Out with the new, in with the old: Central bank doubles back on import regulations

After being phased out earlier this year, Egypt’s old import payment system was reinstated late last week, according to a central bank circular seen by Mada Masr.

Facing a chronic shortage in dollar liquidity in Egypt’s banking system over the course of 2022, banks were unable to finance import deals under the February regulations, causing bottlenecks for close to a year in Egypt’s ports, where around $9.5 billion worth of goods are currently held up.

The congestion has hampered industrial activity ranging from food production to construction and has exacerbated inflation for households nationwide.

The old import collection system, now reintroduced, allows importers to pay small installments up front before receiving their shipment of goods and permits them to top up the remainder of the shipment’s value upon collection. 

The letters-of-credit system introduced in February, meanwhile, required importers to open a credit line and deposit payment for their goods upfront in foreign currency, with banks then guaranteeing payment to exporters on receipt of the goods.

Both import collection and letters of credit are widely used in international trade, with the latter more commonly used as a guarantee for both importers and exporters who do not have long-established trade relationships, economic analyst and Alraya Consulting & Training CEO Hani Aboul Fotouh explained to Mada Masr. 

But importers have complained about the letters-of-credit system, whereby the importer must first obtain approval for the transaction, then deposit the full amount with the bank, oftentimes months before the goods arrive, he added.

The issue was further compounded by the dollar shortage in the market, with banks unable to guarantee the payments to exporters, leading to the congestion of goods at ports.

Bringing back the import collection system is not going to solve the problem immediately, however, as tons of backlogged shipments will take some time to be processed, according to official statements and to traders who spoke to Mada Masr over recent weeks. 

President Abdel Fattah al-Sisi said on December 26 that a plan devised by the prime minister would front the dollars necessary to begin addressing the “import crisis” within the next few days, while Prime Minister Mostafa Madbuly stated in turn that measures to address the congestion would run into 2023, predicting the release of US$4.5 billion worth of goods by the beginning of Ramadan in March. 

To put that into perspective, the Cabinet estimated last month that around $9.5 billion worth of goods were stored in the ports.

Imports are also likely to remain constrained with the demand on dollars remaining high, industry figures told Mada Masr, especially given that releasing goods from ports requires liquidity, which is in short supply.

For its part, the International Monetary Fund is watching closely and expecting another devaluation of the pound once the backlog is cleared.

IMF mission chief for Egypt Ivanna Vladkova Hollar told Reuters in December that after Egypt’s government phases out the letters-of-credit system, the fund would be expecting the government to fully liberalize its exchange rate — a stipulation of Egypt’s US$3 billion loan program with the global bank.

Hollar said that the import collection system would reduce the demand for dollars in Egypt, and that the fund would expect Cairo to implement an exchange rate that witnesses daily volatility “similar to the volatility observed in truly floating exchange rate regimes."

Though the Egyptian currency has been devalued twice since 2016 in line with IMF policy adjustment recommendations, the central bank has intervened over that period to inject foreign currency from domestic reserves into the market to artificially peg the exchange value of the pound. 

Now, however, "we know that the central bank has not intervened to inject reserves into the foreign exchange market since we reached staff level agreement,” Hollar told Reuters last month. 

Egypt received a first injection of cash, worth $347 million — about half the initially expected sum — under its 2022 agreement with the IMF last month