Fewer Burdens on Importers

Not all importers will be obliged to sign letters of credit as a result of a new presidential decree.

Egypt’s business and importers community welcomed President Abdel-Fattah Al-Sisi’s decision this week to exclude the importers of production supplies and raw materials from the Central Bank of Egypt (CBE)’s three-month old rules stipulating the provision of letters of credit to cover imports.

Al-Sisi also instructed the government to form a working group chaired by Prime Minister Mustafa Madbouli and including the CBE governor and representatives of the ministries of finance and trade and industry and other institutions to follow up the implementation of the new procedures periodically.

In February, the CBE issued new rules obliging all importers to use letters of credit to finance their imports, eliminating the earlier collections system in force for many years.

It excluded foreign companies and subsidiaries from the rules.

The decision to shift to the letters of credit system met objections from importers, who said it would worsen existing supply chain issues and increase production costs, leading to higher inflation.

The new system would also take more time and put capital on hold, they said.

As a result, Al-Sisi’s decision this week was welcomed as a means to support the local industrial sector, especially as it will make importing production inputs that cannot be locally sourced easier.

Speaking to Al-Ahram Weekly, secretary-general of the Federation of Egyptian Chambers of Commerce Alaa Ezz said that under the letters of credit system the importer has to pay the total value of imports in advance to a bank that then acts an intermediary between the importer and exporter.

“This represents a burden on importers amid the ongoing economic challenges on the local and global levels.

Import operations according to this system count for only 20 per cent of overall global imports,” Ezz said.

The earlier system did not oblige the importer to pay the total value of imported shipments and had a longer cycle as the importer would receive them, make the goods available in the market through wholesale merchants, and pay their value after selling them, he added.

“This system allows the importer to pay shipment costs over a period that lasts from three and nine months.

It is like securing a loan without being burdened with interest rates. Prior to the new rules, 80 per cent of Egyptian imports were done through the older cash-against-documents system, while the rest was done under letters of credit.”

“But suddenly the CBE decided to shift the system to be 100 per cent under the letters system, disturbing a market that was already suffering,” Ezz said. Moreover, the shift towards the letters of credit system would overload the banks, which would need to secure the required US dollar to pay the total costs of the imports, he added.

Banking expert Ahmed Shawki welcomed Al-Sisi’s decision, saying it would support manufacturing and mitigate the pressures on both the country’s import bills and demand for the US dollar.

But he said there was a need to increase direct investments in all sectors, especially in industry and agriculture in order to localise the manufacture of a wide range of commodities and products.

“This kind of investment is long-term investment that will benefit the Egyptian economy and keep up its positive performance amid ongoing challenges.

It is unlike the foreign direct investment (or hot money) that flees in times of crisis and causes market disruption,” Shawki said.

Responding to the impacts of the Russian-Ukrainian conflict on the domestic market, the CBE in March raised its key interest rates by one per cent and devalued the Egyptian pound by about 14 per cent.

As a result, the US dollar trading price against the Egyptian pound hit an all-time high to exceed LE18 for selling and buying.

President Al-Sisi issued his recent directions in the light of discussions within the industrial and importers community, according to Ezz, who added that the working group the president has instructed be formed has the authority to add or eliminate procedures on a case-by-case basis to guarantee the continuation of the production cycle and meet the basic needs of the population.