Foreign Exchange Stability in Egypt Hinges on Continued US Dollar Inflows Into The Market: Experts

The Egyptian pound's performance against the US dollar has fluctuated since the last depreciation of the local currency by the Central Bank of Egypt (CBE) on 6 March in line with its commitments to a flexible exchange rate regime under the $8 billion loan deal with the International Monetary Fund (IMF).

The Egyptian pound fell against the US dollar by 1.8 percent by the end of banking transactions over the first two working days after Eid al-Adha's eight-day holiday, which began officially 15th of June and ended on Wednesday 19 of June but which included the weekend on Friday 20th and Saturday 21st of June.

The US dollar rose from 47.50/1 USD at the end of the last working day before the holiday to 48.37/ 1USD.

In the parallel currency market, sources in the importing sector told Ahram Online that the US dollar rate jumped from EGP 47.75/ 1 USD before the Eid Al-Adha holiday to EGP 48.40/1 USD as demand for the greenback increased and buying virtually stopped.

This drop comes after an appreciation of the Egyptian pound during the opening of transactions on Sunday -- when the EGP rate rose by 1.9 percent against the US dollar -- before reducing its losses to close at EGP48.20 /1 USD. Previously, the closing rate for the EGP against the US dollar stood at EGP47.50/1 USD on the last working day before the holiday.

Economists speaking to Ahram Online advised waiting until the end of the week to accurately gauge the market's reaction to the recent surge in the dollar's rate against the Egyptian pound to determine if this rise is a temporary fluctuation or the beginning of a sustained decline for the pound.

Expected Increase “This rise in the US dollar rate was anticipated, particularly after an eight-day holiday, which led to a backlog of currency exchange requests at banks,” banking expert Hany Abou El-Fotouh told Ahram Online.

In a report issued on Sunday, the US-based investment bank Goldman Sachs suggests that the Egyptian pound no longer needs support from the Central Bank of Egypt (CBE) thanks to the foreign currency inflows.

So far, several international financial institutions and partners have committed about $58 billion in finances, including the $24 billion cash inflows Egypt received as proceeds of the Ras El-Hekma development deal signed with the UAE in February.

However, while the US dollar liquidity Egypt received in the first half of 2024 alleviated the liquidity crisis, it did not address the root cause, making a recurrence of the US dollar shortage crisis possible.

Since the eruption of the Russian-Ukrainian war in March 2022, a total of $25 billion in hot money fled the market, causing an unprecedented US dollar shortage crisis that lasted for over two years and negatively affected the country’s economy.

This crisis also pushed the three major credit rating agencies to revise Egypt’s credit rating outlook to stable from positive, before upgrading it recently on the back of the US dollar inflows that have started to enter the market.

According to data from the Ministry of Finance, Egypt aims to issue international bonds worth EGP 69.3 billion in the FY 2024-2025, which starts on 1 July, compared to an estimated EGP 56.9 billion in FY 2023-2024.

Official data say that the total value of imports increased by 11.3 percent, reaching approximately $5.966 billion in April 2024, compared to $5.360 billion in April 2023, according to official data. Goldman Sachs forecasts a drop in the Suez Canal’s revenues to $6.9 billion in FY2023/2024, which ends on 30 June, and a further decrease in revenues to $6.7 billion in the upcoming FY2024/2025, compared to the all-time high of $8.76 billion attained in FY2022/2023, before a projected increase to $9.6 billion in 2025-2026. Abou El-Fotouh indicated that the US dollar-denominated certificate of deposits (CDs) issued recently by state-owned banks have failed to encourage some dollar holders to relinquish their dollars in exchange for benefiting from the high interest rate. Following the CBE’s action of raising the key interest rates on 6 March, the state-owned National Bank of Egypt and Banque Misr issued a three-year certificate with a decreasing annual interest rate of 30 percent for the first year, 25 percent for the second year, and 20 percent for the third year, with interest paid annually.

He emphasized that the investment environment in Egypt needs further simplification of procedures to make it more attractive for capital investments.

IMF Requirements International net reserves (NIRs) reached $46.1 billion at the end of May, backed by US dollar inflows. Restoring Egypt’s NIRs is a key commitment Egypt has pledged to the IMF.

Foreign Exchange Market Stability According to experts, the ongoing high demand for the US dollar is a key factor behind the continuity of the parallel currency market. They also stressed that banks prioritize importers' need for the US dollar, which forces some to buy US dollars from the parallel currency market.

Abou El-Fotouh suggested stabilizing the exchange rate by curbing the parallel currency market by banning non-essential imports, a measure allowed under the General Agreement on Tariffs and Trade (GATT) agreement, stressing that boosting local production and deepening domestic manufacturing could positively impact the import bill.

Speaking to Ahram Online, lecturer of finance at the Faculty of Economy and Political Science at Cairo University Ramy El-Galy explained that the continued activity of the black market is linked to the regular inflow of US dollar liquidity into the Egyptian economy and its availability through official channels.

The government should build on the “Ras El-Hikma” deal and increase direct investment to attract more similar investments.

Impacts of global, regional, and geopolitical tensions El-Galy pointed out that the global and regional geopolitical tensions have impacted the US dollar inflows into the country, particularly revenues from the tourism sector and the Suez Canal, which have dropped by 60 percent.

Furthermore, remittances from expatriate workers have not seen a significant surge to compensate for the decline in other dollar sources.

the World Bank announced its approval of a financing package worth $700 million for the Egyptian government as part of the Development Policy Financing (DPF) program.

This is a part of the $6 billion bailout package the bank has committed to Egypt.

El-Galy explained that the continued influx of US dollars is crucial for the Egyptian economy, especially with Egypt's obligations to pay service debt instalments, interest, and the import bill.

He noted that the decision of foreign investors to inject capital into various countries depends on currency stability rather than its value.