Russia’s invasion of Ukraine is putting Egypt’s economy under stress, raising concerns about popular discontent in the Middle East’s most populous country.
The Egyptian pound fell by more than 11% on Monday while the country’s central bank raised key interest rates by 100 basis points each at a surprise meeting, the first rate increase since 2017. Analysts had expected the bank to raise interest rates at a meeting scheduled for Thursday.
In a statement, the central bank said it was acting in response to “global inflationary pressures” along with supply chain disruptions and rising commodity prices. Yearly headline inflation hit 8.8% in Egypt in February, the highest rate in more than three years, according to the central bank.
“These pressures became amplified with the recent Russia-Ukraine conflict,” the bank said.
Egypt is the world’s largest importer of wheat, making it especially vulnerable to the shock of the war in Ukraine. Tens of millions of Egyptians rely on subsidized bread, with Egypt obtaining as much as 85% of its wheat from Ukraine and Russia.
Last week the Egyptian government imposed new price controls on unsubsidized bread. The government set prices on Monday between a half a pound and one pound per loaf, depending on the type of bread.
The price of bread is a central political issue in Egypt. Rising food prices are regarded as one of the broad conditions that led up to the 2011 uprising that ousted former President Hosni Mubarak.
Egypt’s broader economy has grown in recent years but living standards have sharply declined for most of Egypt’s 100 million people as a result of government austerity in conjunction with an IMF loan program that began in 2016.
Foreign investors have scaled back from Egypt since Russia launched its invasion of Ukraine last month over concerns about how the Egyptian economy could suffer as a result of the war. Egypt is also facing a loss of revenues from Russian and Ukrainian tourists, a key source of foreign currency.
The Egyptian pound has been relatively stable for years, owing in part to interventions by Egypt’s state-owned commercial banks, economists and bankers say. The government has not acknowledged the interventions.
“People’s income does not correspond to a decent life, but we are doing our best efforts to improve the [economic] situation,” President Abdel Fattah Al Sisi said in TV statements on Sunday evening, asserting that Egypt faces no shortages in basic commodities or wheat.
The Central Bank said it decided to raise the overnight deposit rate, the overnight lending rate and the rate of the main operation by 100 basis points each to 9.25%, 10.25% and 9.75%, respectively.
The invasion has disrupted exports of grains from Ukraine through the Black Sea, and also raised doubts about that country’s ability to plant for the next harvest.
Egypt is by no means the African country most heavily dependent on Russian and Ukrainian food supplies. According to the UN, Somalia and Benin each relied entirely on the two countries for their wheat imports in 2018 through 2020. While other sources of wheat are available, world prices have arisen since the invasion.