Life for early stage startups and businesses is getting tougher and tougher as restrictions on the use of foreign currency pile up. Every business that needs to pay Google or Microsoft — or that wants to run an ad campaign online, pay for cloud infrastructure, subscribe to a monitoring service, or pay for an industry-specific software tool — needs access to foreign currency. That’s an increasingly nasty “business continuity challenge” for companies nationwide that don’t have (a) offshore arms and (b) access to foreign currency (FX) through offshore revenue streams or deep-pocketed foreign investors.

Where things stand now: The Central Bank of Egypt in October restricted foreign-currency (FCY) transactions on local-currency credit cards to EGP 7,750 per month (about USD 250 at the official rate) and stopped the use of local-currency (LCY) debit cards abroad.

There are zero exceptions: Three major banks we spoke with said they make no exceptions for companies that can prove their online FCY expenses are key to the running of their businesses, whether for access to email, productivity tools, or cloud infrastructure.

Early-stage startups are the most vulnerable, followed closely by existing businesses with no FCY-denominated revenues. The impact of the central bank’s moves on startups largely depends on what stage of investment the company is in, Acasia Ventures managing partner Aly El Shalakany tells us. “Early-stage startups may not have offshored yet, meaning that they probably still don’t have a foreign bank account. These inputs used to be covered by corporate debit or credit cards. Now, this has become incredibly difficult,” he said.

Small- and medium-sized businesses, agencies, and local professional services firms face a tougher challenge, a managing partner at a prominent agency told us. “We don’t have an offshore entity because we’ve never needed one, so now we’re scrambling because there’s no clear end in sight to the restrictions. We’re fortunate that we have just about enough revenue from clients outside Egypt to cover our [foreign currency] online expenses, but it’s tight.”

THE WORKAROUNDS-

The alternative: Buying FX on the parallel market and depositing it to your FCY account here in Egypt, then using a USD-denominated debit card to pay offshore expenses. “We do it, but we’re not comfortable with it. Our bank has warned us that there isn’t a 100% chance we’ll be covered if our [debit] card were hacked,” said the CEO of a medium-sized manufacturer. “I already source on the [parallel market] to cover the import of my production inputs, so it’s just more pressure.”

How does that work? Many banks have had a no-questions-asked approach to cash FCY deposits for some months now, allowing some businesses to source their hard currency needs on the parallel market and then deposit into their accounts to cover key imports. They’re allocated 85% of the amount they deposit in FCY and take the rest in local currency.

More established startups are in a better place, as are non-tech players with reliable foreign currency revenues: “We haven’t been super affected by the decision,” says Hussein El Kheshen (LinkedIn), the co-founder and CTO of online real estate marketplace Sakneen, pointing to the company’s FX funds abroad from previous investments. “Secondly, it’s always been easier to subscribe to software abroad anyway, [due to Egypt’s hefty tax on software paid for in FX], so we had already been paying for our software services from abroad prior to the FX restriction.”

Name that tax: The Tax Authority began this year requiring global tech companies to charge and remit 15% value-added tax on services sold in Egypt. It is also now demanding that Egyptian companies withhold 20% of the value of any service paid for abroad and provide the seller with a withholding tax receipt. The catch: Global players won’t talk to small- and medium-size businesses about withholding tax, leaving most companies no choice but to “gross up” their payments and remit the 20% to the state.

Outsourcing payments? “We [own] an offshore company that handles [software and marketing payments], but it’s a huge problem for young local startups, who will now have to look outside,” co-founder of the women-targeted health and wellbeing startup Motherbeing Youssef El Samaa (LinkedIn) said.

“Local” outsourcing: Closer to home, some companies — including Microsoft and Google — have local partners who will take payment in EGP, then take care of paying the offshore provider. The cost: Significant markups, payment 12 months in advance, and much less flexibility when it comes to adding seats or changing plans.

How have younger startups been meeting obligations? One startup had to use multiple credit cards, including employees’ personal cards, to meet payments, one founder told us, pointing specifically to payments for social media ads, which are strictly pay-as-you-go. “Our total marketing costs are up 13% and our indirect tech costs are up 15%. It’s been rough,” the founder said.

Paying in FCY by bank transfer is possible if you have the cash — but not from all vendors, and generally only if you’re paying a year in advance, delivering a hit to cashflows.

While some companies are looking to open offshore arms, especially in the Gulf, others are seeking virtual bank accounts that can be opened abroad, El Samaa said.

Alone among the big global tech players, Google has gotten the memo: Google gave Egyptian clients paying with local credit cards a two-month extension starting in November on payments that were due shortly after the CBE announced its decision, allowing them to use Workspace services until January.

NOT WHAT FOREIGN INVESTORS WANT TO SEE

No FX? No investment. Venture capital investors — already a rare breed in Egypt since the end of the “freemoney” days — are less inclined to invest in companies that only generate EGP revenues — even if they are growing, El Samaa said.

“These regulations just cement venture capital firms’ reluctance to invest in Egypt,” El Shalakany said. The revenues of Egyptian startups are already down 50% in USD terms and the LCY cost of the USD expenses is up 2x. “It’s a double whammy of sorts,” El Shalakany said.

It might be time to expand abroad: “In the short-term, business will have to survive by going to other markets,” El Shalakany said. “This will result in a level of brain-drain, of course, but thinking beyond Egypt is one of the main ways to hedge this risk. This means that you may have to reallocate resources that would’ve increased business in Egypt to other markets.”

The gov’t is in an unenviable position, ElShalakany says. “This is probably not the biggest priority for the government right now, given the current economic landscape. Obviously, you also don’t want the economy to stall as that would create a much bigger problem. I do have to stress that this is not about the policy not being done with good intentions. It could be benefiting the majority of the people in the economy — but for people in this minority [startups and small businesses], this can be detrimental to your business for the short-to-medium term.”

“But it’s not all doom and gloom,” El Shalakany added. “It’s over dramatic to say that this makes Egypt an uninvestable market. Despite the challenges, Egypt is a large market with great talent and people that are building very innovative solutions. As long as you can build innovative products and there’s a market for them, people will buy and you can have a successful business”, El Shalakany said.