, and the hikes have driven operating costs of companies to new highs, with many being unable to pass the costs on to the consumer,” the report noted.
“We have increased prices on average by 15% because consumers’ purchasing power cannot take more, whereas the increase should have been more like 30%,” says Ibrahim Soudan, who heads cheese manufacturer Riyada.
These gripes come despite reassurances from Chris Jarvis, the IMF head of mission in Egypt, that raising rates will lead to inflation falling to 11-13% by mid-2018.
“It is imperative for interest rates to go down as quickly as possible,” said Pharos Holdings COO Angus Blair. “Without private sector investment, economic growth will remain below par, and there won’t be an improvement in employment figures,’ he said.
The report circled also that devaluation was one of several politically sensitive measures the government took that has earned it plaudits from the IMF and helped lure foreign investors back to the local debt market.
“Who could have a healthy business with these rates?” said Omar El-Shenety, managing director of Multiples Group, a private equity firm and investment bank.
“People are borrowing for working capital, but the risk does not justify long-term capital investment. You have to be making sustainable profits in the order of 30 to 35% in order to take loans at 22 to 24%,” he said.
The Central Bank of Egypt (CBE) raised its overnight lending rate this month to 19.75%—its second increase this year.