Egyptian economy makes modest gains amid high inflation

BRICS membership to enhance Egypt’s financial position
Egyptian economy makes modest gains amid high inflation
Central Bank releases July data on Egypt’s net foreign assets

The deficit in Egypt’s net foreign assets (NFAs) has declined by three percent or EGP24.9 bn. According to data from the Central Bank of Egypt, the country’s NFAs hit negative EGP812.4 bn in July. This marks the first decrease since March of this year.

This recent improvement was primarily driven by an increase in NFAs with commercial banks. NFA refers to the overall net worth of foreign assets held by a country’s banks and monetary authorities minus foreign liabilities.

Egypt’s financial woes

Over the past three years, Egypt has been facing financial concerns. A prolonged scarcity of foreign currency, paired with a significant expansion in the money supply, serves as the major cause.

Egypt’s M1 money supply, which represents the currency in circulation and local currency demand deposits, grew by 33.1 percent year-on-year (YoY) in July. This is lower than the 33.4 percent YoY increase recorded in June. 

On the other hand, the M2 money supply, which comprises M1 and local currency time and savings deposits and foreign currency deposits, rose by 24.4 percent YoY in June.

The rapid expansion of the money supply raises concerns about inflation in Egypt, which reached a historic high of 36.5 percent in July. Meanwhile, its currency has dropped by half in 18 months. 

The International Monetary Fund (IMF) noted in December that the country had been financing its current account deficit by drawing down NFAs. Since late 2021, the reduction in NFAs has also been playing a critical role in supporting Egypt’s currency. Before the decline began, NFAs were at a positive EGP248 bn.

Read: Egypt’s economy to grow by 4.2 percent, says Morgan Stanley

Joining BRICS 

Despite these challenges, Egypt is hoping to bolster its foreign currency reserves and attract new investments by joining the BRICS. Brazil, Russia, India, China, and South Africa make up the said bloc. 

The group recently extended an invitation to Egypt to become a member starting January 1, 2024. Other invitees include Saudi Arabia, the United Arab Emirates, Argentina, Ethiopia, and Iran.

“​​I appreciate Egypt being invited to join BRICS and look forward to coordinating with the group to achieve its goals in supporting economic cooperation,” expressed President Abdel-Fattah al-Sisi.

In a recently released statement, the cabinet said that “the group’s aim of reducing dollar transactions will lower the foreign currency pressure in Egypt.” Being a BRICS member entails transacting with fellow member states and trading partners in local currency. 

Additionally, the bloc’s New Development Bank (NDB) will grant Egypt access to concessional funding for development projects. BRICS members established the bank in 2015.

Monica Malik, chief economist at the Abu Dhabi Commercial Bank, said that “it’s positive for Egypt to be included.”

“While in the near term, the impact is expected to be limited, it could help strengthen its relationships with key emerging market economies,” she further remarked. 

Meanwhile, James Swanston, emerging markets economist at Capital Economics, also pointed out that BRICS expansion will not have a major economic impact immediately. However, “the possible shift in geopolitical alignment could have longer-run implications for trade and economic growth,” he shared.

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