Egypt's national currency, the Egyptian pound, has fallen to a record-breaking 26.49 against the US dollar.
Egypt has been grappling with foreign exchange (FX) liquidity issues, primarily due to a combination of structural economic challenges and external shocks. The financial impact of the conflict in Ukraine has been a significant factor, straining Egypt's finances since March.
The value of the Egyptian pound deteriorated from 19.7 to the US dollar in March, and on Wednesday, it weakened further to 26.49 to the US dollar, marking its biggest one-day move since October 27. Underground market currency dealers bought US dollars for 29 pounds each on the black market on Wednesday, despite the devaluation.
Egypt's two main state financial institutions, Banque Misr and National Bank of Egypt, announced on Wednesday they were providing 1-year savings certificates with a return of 25%, a common practice during a decline. This move was aimed at attracting domestic savings and bolstering FX liquidity.
The IMF approved a 46-month, $3 billion financial rescue plan for Egypt in October. Alongside this, Egypt has seen strong foreign exchange inflows from portfolio investments and official sector support. Notable among these are a $12.5 billion investment pledge from Gulf states like Qatar and Kuwait, with about half expected by the end of 2025. Worker remittances have also surged, aiding the current account deficit narrowing and stabilizing FX liquidity.
Egypt benefits from an $8 billion IMF loan and rising tourism revenues, contributing additional external financing. However, the country still faces liquidity challenges in commercial banks and the broader FX market due to high debt payments, a sharp drop in Suez Canal toll revenues, dwindling gas production, large wheat imports, and the military’s dominant role in the economy.
In response to these challenges, financial experts and authorities have proposed several solutions. These include the implementation of policy reforms, such as easing cycles by the Central Bank of Egypt to stimulate financial markets and attract carry trade investment. Expansion of local debt instruments and retail bonds targeted at citizens is also being considered to improve domestic financing and liquidity.
Strengthening banking regulatory and supervisory frameworks, safety nets, and interbank liquidity markets is another recommended measure to safeguard financial stability. Continued fiscal tightening paired with strategic foreign investments and infrastructure projects, like the Suez Canal Economic Zone, are designed to enhance longer-term FX inflows and economic resilience.
Encouraging the private sector through better access to loans, particularly in industrial and services sectors, is another proposed solution. As commercial bank liquidity slightly improves, this could provide a much-needed boost to Egypt's economy.
In summary, Egypt’s FX liquidity issues stem from structural economic challenges and external shocks but are being addressed through a mix of foreign investment inflows, policy reforms, debt instrument innovations, and macro-financial stability measures. The key to resolving the exchange rate issue, according to Goldman Sachs analyst Farouk Soussa, is to merge the exchange rate, which requires removing the FX backlog and ensuring demand for FX is met going forward. Money flexibility is considered essential by both the IMF and Goldman Sachs for Egypt.
- To address Egypt's FX liquidity issues, the private sector is encouraged to access more loans, particularly in the industrial and services sectors, potentially boosting the domestic economy.
- Amidst Egypt's FX market challenges, financial experts and authorities have proposed strengthening banking regulations, increasing the supply of local debt instruments, and improving interbank liquidity markets to safeguard financial stability.
