The Central Bank of Egypt (CBE) has said it will require importers to use letters of credit (LCs) rather than documentary collection when buying from abroad, despite business concerns over the move.

CBE’s rule change, which aims to address import governance issues in the country, came into effect at the beginning of March.

“[In recent months], the government seems to have put an increased focus on import controls and the promotion of local production,” trade credit insurer Credendo says in a note covering the decision.

The ruling will apply to all import transactions, barring those covered under a list of exemptions, including intragroup sales between foreign companies and their subsidiaries. Banks will be allowed to accept invoices for goods shipped prior to the central bank’s decision.

CBE has 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.

As reported by Reuters, business groups responded to the decision by warning the new rules could exacerbate supply chain problems, damage competitiveness and delay import shipments.

Samer Shibl, director for trade finance and export promotion at the Export Development Bank of Egypt, says the new LC requirement will allow for greater oversight of imported goods by banks.

“If the bank is obliged to pay through an LC… they will study the client and decide whether this is a legitimate transaction or not. With the documentary collection system, you don’t have any clue on the transaction,” he tells GTR.

“There are some goods imported into the market over the past couple of years that were not suitable for consumers,” he adds.

At the same time, he says the rule change aims to guard against any foreign currency issues developing in the country.

“The plan is to grow the number of manufacturers and producers in Egypt, so the economy is not dependent on imports being sold within the market – without value being added to these goods.”

Shibl says the Central Bank has directed trade finance banks in Egypt to reduce the price of LCs so importers are not burdened with extra costs from the rule change.

 

Steep import bill

In its February 21 note, Credendo says the introduction of the regulation comes as Egypt faces mounting current account pressures.

“Egypt is not the only country facing these pressures,” the credit insurance group says, but its reliance on imports for oil and food means it is particularly sensitive to the current increase in commodity prices and the heightened tensions between Ukraine and Russa, in particular the impact on wheat prices.

Egypt is the largest wheat importer globally, says the note, which was published prior to Moscow launching a wide-scale invasion of Ukraine.

Credendo says short-term liquidity risks within Egypt’s economy “remain moderate” and the country has sufficient foreign exchange reserved to cover imports for roughly five months.

In this context, the Credendo short-term political risk rating for Egypt remains stable in category 4/7, it says.

“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,” Credendo says.

Egypt is working to contain a rising import bill, which grew by 34% in Q3 last year compared to the same quarter in 2020.

Credendo says Egypt’s current account deficit widened to US$18.4bn in the 2020/21 financial year, a marked increase from the US$11.2bn recorded the previous year.