CAIRO — The central banks of Egypt and the United Arab Emirates signed a currency swap agreement worth $1.36 billion late last month that could provide Cairo with a lifeline in its dire financial crisis. Few details have been made public, but the arrangement will give Egypt access to up to 5 billion Emirati dirhams ($1.36 billion) in exchange for 42 billion Egyptian pounds ($1.36 billion).
Since the onset of the Ukraine war in early 2022, Cairo has been grappling with a hard currency shortage, largely caused by a massive capital flight and its difficulties in accessing capital markets, that is complicating its ability to cover its import bill and debt obligations. The Egyptian pound is also experiencing great instability and has been devalued three times since March 2022, losing about half of its value against the dollar.
Hany Abou el-Fotouh, director of the Alraya consulting firm, told Al-Monitor that the deal is promising. “For Egypt, the currency swap deal will provide a buffer against external shocks and help it to maintain financial stability. It is particularly timely given the current global economic uncertainty, which has put pressure on many economies, including Egypt,” he said.
The currency swap agreement will give Egypt some respite from its hard currency crunch and relieve some of the pressure on its foreign reserves by allowing it to finance trade with the UAE with its local currency instead of dollars.
Egypt’s imports from the UAE, mainly fuel and oil products and plastics, reached $2.65 billion in 2022, according to UN Comtrade data.
Alia al-Mahdi, former dean of the Faculty of Economics and Political Science at Cairo University, told Al-Monitor that the deal is a welcome development. She explained, “According to the agreement, the UAE will allow Egypt to import 50% of their imports in EGP.”
The swap line also guarantees Cairo access to low-cost external financing, FX liquidity and stability in the exchange rate with Abu Dhabi at a time of great volatility for Egypt’s currency. Under the arrangement, the implied AED/EGP exchange rate is set at 8.40.
Today, Egypt's local currency remains under considerable pressure and a fourth devaluation is considered a matter of time, partly because it is a requirement under the $3 billion loan agreement signed with the International Monetary Fund in 2022.
James Swanston is an emerging markets economist at the independent economic research business Capital Economics. “The swap line adds to the financial support that the Gulf states have provided to Egypt in light of its balance of payment strains,” he told Al-Monitor. “It comes at a time when the IMF disbursements of Egypt’s deal have been delayed, and will provide the Central Bank of Egypt with more ammunition to either bolster its FX reserves or to use to prop up the currency before any scheduled currency move,” he added.
Swanston also noted that given the news of Egypt's presidential election to be held in December, “a devaluation may come after that, hence the need for more financial resources to tide policy-makers over now.”
The central banks of Egypt and the UAE have disclosed very little information about the arrangement and some details, such as its maturity, have not been made public.
The agreement’s scope remains to be seen, as such swap lines can also simply act as a safety net and enhance the response capacity of one of the central banks involved in the arrangement by ensuring it has access to hard currency but without necessarily having to get to use it.
In the press release announcing the agreement, Egyptian Central Bank Governor Hassan Abdallah is quoted as saying only that the line will contribute to “facilitating and increasing the volume of trade between the two countries.”
His Emirati counterpart, Khaled Mohamed Balama, simply stated that the arrangement will constitute an opportunity to develop the economic and financial markets of both countries.
Yet Abou el-Fotouh believes that the UAE stands to benefit from the agreement as well. “The currency swap deal will further strengthen [the UAE’s] economic ties with Egypt, which was its largest Arab trading partner in 2022, with bilateral trade reaching $10.3 billion. The deal will make it easier for businesses to operate in both countries and will promote further trade and investment,” he said. “It is worth noting that the UAE is a major source of foreign investment in Egypt, with Emirati companies investing $9.4 billion in Egypt in the first half of 2023.”
The announcement of the swap line followed Egypt and the UAE being accepted into the BRICS bloc at the end of August during the group’s latest summit in South Africa, where its member states reaffirmed their intention to de-dollarize their trade relations and increase the use of local currencies in their commercial transactions.
In this context, on Sept. 27, the day before the swap line with the UAE was announced, the Central Bank of Egypt also reported that it is discussing another currency swap agreement with China’s central bank to enhance the relationship between the two countries.
The China Development Bank also expressed interest in discussing an expansion of the use of the yuan in future projects and joint financing activities with Egypt, according to a third Egyptian Central Bank statement released on Sept. 28.
In 2016, the bank signed a three-year currency swap line with the People’s Bank of China worth about $2.6 billion to enable Egyptian businesses to settle their trade relations with Chinese firms in yuan.
Although the agreement between Egypt and the UAE is being broadly welcomed, a 2017 IMF report on currency swap arrangements warned that these lines, if counted as reserve assets readily available by the countries involved, risk providing them with the chance to “window-dress” their more alarming indices, such as FX reserves, and to delay essential structural changes, given their ability to print their own domestic currencies.
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