EGYPT – The collapse of the Black Sea grain initiative and the ensuing rise in global wheat prices is expected to add more strains on Egypt’s struggling economy and aggravate inflationary pressures, Capital Economics has warned.
Egypt, a nation of 105 million people, is one of the world’s biggest wheat importers and also relies on imports of other basic foods and fuel.
However, Egypt’s economy has been negatively affected by an increase in grain prices since Russia invaded Ukraine last year coupled with the recent withdrawal of Russia from the Black Sea Agreement.
The Egyptian pound has lost more than 50% of its value since the Russian invasion of Ukraine in 2022, further driving up the cost of acquiring new wheat in the international market.
Yet, multilateral, and regional partners believe it remains quite overvalued and hold that a flexible exchange rate could remedy many of the country’s economic woes.
Last week, Russia pulled out of the UN-brokered agreement that ensured the safe passage of 33 million tons of grain and foodstuff from Ukraine to the rest of the world following the outbreak of the ongoing war.
A few days later, Russia launched a series of strikes on Ukrainian ports, a move that led to an immediate increase in global grain prices and brought Russia under international criticism.
To adapt to this new reality, Egypt negotiated with the UAE for US$400 million in financing to help it purchase Ukrainian wheat.
However, a policy briefing issued on Monday rose fear citing the possibility of higher wheat prices adding strains to Egypt’s balance of payments, forcing the government to cut non-subsidy spending and pushing up inflation.
“Egypt is particularly vulnerable to developments in the wheat market,” the briefing said. “It is, after all, the world’s largest wheat importer and, before the war, nearly 90% of its imports and around 45% of its total wheat needs came from Russia and Ukraine.”
According to experts, the London-based think tank expects Egypt’s wheat import bill to reach US$2.5 billion on an annualized basis. Although lower than the 2022 bill of US$3.8 billion, the cost will still bring the country’s balance of payments and foreign reserves under more strain.
Capital economics intimates that turmoil in wheat markets is expected to take inflation rates to new levels in a country where bread remains the main daily staple.
“The bread subsidy will shelter households from the majority of the hit, but wheat products make up around 5% of the CPI basket,” the report added. “Inflation, which clocked in at over 35% YoY in June, the fastest pace in at least 60 years could remain higher for longer.”
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