play videoplay video

In the first reaction to the announcement of the agreement regarding the Ras al-Hikma city deal between Egypt and the Emirates, the exchange rate of the dollar fell in the parallel market in Egypt, to between 48 pounds and 52 pounds to the dollar, after it had been around 64 pounds.

The improvement in the pound's exchange rate came immediately after the announcement of the deal, which was valued at $35 billion, of which the UAE is scheduled to pay $24 billion in two installments, the first within weeks and the second after two months, in addition to settling the status of $11 billion that were deposits of the UAE with the Central Bank of Egypt. , to be dropped from the value of the Egyptian external debt.

Questions arise here, perhaps the most important of which is about the possibility of the pound’s exchange rate continuing to rise, after implementing the deal and completing the first and second reviews of the borrowing program from the International Monetary Fund, while increasing the value of the agreement.

To answer this question, it is necessary to know the status of inflows and outflows of foreign exchange in Egypt, and the negative repercussions affecting flows from their main sources.

Status of dollar reserves

If the Central Bank’s data indicates that there is a deficit in net foreign assets of about $27 billion at the end of last October, then writing off the value of the UAE’s deposits from the debt will undoubtedly improve the deficit situation in net foreign assets, but it is unlikely to end the situation. the problem.

It is expected that the foreign assets deficit will remain at best $16 billion, and may increase in light of the tendency of the banking system - in particular and the government in general - towards expanding borrowing from abroad.

This may lead to continued pressure on the Egyptian pound, and the return of the parallel market (black market) again at an exchange rate higher than the current prices.

As for the movement of foreign exchange through the balance of payments, there is a challenge facing it, represented by the weak performance of merchandise exports, as well as the rest of Egypt’s foreign exchange resources. What is new is the negative impact due to the decline in revenues from the Suez Canal and revenues from the tourism sector, against the backdrop of the decline in ship traffic that the Bab al-Mandab Strait is witnessing. As a result of the Houthi attacks on Israeli ships or those heading to Israel in the Red Sea and the subsequent escalation.

The Egyptian Prime Minister during the announcement of the Ras El Hekma deal (Egyptian Council of Ministers via Facebook)

Suez Canal revenues declined by about 45% during the past months of December and January, according to statements by the Chairman of the Suez Canal Authority, Osama Rabie.

It is unlikely that the Red Sea disturbances will end in the short term, and thus the pressure on canal revenues and the tourism sector may continue, at least through 2024, which makes dollar flows to Egypt during the current year less than they were before the Al-Aqsa flood operation launched by the Palestinian resistance in The seventh of last October, which means that the foreign exchange crisis will continue, and that the Egyptian pound will witness a crisis of devaluation during the coming period.

Non-petroleum merchandise imports to Egypt declined during the fiscal year 2022-2023 to 57 billion dollars, after being in the range of 73 billion dollars, according to the Egyptian balance of payments data.

The foreign exchange crisis in Egypt is expected to continue during the coming period, unless the external debt crisis is resolved

This decline is due to the restrictions imposed by the government on import movement due to the crisis of non-availability of foreign exchange, and this has led to the non-oil private sector in Egypt suffering from a state of recession extending for consecutive months.

If the restrictions are lifted, the value of non-oil commodity imports is likely to jump again, constituting a significant increase in demand for the dollar, and the question remains: Will the UAE flows related to the “Ras El Hekma” deal allow this gap to be covered?

Egypt is suffering from pressures related to its obligations during the year 2024 with regard to paying the burden of external public debt at about 42 billion dollars, and therefore the proceeds of the Ras El Hekma deal will be hijacked between external debt obligations and import requirements, and an attempt to compensate for the deficit in revenues from the Suez Canal and the tourism sector, and even in the needs of individuals for travel purposes. They suffered a lot during the past period.

IMF loan

If the “Ras El Hekma” deal will provide Egypt with urgent flows of foreign exchange, the nature of the credit facilities provided by the IMF differs in terms of the method of payment, as it is paid in tranches during the agreement period, which may extend to about 3 years.

If some estimates indicate that the value of the IMF loan to Egypt may reach $10 billion, it will represent payments that will alleviate the blow of the foreign exchange crisis for Egypt, and may help improve the psychological state regarding the exchange rate of the pound, but this will be for a temporary period.

Similar to the mechanism for dealing with the International Monetary Fund, come the promises of the European Union and the US Treasury. They both provide support related to projects, and in the best case scenario, if they provide support to the public treasury in Egypt, it will not exceed a few million dollars, and from here it is expected that the foreign exchange crisis in Egypt will continue. During the coming period, unless the external debt crisis is resolved.

Egypt's situation with regard to foreign exchange will not be improved unless it drops about $100 billion, so that it can redraw its economic policies.

Debt cancellation hypothesis

More than once, Egypt got rid of its financial crises through the external portal, especially those related to Egypt’s political and military role, as happened in the First Gulf War in 1990, when Egypt sent ground forces to participate in the liberation of Kuwait with the international coalition forces, which allowed Egypt to reach an agreement with... The International Monetary Fund and write off part of its external debt.

The question arises about the relationship of the Israeli war and Egypt’s hosting of refugees from Gaza to obtaining an International Monetary Fund loan and forgiving part of the debt, especially after a statement by International Monetary Fund spokeswoman Julie Cusack last week linked the two matters together.

If this happens, Egypt's situation with regard to foreign exchange will only be improved by dropping about $100 billion, so that it can redraw its economic policies in a way that allows it to emerge from the crisis


Dropping such an amount of Egypt’s foreign debt will enable it to get out of the short-term debt dilemma, which has confounded its financing policy over the past ten years.

On the other hand, if Egypt is unable to cancel a significant portion of its external debt, all forms of support and assistance will be like painkillers, and will not change the reality of the decline in the value of the Egyptian pound in any way.

A crisis of confidence

The Egyptian government’s tools to get out of its financing crisis and improve the exchange rate of the Egyptian pound remain subject to restoring confidence among those seeking the dollar from the banking system, whether they are individuals or institutions.

Egypt may obtain an International Monetary Fund loan, support from the European Union and the US Treasury Department, and aid or support from other Gulf countries, but this may have no effect on improving the exchange rate of the pound, if individuals go to the banks to get the dollar and do not find it.

In this case, the parallel market will be the way out for those seeking the dollar, and Egypt will continue to suffer from a decline in remittances from workers abroad, due to the presence of this market, which fuels a demand that the government is unable to satisfy.

The fact remains that the exchange rate of the pound, and its exposure to further successive declines in its value, is linked to the weak performance of the Egyptian economy in general, and in the productive aspects in particular.

Source: Al Jazeera