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Following the invasion of Ukraine, inflation and a shortage of foreign currency has hit Egypt

March 8, 2022 at 12:30 pm

People walk past a currency exchange shop displaying a giant US dollars banknote on November 3, 2016 in Cairo, Egypt [KHALED DESOUKI/AFP via Getty Images]

Egypt’s Food and Agriculture Organisation (FAO) has revealed that the cost of vegetable oil and other basic foodstuffs has increased over the past month, not least because the country’s self-sufficiency in commodities such as corn, meat and cooking oil has been reduced. According to the World Bank, the month on month cost of crude oil, natural gas, coal, cacao, coffee, aluminium, iron ore, nickel, tin, zinc and gold have all increased. The impact of the invasion of Ukraine cannot be discounted.

Prices have continued to rise. The price of Brent crude in February was $85.5 a barrel, but it has already jumped to $118 a barrel during the first week of March. Analysts expect it to rise to around $160 per barrel if the war in Ukraine continues and supplies from Russia are affected.

With the suspension of Ukrainian and Russian wheat imports due to naval operations in the Black Sea, the price of deluxe wheat, known to Egyptians as foreign wheat, went up by about 22 per cent, from 9,000 Egyptian pounds per ton to 11,000 pounds. This has been reflected in the price of bakery products, including bread. Owners of smaller bakeries, which use local wheat, are getting ready to increase their own prices in light of the expected increases in their costs within days, or even hours.

Shortages of imported corn and soya beans, which are essential for cattle and poultry feed as well as fish farming, have led to an increase in the cost of red meat, chicken and eggs. Due to the now daily price increases, wholesalers are insisting that animal feed factories pay in cash instead of by credit note as before. As a result, many animal feed factories have had to halt their production and wait to see where things are heading in terms of increases in the price of raw materials.

READ: Russia’s invasion of Ukraine may cost Egypt $955m in wheat import bills

Petroleum and its products are priced by the Egyptian government quarterly. A petrol price increase is expected early next month. It is likely that diesel and kerosene will follow suit. However, I think that price rises might be postponed until after Ramadan. The rise in the global price of coal, meanwhile, has led to an increase in the price of local cement, coal being the main fuel used in this industry. Metal products are also likely to increase, as has been seen with local aluminium.

The rise of the price of fertilisers overseas will motivate local producers to focus on exports at the expense of the domestic market. This will lead to an increase in their prices, especially given that subsidised quantities — the price of which has also increased recently — do not meet farmers’ needs.

Consumers of Egypt’s popular foods, including broad beans and falafel sandwiches, which all include imported ingredients, are also going to face higher prices.

Tensions between Russia and Ukraine rise on the shared border - Cartoon [Sabaaneh/Middle East Monitor]

Tensions between Russia and Ukraine rise on the shared border – Cartoon [Sabaaneh/Middle East Monitor]

The tourist industry in Egypt has already suffered from the effects of the coronavirus pandemic, and now stands to face further losses due to Russia’s war in Ukraine. Both Ukrainian and Russian tourists have fallen away, due to the war and the sanctions imposed on Russian airlines. Together, tourists from both countries make up the majority of foreigners who head to Egypt’s Red Sea resorts. Revenue from tourism will thus decline considerably just as the cost of imported commodities is rising.

The increasing cost of imports comes at a time when Egyptian banks are suffering a deficit in net foreign currency reserves due to the increase in their foreign currency expenditure over assets. This was the case from last July until January, when the latest figures were published. The size of that deficit has grown over the past few weeks.

This has been complicated by the decline of Central Bank net foreign currency reserves as well as the decline in remittances from Egyptian expatriates. In turn, this has been exacerbated by the flight of foreign investors from the Egyptian stock exchange and the decline in foreign purchases of Egyptian treasury bonds during the past three months of 2021 in advance of the decision of the US Federal Reserve to put up interest rates this month. The data about investors’ withdrawal from treasury bonds is not published by the Egyptian government.

The decline in foreign purchases of Egyptian government debt instruments has got worse in the wake of the Russian invasion of Ukraine, as investors bid to stay away from unstable emerging markets. Banking assessments suggest that around $3 billion dollars left Egypt in the week following the invasion. No matter what happens in Ukraine, foreign investments in Egyptian government debt instruments is only likely to fall with the rise of US interest rates. Five such increases are expected during the current year.

In this way, the Egyptian regime finds itself besieged not only economically but also politically. It does not have the ability to ban Russian aircraft, as Europe has done. Russian tourism was just getting back on its feet after Moscow’s ban on flights to the Red Sea resorts in the wake of the 2015 air crash in the Sinai Peninsula. Nevertheless, Cairo will come under Western pressure to boycott Russian airlines. Moreover, the issue of Russia’s construction of an Egyptian nuclear reactor has become somewhat vague and uncertain. The same applies to Egypt’s ability to buy Russian weapons or the possibility of seeking help from the Gulf States to pay for them.

READ: Egypt’s limited options towards the Ukrainian crisis

The regime had been preparing to reduce bread subsidies by the end of this month. However, the wave of inflation that is hitting the markets at the moment, to which President Abdel Fattah Al-Sisi has referred more than once recently, will force it to reconsider due to rising public discontent.

The Egyptian authorities were also aiming to reduce the value of imported commodities, which reached $83.5 billion last year. This would have been done through administrative measures implemented jointly by the Ministry of Finance, the Central Bank and the Ministry of Trade and Industry. However, the aforementioned rise in the prices of basic commodities internationally will lead to a rise in the cost of imports.

Even resorting to more foreign loans has become difficult in the shadow of demands by investors to first move the Egyptian pound’s rate of exchange, which has been fixed for years, to the extent that it is now overvalued. Floating the rate of exchange would cause a further increase in inflation incongruent with the current price hike. In the meantime, the regime finds it difficult to pay the interest and instalments on its huge foreign debt. Defaulting on payments will undermine the ability of the state to continue borrowing.

All of the above points to the fact that the Egyptian regime is in a real predicament, with domestic discontent due to the general decline in the standard of living, and Western expectations about Cairo’s position vis-à-vis Russia and the measures it intends to take against it. There is also the shortage of foreign currency in the banks to consider, and the rising demands for the purchase of basic commodities and buying the materials needed to finish the construction of the new administrative capital. Its inauguration date has been set more than once but has now been postponed indefinitely. The regime is pinning great hopes on the inauguration to preoccupy the Egyptian people and divert their attention away from the crises in their daily lives, and the lack of trust in the government’s repeated promises to improve living conditions.

Translated from Arabi21, 6 March 2022, and edited for MEMO.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.