Egypt’s central bank will continue to protect FX reserves and aim for a stable currency
Policymakers often make jarring decisions, like these import restrictions, on short notice, so MNCs should maintain communication with authorities to anticipate these kinds of decisions in the future. Banks will likely scrutinize the contents of all imports and may use their discretion to not finance the import of certain goods, so MNCs should engage their banking partners to align on future importing activity. Additionally, these regulations will severely affect SMEs with limited access to credit, and MNCs should assess how this will affect their local partners and distributors. Finally, due to bottlenecks in issuing letters of credit, MNCs should anticipate cost-push inflation pressures on imports in the coming months.
Overview
The Central Bank of Egypt (CBE) has announced new import rules requiring banks to only accept letters of credit from domestic firms to facilitate imports; these rules will be implemented on February 22, 2022. These rules, which do not apply for foreign companies or their subsidiaries, were met with backlash from domestic companies due to concerns about higher costs and operational challenges. The CBE has since made exemptions for imports worth less than US$ 5,000, medicines, vaccines (and their active ingredients), as well as several food staples.
Our View
As part of the CBE’s bid to maintain a stable currency, MNCs should expect to see new regulations related to limitations in accessing foreign currency and some import restrictions. Amid US Federal Reserve hikes and mounting inflationary pressures, Egypt is increasingly concerned about maintaining its carry trade inflows, driving the central bank to protect its foreign reserves. Additionally, rising global oil and food prices mean that Egypt’s import bill will grow, putting further pressure on the Egyptian pound. However, these measures will complicate business activity for the already-struggling private sector, and the short notice of this announcement will create a bottleneck as banks deal with a surge in letter-of-credit applications. Private sector recovery will continue to face challenges in 2022, as the public sector takes the priority in economic growth.
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