Egypt has started trading with other countries using their own currencies instead of the USD dollar. This comes as the country has agreed to import products from Russia and India using the Russian ruble and the Indian rupee. Accordingly, Egypt will no longer need to secure USD in order to import goods from both countries. Since 2018, the local currency settlement (LCS) mechanism has been implemented and embraced by a number of countries, including Malaysia, Japan, Thailand, and China. This helped maintain a positive LCS growth trend within the financial markets, recording $868 million in the first quarter (Q1) of 2022, according to the Bank of Indonesia. Experts believe that adopting this LCS mechanism in international trade will help Egypt’s economic recovery.
Trading in Local Currencies
In September 2022, Russian Ambassador to Cairo Georgy Borisenko said that his country adopts a settlement mechanism using the local currency in trade exchange between Egypt and Russia, which includes a mutual acceptance of payments in the Egyptian pound or the Russian ruble in the two countries trade.
Moreover, India adopted a new foreign trade policy to trade in rupees with countries facing a shortage of dollars in order to "disaster-proof" them and to boost its exports, Sunil Barthwal, Commerce Secretary, said in a news conference in New Delhi late March 2023.
To import using the local currency of the exporting country, Egypt needs to reach an agreement with the central banks of these countries to obtain their currencies for trade or to allow the payment in EGP for them. While the North African country mainly imports its wheat from Russia, its wheat imports from Russia decreased by 6.7% in 2022; however, Russia’s share of Egyptian wheat imports increased to 57% from 50% in 2021, according to Reuters. Moreover, Egypt's rice imports from India were worth $87.19 million in 2022, according to the United Nations COMTRADE database on international trade. Egypt plans to purchase at least 150,000 tons of rice from India; therefore, getting into a deal with both India and Russia is beneficial for Egypt, which has just resolved an issue of goods piling up at ports due to the USD shortage.
Being an Economy Boost
The agreement with Russia is a good step for Egypt to reduce its dependence on USD for trade. Alaa Ali, Economist and Head of the Credit Support Group at the Egyptian Agricultural Bank, previously told Sky News Arabia Business that the agreement would contribute to providing many basic strategic commodities, primarily wheat, without putting pressure on the dollar and reducing the need for it.
The move to trade with the two countries in their local currency will boost Egypt’s trade. Certainly, the import laws of trade changed, allowing Egypt to import from Russia and India. Mohamed Waheed Aglan, Principal Co-Founder of TEBA Import, Export, and Supplies, tells Arab Finance: “This will really reflect positively on market movement and low prices to make it affordable for everyone.”
Several economic experts are looking forward to Egypt sealing a similar deal with China, as most of the country’s imports are from Russia and China. In January 2023, imports from China accounted for 14.7% of Egypt's total imports, while Russia’s share made up 7.4% of the country’s imports. Economic Expert Ahmed Khattab speculated last January that if China recognizes the EGP as a trade currency like the euro, dollar, and yuan, the USD in Egypt would drop to less than EGP 20, which could result in a global decline in the dollar rate, as Egypt is the primary and main driver of the Middle East and North Africa (MENA).
Using Egyptian Currency for Trade
Egypt, like Russia and India, may consider agreeing with other nations facing a USD shortage to use the EGP when exporting from Egypt. The step could also have a positive impact on the Egyptian economy as it may help Egypt increase its exports to countries hindered by an insufficient USD reserve. Nirmeen El Sayyad, UN Women Project Manager at the American University in Cairo and Economic Expert, tells Arab Finance: “Such a decision would positively improve the production and exporting processes.”
El Sayyad explains that “using the local currency would increase revenues in EGP to the Egyptian economy and would similarly require imports of intermediate products to be done in EGP as well; this would eventually ease the production process."
In case Egypt adopts this policy, it will be of mutual benefit to both Egypt and the importing country. El Sayyad remarks that “other countries that experience USD shortages and face barriers importing would benefit the most from such a decision. Importing from Egypt in EGP would be facilitated and this would positively boost Egyptian exports as new markets are.”
Embracing the LCS mechanism between Egypt and its trading partners is a leap toward economic recovery. Egypt has started adopting such mechanisms with both Russia and India and we are all looking forward to seeing more.
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