Egypt is in a cash crunch due to various external factors that caught it off guard after the start of the Ukraine conflict in 2022.
The United Arab Emirates and the central banks of Egypt agreed upon a currency swap agreement last month. The agreement is worth $1.36 billion and can lend a helping hand to Egypt during its strenuous times of financial turmoil. This currency swap will help Egypt exchange 42 billion Egyptian pounds for 5 billion Emirati dirhams.
Egypt is in a cash crunch due to various external factors that caught it off guard after the start of the Ukraine conflict in 2022. Cairo faced a massive capital outflow, and it became extremely difficult for it to access foreign capital markets for some relief. This further pushed it into the inability to fulfil its domestic import demands and debt repayments. Their currency, the Egyptian pound, was highly volatile and countered huge-scale price oscillation. Its currency was devalued three times since March 2022, which halved against the US Dollar.
Hany Abou el-Fotouh, director of Alraya consulting firm, said that this deal is of utmost importance for Cairo to tackle its monetary issues. The currency swap will provide it a buffer against any further external hazards and also help it develop financial stability. He highlighted the deal timing is crucial for the present global economic scenario, which is a headache for a lot of emerging and underdeveloped economies.
Egypt is in a dire situation of needing hard cash, and this currency swap agreement will give it some relief in terms of easing the pressure on its foreign reserves. Cairo will now be able to finance its trading activities with the UAE in its domestic currency and keep aside its dollar reserves.
As per the UN Comtrade data, Egypt’s imports from the UAE went over $2.65 billion, mainly of fuel and oil products and plastic. Alia al-Mahdi, former dean of the Faculty of Economics and Political Science at Cairo University, said that the current is viewed as a welcome development and as per the agreement, the UAE government has agreed to allow Egypt to import 50% of their import requirement in EGP.
Under this swap agreement, the currency exchange rate for AED/EGP is agreed to be at 8.40. This will enable Cairo to avail low-cost external financing, short-term liquidity in foreign reserves and a stable exchange rate with Abu Dhabi.
James Swanston, an emerging economist at the independent economic research business Capital Economic, said that this currency swap would be an add-on over the extended financial aid provided by its Gulf counterparts to help Cairo with its balance of payment troubles. He mentioned that recently, the deal with the IMF got delayed, which would have enabled the central bank of Egypt to either improve its foreign reserves or pour these resources into improving the currency before any scheduled currency move.
The announcement of the swap agreement came after Egypt and the UAE were invited to join the BRICS bloc at the end of August during the latest summit in South Africa. The member nations talked about solidification of their plans to reduce their dollar dependency and push forward trade deals in domestic currency.
The Central Bank of Egypt disclosed on the day when the swap agreement was announced that they are in talks with the Central Bank of China for another currency swap agreement to boost trade relations between the two nations.
The Egypt-UAE agreement is widely welcomed, but a 2017 report published by the IMF highlights the harsh truths. The report showcased that if such agreements are looked upon as reserve assets available for the countries involved in the deal, then this would pose a risk of exaggerating the flashy metrics like forex reserves and delaying the structural changes required to rectify the root cause.