Egyptian entrepreneurs, like Ibrahim Soudan, were forced to scour the black market for dollars a year ago to pay for imports as they battled a crippling foreign currency shortage. But today the country’s banks are flush with greenbacks and the black market for dollars has been wiped out — the result of Cairo’s decision to float the pound eight months ago to clinch a $12bn International Monetary Fund loan. The 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. Yet for Egyptian businessmen, the resolution of one problem has triggered a new set of challenges: soaring inflation and rising borrowing costs. The issues are causing some companies to put their expansion plans on hold, including Mr Soudan’s cheese manufacturer, Riyada. His firm has postponed plans to open a juice factory with a foreign partner, “until we know where we are heading,” he says, citing interest rate rises and the increasing costs of energy, transport and packaging material. “Everything has gone up in a frightening way,” Mr Soudan says. His is not the only business suffering. Firms that have foreign currency debt have been left exposed after the pound lost half its value after its flotation. Manufacturers who rely on imported inputs have seen their working capital fall by as much as half. Inflation running at around 30 per cent has also hit the buying power of companies’ customers. “Who could have a healthy business with these rates?” says Omar al-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 per cent in order to take loans at 22 to 24 per cent.” The central bank raised its overnight lending rate this month to 19.75 per cent — its second increase this year.
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The IMF insists the rate rises and the reforms, which included the introduction of a value added tax and cuts to energy subsidies, were necessary. Last week, the fund disbursed the second $1.25bn tranche of the $12bn loan. “Egypt is in a better place than last year,” says Chris Jarvis, the IMF mission chief for Egypt. “I think they have already taken the most difficult steps on the macro- economic level and what remains is to continue [with the reforms]. But it doesn’t involve a lot of big adjustments, certainly not over the next few months.” He said the interest rate increases were needed to dampen expectations of inflation which he predicts will fall to between 11 and 13 per cent by the middle of 2018 “with continued strong policies”. As foreign inflows have increased and remittances have picked up, foreign reserves have swelled from $19bn in October to $31bn at the end of June. Bankers also say they are noticing renewed interest from foreign firms to invest in the Arab world’s most populous nation. But those positives offer little comfort to Mr Soudan and others in the private sector. He says that with more than 60 per cent of his company’s inputs imported, the firm’s production costs have spiralled. But it has not been able to pass off the increases to consumers, who are also being hit by rising living costs in a country blighted by widespread poverty. “We have increased prices on average by 15 per cent because consumers’ purchasing power cannot take more, whereas the increase should have been more like 30 per cent,” Mr Soudan says. His company has also not been able to take advantage of the weak pound to boost exports because traditional markets for the Egyptian food industry — Libya, Syria and Yemen — have been plagued by conflict. Businessmen say they want more supportive policies from the government, including measures to slash bureaucracy and tackle monopolies distorting the market. Sahar Nasr, Egypt’s minister of investment, says these problems are being addressed under a new investment law that provides tax incentives and is intended to reduce red tape. “Investors can expect reduced bureaucracy and red tape, a clear investment policy and easier access to investment opportunities,” she said. “[The law offers] greater transparency and accountability and compelling incentives to invest in lagging regions and high potential sectors.” But Angus Blair, chief operating officer of Pharos Holdings, an investment bank, says it is “imperative for interest rates to go down as quickly as possible”. “Without private sector investment, economic growth will remain below par and there won’t be an improvement in employment figures,” he says.