Egypt: Central bank of Egypt announced new rules for importers

Event

On 12-13 February, the central bank of Egypt communicated that documentary collections to finance imports will no longer be accepted as of the beginning of March. Instead, importers will be required to use letters of credit. Intragroup sales (sales between foreign companies and their subsidiaries) are exempt from the decision and banks will be allowed to accept invoices for goods that were shipped before the decision was issued. Responding to concerns raised by traders, the authorities listed additional exceptions on 16 February and changed the application date to 22 February 2022. Imports of goods valued at less than USD 5,000 as well as some goods such as vaccines, tea, meat and poultry products, fish, wheat, oil and milk powder will be exempt from the rule. The exact scope of the new restrictions remains unclear. 

Impact

Following the communication of the new import rules, trade and industry organisations raised objections to the prime minister. They expressed their concern about the additional costs that these rules will incur and the possible impact on their competitiveness. Nevertheless, the authorities encouraged businesses to adapt to the new provision and defended the measure as a way to improve import governance. During the last months, the government seems to have put an increased focus on import controls and the promotion of local production. Hence, as changes were made directly after the introduction of the restrictions and the opposition of importers, it is unclear whether the authorities will further modify the regulation. 
 
This regulation is introduced while Egypt is facing current account pressures. Egypt is not the only country facing these pressures; however, being an oil and food importer (Egypt is the largest wheat importer in the world) the country is particularly sensitive to the current increases in commodity prices and the heightened tensions between Ukraine and Russia (and their impact on wheat). Consequently, Egypt’s import bill increased by 34% in the third quarter of 2021 with respect to the third quarter of 2020 and the current account deficit widened. It is estimated at USD 18.4 billion for FY 2020-21 compared to USD 11.2 billion in FY 2019-20.

Short-term liquidity risks, nonetheless, remain moderate. The successful implementation of an IMF programme (2016-2019) allowed Egypt to strengthen its macroeconomic fundamentals. Currently, the country enjoys sufficient foreign exchange reserves, which cover around 5 months of imports. The expected recovery of the tourism sector should also support the foreign exchange reserves. In this context, Credendo short-term political risk rating remains stable in category 4/7.

However, looking ahead, Egypt faces important vulnerabilities. Its reliance on foreign capital inflows and its weak public finances make the country vulnerable to capital outflows, in the event of a tightening of the global financial conditions (driven by a tightening of the US monetary policy, among others), despite the country’s important buffers. 

Analyst: Andres Hernandez Cardona – a.hernandezcardona@credendo.com