Egypt’s import restrictions are a double-edged sword 

Magdi, an importer in Egypt where a number of staples and products, such as cereals and oils, are shipped from abroad, has not been able to bring in a single item since the Ukraine war erupted in February.

The Egyptian man, who did not want his real name to be disclosed, is one of the thousands of importers who have borne the brunt of the Russian invasion and the ensuing hard currency crunch in the North African nation.

“Importing is largely on pause,” Magdi tells The Africa Report. “If you have a stock, then you’ll be using it, but this is dangerous since after a while the stock will run out” and various goods will be scarce, he adds.

Inflationary pressures

With Egypt heavily relying on imports, the current circumstances will inevitably lead to higher inflation, which stood at 13.2% in June.

“Egypt imports [a wide range of items, from] raw materials to everything else,” says Alia Mamdouh, chief economist at the Cairo-based investment bank Beltone Financial. “Some of the banned items cannot be produced domestically, so they won’t be available and thus there will be pressure on their prices.

“Domestically-manufactured alternatives will also be more expensive” as the gap between supply and demand widens, she tells The Africa Report. “Halting imports doesn’t mean that you’re not subject to the global commodity cycle.”

Egypt’s import bills jumped significantly by war-induced hikes in commodity prices, particularly oil and cereals, from $5bn to $9.5bn as Finance Minister Mohamed Maait said in July. This has prompted authorities to impose import restrictions.

And as the liquidity crisis keeps festering simultaneously with the fighting in Eastern Europe, such measures have gradually been tightened, intrinsically curtailing import businesses and, as such, hard currency outflow.

Import ban 

The General Organisation for Import and Export Control (GOEIC) in April hindered the import of hundreds of miscellaneous brands, citing unfinished paperwork to comply with the Egyptian law. The import of luxury products had earlier been banned.

Essential items, such as basic foodstuffs and materials used in production processes, can still be imported. All the same, the banks’ mechanism to assess whether certain items are exempted from the ban is anything but clear-cut.

Magdi, for example, says he recently tried to ship in units used in furniture and decoration factories, expecting his request to be approved as the targeted imports are used in a production process. The bank turned him down.

Money upfront, late transfers

With a debt investor exodus on the back of the pandemic, the Central Bank of Egypt (CBE) announced a fortnight before the Ukraine war that traders would have to use letters of credit starting last March.

The new rules ended a more flexible cash-against-documents system that needed less payment in advance, requiring instead the whole sum owed to exporters to be deposited in Egyptian banks upfront. And it would take the banks more time to transfer the funds to suppliers.

“Initially, the transfer would be made instantly upon the arrival of the documents [sent by exporters to Egyptian banks] to prove that shipping has started,” says Magdi, adding that it can take up to four months nowadays. “No suppliers would accept” such a delay, he bemoans.

Killing the black market

The CBE in April also discountenanced unsourced foreign currency deposits by importers. Instead, they ought to provide Egyptian pound payments and the receiving banks would convert the funds.

“Traders were previously required to secure the US dollar [amounts] on their own,” Magdi says. “Providing US dollars is a very large burden on the bank[s],” and it is probably why numerous import requests are rejected, he adds.

When Egyptian banks used to accept unsourced hard currency during previous periods of liquidity shortages, traders would resort to the black market, which would, in turn, thrive and create higher unofficial exchange rates.

Reversing the trend has “completely killed” the black market, according to Beltone’s Mamdouh. “It was a smart move by the central [bank],” she says. “Now the black market dealings are incredibly limited.”

Informed sources tell The Africa Report there are no well-known black market rates for the time being, with conversions outside the interbank greatly dwindling.

Lesser evil

The bank rejection of hard currency obtained by importers from unknown sources, or from exchange offices, has further curbed imports. Nonetheless, it remains the lesser evil, Mamdouh says.

“It’s the only way to control the demand on the foreign currency. They [CBE] don’t control exchange rates directly, but they control supply and demand,” she says. “I believe they will stick to this system irrespective of any circumstances.”

“Letting the black market prevail would hurt the investment appetite and pave the way for macroeconomic instability,” Mamdouh adds.

And in all cases, “the black market doesn’t have enough liquidity like in 2015, for instance. It’s not a solution” for importers to overcome the ongoing liquidity crunch, Mamdouh says.

Slipping pound

In late March, Egypt devalued the local currency by over 15%, and ever since the pound has been slightly, yet constantly falling, having exceeded 18.9 against the US dollar.

“Once the Egyptian pound was devalued, it slipped towards 18 against the US dollar because that was the price people were practically dealing with” in the black market, Mamdouh says. Judging by its sliding pace over the past months, she expects the local currency to reach 20 against the US dollar by October this year.

“The way it’s been moving since March is more of a slight movement, as though [the CBE is] sending the IMF a message that they don’t keep the rates at a certain level,” Mamdouh says, expecting the Fund to keep pushing for a more flexible exchange rate in Egypt.

IMF stand-off

Despite far exceeding its lending quota from the IMF, the hitherto dollar-hungry Egypt has been in talks with the global lender since March over yet another extended fund facility. Both sides have so far been unable to break a deadlock, as the Fund is calling for steps that Egypt repudiates.

“… decisive progress on deeper fiscal and structural reforms is needed to boost the economy’s competitiveness, improve governance, and strengthen its resilience against shocks,” the IMF executive board said on 26 July.

Egypt’s previous agreements with the Fund have entailed multiple reforms and austerity measures, including a sharp currency floatation and gradual phasing out of subsidies, which are still in progress.

But with the Ukraine war ramifications weighing on the poor, who comprise nearly one-third of the Egyptian population of about 103 million, the third-largest Arab economy started to slow down the rollout of such measures.

Egyptian President Abdel Fattah al-Sisi earlier this month called on European countries to help financial institutions, such as the IMF and the World Bank, understand Egypt’s reality, saying “we cannot do like what happens in Europe and let prices reflect on citizens” as they are without buffers.

Allocations to subsidies and social programmes in Egypt’s budget for fiscal year 2022/2023, which started in July, amount to over LE490bn (nearly $26bn), increasing 69% in seven years, said Prime Minister Mostafa Madbouly on Thursday 29 July.

Short-term painkiller?

The financial burden Egypt will shoulder annually due to the Russian invasion is wholly estimated at $25.4bn, PM Madbouly earlier said, surpassing by 27% the value of all IMF loans the country has taken out since 2016.

To fulfil its financial obligations without tapping its foreign reserves, which shrunk to $33.375bn in June down from $35.495 in the previous month as pressures keep mounting, Egypt “needs at least from $8-$10bn” from the IMF, Mamdouh says.

But the “current estimates [for the new loan] are around $4-$5bn,” she adds. “This would be a very short-term painkiller” that will not change much amid the war’s repercussions, including the US Federal Reserve’s aggressive tightening cycle.