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How the war in Ukraine plunged this Middle East nation into crisis?

Cairo and Abu Dhabi (CNN)There are only a few items in Hanna Ayyad's fridge at any given moment these days. The Cairo street fruit vendor has restricted his family's diet as inflation triggered by the Ukraine war has soared in Egypt.  
"Now we buy new clothes every other holiday," he tells CNN. "We can do without eating meat, buying it once a month, and we may buy chicken two or three times a month, not like before." 
His customers too can only afford a fraction of what they used to buy, shrinking his daily income.  
"Some people used to buy 5kg or 10kg of fruit -- now they can buy 1kg or 2kg at most," he says. It takes him days to sell the same amount of produce he used to sell in one day.   
Egyptian households of all income levels are seeing their spending power erode fast. The economic crisis raises prospects of unrest in a country where a regime was overthrown just a decade ago in an uprising calling for "bread, freedom and social justice."
In recent months, scores have protested because of delays to new car deliveries caused by import restrictions and the devaluation of the local currency; Facebook groups were set up to find local alternatives for pet foods after imports were restricted, and poorer Egyptians like Ayyad have cut back on groceries.
Moody's credit rating agency warned in May about "social and political risks" as it downgraded Egypt's economic outlook for the year from stable to negative. And the government appears to share those concerns.
Anticipating unrest, President Abdel Fattah el-Sisi has initiated a national dialogue with opposition figures, a change of tack from a crackdown on dissent that has kept thousands of people behind bars for years. 
Wheat import prices double
Egypt's official inflation rate stood at 14.7% in June, up from around 5% at the same time last year, but consumers say prices have skyrocketed beyond this figure since the Russian invasion of Ukraine began in February.
Across the capital, at an upscale supermarket, Haya Aref looks for cheaper, local alternatives on her shopping list. Previously, she would notice 10% to 15% increase in prices every six or eight months, but the price hikes have become more frequent and bigger now, she says.  
"I used to buy an international brand [of cereal] that was probably around 70 or 80 Egyptian pounds (around $4) that has now gone up to 250 ($13)," the 23-year-old architect says. She has cut down on proteins and snacks to trim her monthly budget. For her, locally grown vegetables have become an affordable and healthier option.      
The war in Ukraine has brought uncertainty to global grain markets and driven up prices. Egypt, which depends on Russia and Ukraine for 80% of its wheat imports, now pays $435 per tonne instead of $270 last year, according to the government.

Tourism slammed
The invasion has also dented Egypt's tourism industry. Russian and Ukrainian tourists used to make up a third of the country's annual visitors but those numbers have dipped.  
At a time when the economy was barely recovering from the slowdown spurred by the Covid-19 pandemic, the war kicked its enduring challenges into high drive.  
An increase in interest rates in more stable markets like the United States has driven an estimated $20 billion out of Egypt , according to the Standard and Poor's credit rating agency.  
"For the last five to six years we relied a lot upon what we call hot money. I call them hidden external debts," economic analyst Salma Hussein explains. "When you have a very profitable rate of return on [government debt], you're inviting people from all over the world to the party. These people are standing all the time at the exit point of the party, whenever anything shakes or changes, they are the first to leave." 
This left the government reeling under a cash crisis and debts amounting to 85% of the size of its economy. With the foreign currency reserves dropping, the government started a limited devaluation of the pound that saw it lose 17% of its value in a matter of days in March.  
Together with other government measures to control the flow of foreign currency out of the country, this has made importing much more difficult, affecting both consumers and manufacturers.  
"We should all know the gravity of the crisis is not just in Egypt, but all around the world," Prime Minister Mostafa Madbouly said in a televised press conference in May outlining the government response to the "unprecedented" economic crisis.
The direct and indirect impacts of the crisis will cost Egypt 465 billion pounds ($24.6 billion), including providing a social safety net for its citizens, he said.  
The government is seeking more loans -- notably from the International Monetary Fund, which has already lent Egypt $20 billion since 2016. Gulf Arab countries have poured billions of dollars into the country to replenish its dwindling foreign reserves since February.   
A big chunk of money from the United Arab Emirates is coming in the form of investments in, and acquisitions of, major Egyptian companies. The Egyptian government wants to see more of that. Madbouly has outlined a plan to offer shares in state and military-owned companies, including seven ports, to bring in $40 billion over four years.  
For Hussein, the economist, this is a quick fix to plug the debt, without addressing the underlying problems. "I'm not worried [about] a collapse of the Egyptian economy. I'm worried [about] a collapse of more people under the poverty line," she says.   
One of the main undertakings of the government at the moment is to secure the wheat for its bread subsidies to reach 70 million Egyptians, in a country of about 100 million. It's offering incentives for local farmers to grow wheat and sell it to the government in order to fill part of the expected gap in grain imports.  
Ayyad, the street vendor, depends on basic subsidies and government cash handouts. As his income shrinks, he is also cutting down on spending on his sons' education. He watches the news anxiously and fears the situation might get worse.  
Aref, the architect, feels like Egyptians are in survival mode "and it's getting a bit scary."  
Magdy Samaan contributed to this report
Jul 11, 2022 11:04
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