Egypt’s foreign-currency position, which was already constrained at B-/Stable/B, is facing difficulties due to reduced traffic in the Suez Canal caused by attacks on international shipping in the Red Sea. According to S&P Global, the royalties earned from Suez Canal traffic account for nearly 8 percent of the Egyptian government’s revenue and play a significant role in generating foreign-currency earnings for the country.
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The limited availability of foreign currency in the Egyptian economy is putting additional strain on the funding profiles of Egyptian banks. Consequently, many banks have decided to further reduce the credit card limits for foreign-currency transactions.
It is anticipated that the Egyptian authorities will devalue the Egyptian pound (EGP) beyond the current exchange rate of 31 EGP/$ to align it more closely with the parallel market rate, which stands at approximately 60 EGP/$. This move towards increased exchange rate flexibility aligns with the objectives of the existing $3 billion IMF program.
However, the report acknowledges that the tighter monetary conditions, which are unlikely to ease following the devaluation, have resulted in a significant rise in the government’s debt service on local-currency debt over the past few months.
Crucial structural reforms
As part of the IMF program, the Egyptian government has already implemented crucial structural reforms. These include enacting a law to enhance the business environment by ending preferential tax, fee, and customs treatments for state-owned enterprises, including military companies engaged in economic and commercial activities. The government has also begun reducing its influence, as well as that of the military, in key sectors of Egypt’s economy. Additionally, the Central Bank of Egypt has discontinued its subsidized lending programs.
Consistent problem posed by the dollar for Egypt
On January 24, Egypt’s President Abdel Fattah El-Sisi highlighted the persistent difficulties Egypt confronts in relation to the currency crisis and the fluctuation of the Egyptian pound against the dollar. This recurring problem significantly affects the nation’s economy. President El-Sisi clarified that the dollar has consistently posed a challenge for Egypt, mainly due to the government incurring expenses in dollars for services that are subsequently sold to citizens in Egyptian pounds. This discrepancy, he emphasized, has repeatedly arisen every few years, impacting the country’s financial stability, Reuters reported.
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