The International Monetary Fund (IMF) has been counting the cost of Egypt's controversial policy over the last two years to significantly limit the availability letters of credit (L/C) as a measure to control the country's balance of payments and manage foreign exchange reserves.

In a new staff report for Egypt entitled First and Second Reviews under the Extended Arrangement under the Extended Fund Facility, the IMF concludes that the measure had a significant impact on the Egyptian economy

The staff report examines in detail the IMF's 46-month US$3 billion extended fund facilityarrangement for Egypt approved in December 2022.

Regulating foreign exchange

The Central Bank of Egypt (CBE) issued instructions to the country's banks to use L/Cs exclusively for import facilitation in February 2022. This directive aimed to regulate foreign exchange outflows and curb the depletion of Egypt's foreign reserves.

By requiring L/Cs, the CBE sought to ensure more stringent oversight of foreign currency transactions and prevent excessive capital flight.

Current account deficit contained

The new IMF report says the CBE's directive in February 2022 instructing banks to exclusively utilise L/Cs for import facilitation heralded a notable reduction in imports during Egypt's 2022-23 financial year.

Despite the cessation of this directive by the end of 2022, an import backlog persisted, estimated at US$6 billion by the end of June 2023, equivalent to 1.5 percent of GDP.

According to staff analysis, in the absence of this policy, Egypt's current account deficit would have been larger.

The IMF staff report for Egypt, First and Second Reviews under the Extended Arrangement under the Extended Fund Facility, can be downloaded from here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.