Importers can now turn the page on L/Cs
Moves on import curbs + privatization: Egyptian authorities removed import restrictions and approved the state ownership policy document on Thursday, helping fulfill pledges made to secure vital funds from the IMF. The government had committed to reducing state involvement in the economy and canceling the requirement for importers to use letters of credit as part of the USD 3 bn loan agreement approved by the Fund last month.
L/C’S ARE HISTORY-
Documentary collection is back: The Central Bank of Egypt (CBE) announced Thursday that it had lifted the requirement to use letters of credit to finance imports in an effort to clear a longstanding backlog of imports. Importers will now be able to use documentary collection to bring goods into the country, the central bank said, reversing a decision taken in February to curb large outflows of foreign currency triggered by the war in Ukraine.
REMEMBER- A shortage of foreign currency has made it difficult for importers to access L/Cs. This left them unable to bring goods and raw materials into the country, resulting in shortages of industrial and consumer goods, economic disruption, and higher inflation.
No surprises here: Egyptian authorities had agreed to fully phase out mandatory L/Cs by the end of the year in tandem with the agreement with the IMF in October, which committed them to adopting a permanently flexible exchange rate. President Abdel Fattah El Sisi said last week that banks would secure the FX needed for outstanding L/Cs before the end of the year.
The current size of the backlog isn’t exactly clear: Prime Minister Moustafa Madbouly said at the weekend that goods worth some USD 1.24 bn were released in the final week of December — bringing the total released last month to more than USD 6 bn — but didn’t disclose how much remains stuck in port. The government last week pegged the value at USD 9.5 bn as of 25 December. The state will prioritize the release of foodstuffs and medical supplies ahead of Ramadan, Madbouly said.
PRIVATIZATION STRATEGY GREENLIT-
President Abdel Fattah El Sisi approved the final draft of the long-awaited state ownership policy, a document which provides a roadmap for how the government intends to reduce its involvement in the economy and boost private investment, cabinet said in a statement Thursday.
REFRESHER- Launched in May, the strategy aims to more than double the private sector’s role in the economy to 65% and attract USD 40 bn in private investment by 2026. The government says it will reduce its involvement in a number of sectors via public share offerings, stake sales to strategic investors, and expanding public-private partnerships. The president’s approval comes after the cabinet in early December approved the final draft, which was produced following weeks of consultations with public- and private-sector stakeholders over the summer and discussions at the Egypt Economic Conference in October. The government has until now been tight-lipped about the strategy.
WHAT WE KNOW NOW–
The state isn’t going to be exiting quite as many industries as we first thought: The government is planning to fully exit 62 sectors, phase out its involvement in 56, and step up its role in 76 others, cabinet said. The initial draft plan envisioned the government withdrawing from 79 sectors and reducing its involvement in 45.
This is now happening over a longer timeframe: The government will fully exit the 62 industries over the next 3-5 years, according to the final document. The initial draft targeted a maximum of three years.
A few notable changes between May and December: The final document doesn’t provide a complete breakdown of how each economic sector will look in five years’ time, but it does illustrate a few of the changes that have taken place since May:
- The state will now increase its involvement in oil and gas extraction and refining, as well as electricity transmission networks;
- It now plans to fully exit some financial brokerage activities including commercial ins.
- Wholesale trade is now among sectors that the government plans to slowly withdraw from
- There will be more state involvement in establishing dry ports, rather than a complete withdrawal
- Pre-primary education is among activities in the education sector in which the government plans to increase its role instead of exiting.
The government has committed to a radical shake-up of the economy under the IMF agreement, including undertaking “wide-ranging” structural reforms to level the playing field between state-owned enterprises and private-sector firms, reduce state involvement in the economy, and increase transparency.
The war in Ukraine has focused minds: The economic turmoil triggered by the Russian invasion of Ukraine pushed the government to accelerate its privatization plans. In 2022, it sold upwards of USD 4 bn worth of state-owned shares of companies to Gulf sovereign wealth funds and the Sovereign Fund of Egypt (SFE) is working on a plan to take to market more than 40 projects worth around EGP 140 bn.
What’s next: Madbouly said that a committee will be formed to implement the strategy, including determining the exit mechanism for industries and a timeframe. The committee will be headed by the PM and includes several ministers, as well as the heads of the Egyptian Competition Authority, the General Authority for Investment and Freezones, the SFE, and the cabinet’s Information and Decision Support Center.
Watch this space #1: Ministers have begun discussing plans to host an investment conference this year to drum up international interest, according to a separate cabinet statement. This follows the Egypt Economic Conference that was held in October.
Watch this space #2: The approval of the state ownership policy could pave the way for more investment in local assets by Gulf sovereign wealth funds, House Budget and Planning Committee Chairman Fakhri El Fiqi said. Abu Dhabi sovereign wealth fund ADQ “is eyeing Banque du Caire,” El Fiqi said. The state-owned bank has repeatedly delayed its long-awaited IPO. Meanwhile, Saudi Arabia’s sovereign fund PIF is expected to acquire United Bank for USD 600 mn, El Fiqi said, in apparent reference to a story reported earlier this month by Bloomberg.