Egypt’s non-oil business sector further declined in September due to supply chain challenges and a sharp rise in prices, according to a business survey.

The S&P Global Purchasing Managers' Index (PMI) fell to a four-month low to 48.7 in September, down from 49.2 in August, indicative of the sector contracting further.

The rise in prices, affected by a weak exchange rate against the US dollar, led to an even sharper drop in outputs and new orders, with businesses holding onto inventories amidst high inflation. Data further revealed that new work intakes dropped at the fastest rate since May, although the decline remained soft compared to the beginning of the year.

Client spending and confidence took a hit by the end of the third quarter, while businesses reported difficulties acquiring raw materials due to import challenges and rapid price rises. The resultant pressure on operating capacity led to the sharpest increase in backlogs of work ever recorded by the survey since it began in 2011.

With a rise in backlog, businesses continued to boost employee numbers, with wage inflation reaching a seven-month high, as some companies opted to raise staff salaries to help staff facing heightened living costs.

“Egyptian non-oil companies faced unprecedented pressure on their operating capacity in September…. Firms frequently reported that the high-inflationary environment - annual urban inflation reached a record high of 37.4% in August - and a lack of raw material supply meant they were often unable to fulfil client orders,” said David Owen, Senior Economist at S&P Global Market Intelligence.

“Adding to this, firms were reluctant to draw down inventories as the outlook for supply and prices remains challenging, resulting in output levels dropping sharply and to a greater degree than new orders,” he added.

Over the past year, Egypt’s economy has come under pressure, with the Egyptian pound tumbling, foreign currency drying up, and inflation soaring. Since 2022, Egypt’s pound has depreciated by nearly 50% against the US dollar, affecting imports and causing a backlog of goods at ports. The affects have been visible in the country’s headline index.

“The weak exchange rate against the US dollar led to another steep rise in purchase prices in September, adding to indications that inflation will remain high until related factors are under control, such as food supply and foreign currency reserves,” Owen stated, adding: “This added to a generally subdued level of confidence towards future activity, as well as another sharp reduction in purchasing levels.”

The industry expert added that despite rising inflation, there have been ‘recent positive movements’, with the 48.7 PMI reading still above the series average.

(Writing by Bindu Rai, editing by Seban Scaria)