The coming months will be a test to see if last month’s sharp devaluation of Egypt’s currency will boost demand for its products at home and abroad.
After nearly six years of pegging the pound to the dollar at a rate far above market value, the central bank last month finally let go and let it float. One dollar now buys more than 18 Egyptian pounds compared with the official price of 8.88 pounds in early November.
Egypt’s biggest manufactured exports are garments and textiles. Can we expect a boom in sales now that their price abroad has plummeted?
The industry suffered badly since the central bank began pegging the pound against the dollar after Egypt’s uprising in 2011, pricing its products out of the international market. The problem became more acute as currency controls tightened over the past couple years, with exports of garments plummeting by 14.7 per cent in the year to end of June and those of cotton textiles by 7.2 per cent, according to central bank figures.
This is in sharp contrast to the years after 2003, when the central bank sharply devalued the currency. From 2003 to 2011, textile exports shot up by an average annual 17 per cent and garment exports by 19 per cent, only to begin slackening thereafter.
Textile exports surged from US$120.1 million in 2002-03 to $782.6m in 2012-13 before falling back to $682m in 2015-16. Garment exports similarly rose, from $218.3m in 2002-03 to $810.3m in 2014-15 before dropping back to $690.8m last year.
Already there has been an uptick in orders since the Egyptian pound was floated on November 3 but it will take time before any exports surge might occur, says Mohamed Kassem, the chairman of the Readymade Garments Export Council of Egypt. The devaluation, which has made imported products more expensive, should increase local demand for garments and textiles as well.
“We will see two waves of textile and garment production growth: first with the use of idle capacity, then with new investment.”
The fact the pound’s price has fallen by more than half means Egypt is back on the radar with foreign textile buyers, he says. But because many components and materials are imported, the price of Egyptian textiles will not fall by half. Domestic inflation should also be factored in. Imports account for 30 to 60 per cent of the inputs of domestically produced garments. Spinners using Egyptian cotton, however, can expect an especially big benefit from the currency flotation. “We have seen an uptick in orders but it will take three to four months before exports actually start to increase,” he says. “It is premature to call it a surge in orders. Producers are concentrating on reversing the decline.”
Many buyers came to a textile exhibition and conference in Cairo on November 11 and 12, held fortuitously just one week after the flotation. Since then, Egyptian exporters have been travelling abroad trying to make sales before Christmas. Egypt will struggle to regain markets after a slowdown in the international economy. Growth in China has weakened, Europe is not in good shape and the recovery in America has not gathered pace.
“A realistic estimate is that exports will be 10 per cent higher in 2017 than in 2016,” Mr Kassem says.
The second part of the equation, an increase in foreign investment in Egypt’s cotton industry, is not likely until late next year, he says.
Mr Kassem has been a driving force behind a plan to build a new city dedicated to textiles manufacturing near Minya, 200 kilometres south of Cairo. The government has allocated 1.3 million square metres for the project, which will be a joint venture with the China National Textile and Apparel Council.
A memorandum of understanding with China was signed early this year and a delegation of Egyptian garment and textile makers will visit China in March for a roadshow. “Hopefully we will see results by the third quarter of 2017,” Mr Kassem says.
The Minya project will be a pilot scheme for up to 10 similar textile cities the government hopes to encourage, mainly in Upper Egypt. It is to be a completely private investment, Chinese and Egyptian. The city would be a hub with a focus on spinning and weaving as well as on dyeing and finishing to supply yarns and fabric to garment makers across Africa.
The advantage of Minya is that it is close to the Red Sea for exports to Sub-Saharan Africa and to the Mediterranean for exports to North Africa and Europe. The project would take two to three years before new production capacity can come on stream.
Although Mr Kassem would like to see more efficiency in government, such as in customs, licensing and taxation, he says the situation has greatly improved after the pound was allowed to weaken. “I am a lot more optimistic.”
Patrick Werr has worked as a financial writer in Egypt for 26 years
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