EcoTV Week

Egypt: Increasing risk on foreign currency liquidity

03/18/2022

The sharp rise in soft commodity prices entails a deepening of the current-account deficit. It should accelerate the deterioration in foreign currency liquidity. In this context, a renewed international financial support could be needed.

Transcript

The war in Ukraine will have a significant impact on the Egyptian economy. It should reinforce a deteriorating trend since mid-2021. The reliance on imports is very high and the rise in commodity prices will affect the whole economy: rise in inflation with adverse consequences on growth and fiscal accounts, and above all a deterioration in external accounts.

Egypt is the first wheat importer in the world and 80% of those imports come from Ukraine and Russia. Wheat price on international market has risen by 50% since the beginning of the year. The tourism sector should be affected as well as it is estimated that around 30% of the tourist frequentation comes from Ukraine and Russia. Those factors should deepen the current-account deficit. Moreover, the cost of debt issuance on international capital market has markedly risen since mid-2021, and the vulnerability to portfolio flows is increasing.

Egypt can rely on financial support from Gulf countries, but the liquidity in foreign currency has been deteriorating since mid-2021. Central bank foreign reserves are stable, but at a price of a fast rise in commercial banks’ net external debt, as they rely on foreign creditors to have access to foreign currency.

If the liquidity in foreign currency is acceptable in the short term, prospects are not good and a financial support from the IMF could be needed. It would entail a rise in foreign currency assets and would maintain the attractiveness of the Egyptian market to foreign investors.

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE