Why De-Dollarizing Egypt Is Easier Said Than Done

Egypt has been considering importing wheat in exchange for foreign currencies other than the USD, including the Indian rupee and Chinese yuan, Minister of Supply and Internal Trade Ali Moselhi stated in April.

The announcement came as part of a global and local movement to shed the USD as the world’s currency franca for trade in the wake of the Federal Reserve’s series of interest rate hikes since 2022, meant to tackle soaring inflation and resulting in a stronger dollar.

That muscular dollar has hurt many economies around the world, including Egypt, which suffered immense pressure on its currency, leading it to lose over 75 percent of its value since March 2022, and a spiralled inflation that peaked at 33.9 percent in March 2023 before easing for the first time in almost a year in April.

While Egypt seeks to find a solution to its USD shortage and reduce dependence on the greenback, abandoning the dollar for imports of basic commodities may not be currently a practical or effective strategy due to Egypt's large trade deficits.

Experts agree that for Egypt to realistically pursue de-dollarisation, major changes in the international financial system and increased acceptance of alternative currencies have to be introduced first.

Trade imbalance "For countries to apply trade exchange using their respective currencies, a major change in the global economic and financial system is required.

These countries must also maintain equal imports and exports to prevent a surplus of currencies that cannot be utilized in trade with other countries,” Ahmed Khattab, a financial analyst, said.

"For instance, India's trade deficit with Russia reached approximately $34.7 billion between April 2022 and January 2023.

If India were to export goods to Russia in rupees, that means that Russia would accumulate a significant surplus of over 2.8 trillion rupees that cannot be utilized in trade with other nations,” Khattab explained.

“In that scenario, India would not possess more goods to export to Russia to make up for that imbalance.

"However, for Egypt, which already faces a substantial trade deficit, receiving payments for exports in rupees, yuans, rubles, or other currencies could have an adverse impact and reduce the country's USD supply,” he noted.

Egypt’s non-oil trade balance deficit reached $17.3 billion in H1 FY 2022/2023, according to the Central Bank of Egypt (CBE).

Why the dollar? "If major economies reach a consensus and demonstrate willingness to embrace de-dollarisation and utilize their respective currencies in bilateral trade, they must achieve a surge in trade exchange between them to cover any trade imbalance, and that would have a positive impact on their economies,” Khattab suggested.

"The global acceptance of the USD stems from the Federal Reserve System being transparent in all of its operations, which makes the world trust in the currency for trade and international reserve accumulation,” he stated.

?Elaborating on the transparency issue, the analyst added: "However, the People's Bank of China and the Central Bank of the Russian Federation exhibit less transparency in their monetary and exchange rate policies.

They extensively intervene in the foreign exchange market to maintain their currencies at specific values."

Mohamed El-Beih, a banking expert, pointed out that "currencies such as the yuan, rupee, or ruble are not widely-accepted reserve currencies, limiting Egypt's ability to utilize them except in trade with the issuing countries."

"Most global trade exchanges are carried out in USD. The greenback is also used in the valuation of key goods in almost all commodity exchanges worldwide.

Hence, if Russia or India, for instance, were to sell wheat to Egypt in their currencies, they would price their exports based on the USD,” said El-Beih.

BRICS' new currency initiative "BRICS countries have not yet succeeded in abandoning the USD in their trade.

They continue to use it alongside the euro for the valuation of commodities,” he added.

Egypt seeks to join the BRICS bloc of Brazil, Russia, India, China, and South Africa, which is an important grouping bringing together the major emerging economies in the world.

Egypt's President Abdel-Fattah El-Sisi approved in March an agreement establishing BRICS' New Development Bank (NDB) and allowing Egypt to join the bank.

El-Sisi participated in two BRICS summits, in 2017 and 2022, when Egypt was invited as a guest to the BRICS Plus High-Level Dialogue in June.

Last month, in New Delhi, Alexander Babakov, deputy chairman of Russia’s State Duma, announced that Russia was spearheading the development of a new currency to be used for cross-border trade among BRICS nations.

?Further discussions regarding the development of the new currency are anticipated to take place at the BRICS Summit in South Africa in August 2023.

“Such a move, nevertheless cannot succeed without a global shift towards reducing dependence on the USD in either pricing and trade of strategic commodities,” El-Beih commented.

Egypt's trade with USD alternatives Russia, China, and India are offering their currencies as alternatives to the USD in trade. But, given Egypt's substantial trade deficit with the three countries, it raises the question of whether Egypt would benefit from using their currencies in trade.

According to the Central Agency for Public Mobilization and Statistics (CAPMAS), Egypt's Exports to Russia recorded $449.5 million in 2022, while imports from Russia reached $3.7 billion in the same year.

Non-oil trade between Egypt and India during the first 11 months of 2022 totalled $4.1 billion, Minister of Trade and Industry Ahmed Samir stated in a meeting with Indian Ambassador to Cairo Ajit Gupte in January.

Egyptian exports accounted for $723 million, the minister noted.

Trade between Egypt and China increased by 2.6 percent to $14.9 billion during the first 11 months of 2022, up from $14.5 billion a year earlier.

Egyptian exports to China amounted to $1.7 billion in the same period, while imports stood at $13.2 billion.