Egypt, the world’s largest wheat buyer, has secured $1 billion of a $3 billion Islamic Trade Finance Corporation deal to fund purchases by its state grain agency, a senior government source with direct knowledge of the matter told Reuters on Wednesday.
Acute shortages of foreign currency had caused delays in past payments by Egypt’s General Authority for Supply commodities (GASC) to global suppliers. The new financing should ensure dollars are available for the state buyer to use on wheat.
Cairo pays around $1.5 billion annually for the grain as part of a bread subsidy programme on which many of Egypt’s almost 100 million people depend.
The financing should allow GASC to pay global suppliers more immediately, which could in turn see them offer cheaper prices in future grain tenders.
GASC may also renew financing when the initial $1 billion tranche is used up so deferred payments for grain will no longer be an issue, the source said.
Supply Ministry officials were not immediately available to comment.
Egypt said on Monday it would pay for wheat bought in upcoming international purchase tenders by opening letters of credit on sight, instead of with payment guaranteed within 180 days, after the government gave a final sign-off on the ITFC agreement.
“The loan can be renewed whenever the money runs out so this is GASC turning to on-sight payments from now on,” the source said.
GASC’s letters of credit - banking guarantees for on-time payment to sellers - were being issued prior to shipment, with payment guaranteed within 180 days. The deferred payment system was introduced at a time when foreign exchange shortages plagued Egypt’s economy.
“It’s positive and implies confidence in terms of foreign exchange liquidity and visibility,” Allen Sandeep, head of research at Naeem Brokerage, said about the move.
The move to on-sight payment means the cost of financing deferred payment will be taken out of traders’ calculations when making offers to GASC at its international purchase tenders.
“The decision to pay on sight could cause a reduction of prices of around $3 to $4 a tonne,” one Cairo-based trader said.
Still, Egypt, which buys mostly Russian and Black Sea wheat, may not see an immediate difference to prices at its next tender as Russian wheat prices edge up on seasonally lower supply and a stronger rouble. nL8N1ZL2MI
“The seller needs to have the money to make the immediate payments though and a billion dollars could be the kick-start needed,” one German trader said.