Egypt’s economy reels from Ukraine war

At a vegetable market in Cairo’s Manial district, Fatma Ibrahim, a mother of two, is shocked by rising prices since the start of the Russian-Ukrainian war and anxious to find out how she can afford to feed her family during the imminent holy month. of Ramadan.

“I barely get by,” said the unemployed divorcee. “Cooking oil has increased a lot and the simplest dish requires it. I no longer buy cauliflower or eggplant because frying them uses a lot of oil. Also the price of flour suddenly skyrocketed.” The daily fasts of Ramadan are interrupted by late night parties and many buy more food. “I don’t know how we will manage in Ramadan.”

Rising prices on market stalls in Egypt epitomizes the profound impact the war has had on the North African country’s economy. Rising oil and commodity prices have hit one of the world’s largest wheat importers hard, as has the loss of tourists from Russia and Ukraine. This is on top of outflows of billions of dollars in recent months from Egyptian debt held by foreigners. Last week, Cairo asked the IMF assistance, the third time in six years. Egypt is already one of the fund’s largest borrowers after Argentina.

The war in Ukraine had “increased Egypt’s external vulnerabilities”, Fitch Ratings said this month. “Egypt will suffer from reduced tourism inflows, higher food prices and increased financial challenges as a result of the Russian invasion of Ukraine,” the rating agency added, saying “the crisis exacerbates Egypt’s vulnerability to investment outflows of non-residents from their local currency. bond market”.

The outflows were driven by rising interest rates globally combined with concerns about Egypt’s economy in the absence of an IMF program and the perception that the currency was overvalued, Fitch said. To shore up its strained finances and restore confidence in its economy that relies heavily on “hot money”, or lure foreigners into the local short-term debt market, Egypt devalued its currency to the pound last week just before announcing that it was seeking IMF support. .

A worker collects traditional Egyptian flatbread 'baladi' at a bakery in Cairo
Egypt is the world’s largest wheat importer and its subsidized bread program reaches 70 million people. © Nariman El-Mofty/AP

“Egypt has a structural dependency on speculative capital and is therefore highly exposed to investor sentiment,” said Farouk Soussa, an economist at Goldman Sachs International. Some $15 billion has been taken out of Egypt since the end of January as a result of the war, he added.

The war in Ukraine has triggered big raises in the prices of wheat, cooking oil and petroleum. Egypt is the world’s largest wheat importer and its subsidized bread program reaches 70 million people, or two-thirds of the population. Successive governments have seen cheap bread as important to stability in a country where more than half the population is considered poor.

On top of that, the loss of visitors from Russia and Ukraine, the two biggest tourism markets, is a blow to a sector that was just beginning to recover from the pandemic.

Occupancy at hotels in Red Sea resorts had slumped to 5 percent, said Nader Henein, vice president of Seti First Travel, a major travel company. “We expected Egypt to double the number of tourists we had last year to 7 million, and the Russians and Ukrainians would have been half of that,” he added. “Everything has stopped. It is a big disappointment. There has been a growth in arrivals from Germany, but they will never be able to replace the Russians.”

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Turning to the IMF should provide some breathing space, Soussa said, noting that because Egypt had exceeded its quota of borrowing rights from the lender, the fund would likely require it to obtain co-financing from other sources. Bloomberg reported that ADQ, an Abu Dhabi sovereign wealth fund, is discussing investments of $2 billion in some publicly traded companies. Other Gulf states are said to be considering supporting Egypt.

Soussa said he hoped the IMF would focus on maintaining a flexible foreign exchange regime and the “role of the military and the state in the economy and creating a level playing field for competition.”

Since Abdel Fattah al-Sisi, the president and former military chief, took office in 2014, the military has expanded its presence in the economy, some say, scaring off a private sector that fears competing with the country’s most influential institution.

As Ramadan approaches, the police and the army, a major food producer, have parked trucks in many poor areas selling staples such as meat, rice, pasta and oil at discounted prices. “We are well prepared [for Ramadan] and all the products can be found in the market,” Sisi said at a televised event last week. “The military has made 2 million boxes of food available and is prepared to provide 3 or 4 million, with no limits.” Addressing the defense minister, he instructed, “sell it for half price.” The answer came: “Yes, sir.”

Back in Manial, Shaaban Hussein, a cafe owner with four children, said food prices were high before the war and rose even higher after the conflict. “I couldn’t pay the rent for the cafeteria because there have been so few customers,” he said. “How are they going to be able to buy drinks when everything has become so expensive?”

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