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Egypt to Face More Economic Strains With Collapse of Grain Deal

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 warned.

“Even if supply disruptions are avoided, higher wheat prices would add to strains in Egypt’s balance of payments, force the government to cut non-subsidy spending, and push up inflation,” read a policy briefing issued on Monday.

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. Few days later, Russia launched a series of strikes on Ukrainian ports_ moves that led to an immediate increase in global grain prices and brought Russia under international criticism. Last week, wheat futures jumped by 9%, which Bloomberg described as the biggest increase since 2012.

“Egypt is particularly vulnerable to developments in the wheat market,” the briefing said. “It is, after all, the world’s largest wheat importer and, prior to the war, nearly 90% of its imports and around 45% of its total wheat needs came from Russia and Ukraine.”

The London-based think tank expects Egypt’s wheat import bill to reach to $2.5 billion on an annualized basis. Although lower than the 2022 bill of $3.8 billion, the cost will still bring the country’s balance of payments and foreign reserves under more strain, according to the briefing.

“In turn, this may ratchet up the pressure on officials to devalue the pound in the coming months,” the briefing said.

The Egyptian pound has lost more than 50% of its value since the Russian invasion of Ukraine in 2022. Yet, multilateral, and regional partners believe it remains quite overvalued and hold that a flexible exchange rate could remedy many of country’s economic woes.

A turmoil in wheat markets is expected to take inflation rates to new levels in a country where bread remains the main daily staple, according to Capital economics. “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.”

Yet, the report ruled out that the government would cut back on its bread subsidy program–which serves 70% of Egyptians–citing fears of social unrest. Instead, the government might make budget cuts elsewhere, the report added.

Source: Zawya