Despite a significant improvement in macroeconomic indicators over the past five years, foreign currency liquidity remains a major source of vulnerability for the Egyptian economy.
The net foreign asset position of commercial banks has steadily deteriorated over the past year and was in deficit by USD10 billion in December 2021, by far its lowest level for a decade. Meanwhile, gross currency reserves at the central bank grew only very slightly over the year. This deterioration of the external position of the banking system as a whole reflects that of the external accounts. The current account deficit is increasing following a sharp rise in imports. When it comes to capital flows, since last September, the increase in the spread on Eurobonds and the reduced vigour of portfolio flows have put additional pressure on external accounts.
The situation is sustainable in the short term, thanks to satisfactory reserves at the central bank and only modest foreign currency debt service due in 2022. However, the outlook is deteriorating. The economic recovery will continue to drive imports higher, whilst the monetary tightening in the USA is likely to affect negatively capital flows to emerging economies. Egypt’s vulnerability to external shocks therefore continues to increase.
External liquidity of banking system
