Egypt’s government has indicated domestic firms will no longer be required to use letters of credit (LCs) when buying production inputs and raw materials from abroad, just months after the new import rule was introduced.
In February, the Central Bank of Egypt (CBE) issued a circular instructing trade finance banks to stop using the documentary collection process and to instead use LCs for the vast majority of imports, barring some exceptions.
Transactions involving intragroup sales between foreign companies and their subsidiaries were not covered, and banks were still allowed to accept invoices for goods shipped prior to the central bank’s decision.
The CBE also excluded goods imports valued at less than US$5,000, as well as essential products such as vaccines, tea, meat and poultry, fish, wheat, oil and milk powder.
Industry figures said the rule change would improve import governance and increase oversight of goods coming into Egypt, in turn helping the government put a brake on foreign currency issues.
But during a May 10 meeting with the economic ministerial group, Egyptian President Abdel Fattah El Sisi ordered a re-evaluation of the decision and said product exemptions under the LC rule should be expanded.
“As per the president’s directives, imports of production supplies and raw materials will be subject to the old system, which requires collection documents,” said a spokesperson for the president following the meeting.
During the discussions, the president also ordered a working group be formed to “periodically follow up and evaluate the import system”.
The Egyptian prime minister will chair the group, with other members including the governor of the CBE, the finance minister, the trade and industry minister, and other relevant bodies.
As the North African state grapples with supply chain disruptions and surging costs as a result of the Ukraine crisis, business groups have praised the government’s decision to relax import requirements.
The move was welcomed by the president of the Chamber of Commerce in Cairo, Ibrahim Al-Araby, who told Daily News Egypt it would help reduce increasing demand for US dollars in the North African country.
Exempting production requirements and raw materials from the LC rule would also help ensure the local market does not face shortages of raw materials needed for manufacturing, Al-Araby said.
Industry groups had flagged concerns when the rule was first announced in mid-February, days before Russia’s decision to launch a full-scale invasion of Ukraine. They warned the move would exacerbate supply chain problems, damage competitiveness and delay import shipment.
Haitham Elsaid, an international letters of guarantee manager at QNB Group, tells GTR that the decision to exempt raw materials and production inputs highlights the government is working to keep factories operating, and is focused on goods that cannot be locally sourced.
Tackling Egypt’s dependence on imports and staving off any future foreign currency issues had been a key thrust of the new import regulations, as Egypt works to ramp up manufacturing of value-added goods.
But business conditions have sharply deteriorated in the country since the LC requirement was first unveiled.
The S&P Global Egypt PMI [purchasing managers’ index] registered a score of 46.5 in March, a 21-month low and a drop from 48.1 in February. The company’s PMI provides a snapshot of operating conditions in Egypt’s non-oil private sector, drawn from a survey of approximately 400 private sector companies.
“The latest reading indicated a solid decline in the health of the non-oil economy that was the sharpest recorded since June 2020,” said S&P Global in its PMI report.
“Inflationary pressures escalated in a number of key areas, including energy, food, fuel and raw materials, as firms found that the Russia-Ukraine war amplified concerns of global supply. Some companies added that import costs had risen due to a devaluation of the Egyptian pound,” it added.
In late March the CBE devalued the Egyptian pound by 14% in the wake of the Ukraine crisis, which saw foreign investors pull billions of dollars out of Egyptian treasury markets and ramp up pressure on the currency.