Is Egypt joining the global de-dollarisation spree?

Since the 2011 Arab Spring uprising, the Egyptian state has struggled to control its balance sheet and suffered grave deficits.

This has led to a spree of borrowing from abroad in an attempt to save the value of the Egyptian pound (EGP) and restore economic growth to stabilise a country that suffered from a failed democratic transition process which undermined its economic strength.

By the end of 2011, Egypt’s national debt was around $36 billion USD at 75% of GDP. Today, Egypt’s foreign debt has ballooned to nearly $140 billion USD at 90% of GDP.

To keep up with such deficits, Egypt has worked with the IMF to balance its finances. In 2016, it borrowed 12 billion dollars to finance an economic reform programme, which led to the devaluation of EGP from 8 EGP per USD in 2016 to 18 EGP per USD in 2022.

As a result of the Covid-19-induced global economic slowdown, it was forced to obtain another loan from the IMF’s Rapid Financing Mechanism of $2.77 billion in May 2020, and a third loan of $5.2 billion from the Stand-By Arrangement in June of the same year. Currently, Egypt is seeking another $3 billion loan from the IMF to cope with the added economic pressure of the war in Ukraine.

"Egyptian citizens are seeing their economic well-being regularly slashed with every loan, while inflation eats into their savings and incomes, paralysing their ability to accustom to the new prices"

The growing cost of borrowing is causing a negative impact on Egyptians’ wages and living standards despite the contribution of loans to sustaining economic growth and preventing economic collapse. Egyptian citizens are seeing their economic well-being regularly slashed with every loan, while inflation eats into their savings and incomes, paralysing their ability to accustom to the new prices.

Thus, to reduce its deficit further and create better job opportunities, Egypt has sought to increase its Foreign Direct Investments, particularly from ally GCC countries.

For example, Saudi Arabia recently announced $8 billion in investments in renewables, pharmaceuticals, and e-commerce in Egypt, while Qatar announced another $5 billion. Furthermore, the UAE announced $10 billion in forthcoming investments in Egypt in partnership with Jordan.

Egypt also frequently receives central bank deposits from Gulf countries worth billions to stabilise the exchange rate of the currency and restore confidence in the state’s ability to meet its foreign debt obligations. Unfortunately, this regional support does not cover the skyrocketing debt service bill.

“The growing mountains of debt and high cost of borrowing in USD is forcing Egypt to seek alternative windows for funding to avert a potential sovereign debt crisis and a collapse in EGP’s purchasing power, which could destabilise society and the government,” Magdy Abd Alhadi, an Egyptian economist, told The New Arab.

To diversify its sources of finance, the Egyptian Minister of Finance Mohamed Maait announced in May 2022 the country’s intention to issue bonds in yuan to raise capital for the first time in the Chinese bond market. The announcement came during a meeting with the Chinese ambassador to Egypt that discussed economic and financial relations.

“We aim for joint cooperation with China to issue Egyptian bonds in yuan in the Chinese market, which is the second-largest bond market in the world. This will contribute to diversifying our financial resources and attracting new investors, and help reduce the cost of financing developmental projects,” the minister said.

“Egypt imports a large amount of goods and services from China, including for the construction of the New Administrative Capital. This requires Egypt to have access to the yuan. It is likely cheaper to borrow in yuan than to borrow in dollars and convert to the yuan,” explained Firas Modad, a London-based independent analyst, to The New Arab.

Egypt also reached out to Russia, despite US-imposed global financial sanctions on it due to its “military operation” in Ukraine, to discuss further trade in national currencies, in what some observers described as an “act of defiance” from a close US ally.

In particular, an Egyptian delegation led by President Abdel Fattah El-Sisi took part in the Russian June 2022 St Petersburg International Economic Forum to discuss economic collaboration.

Currently, the total trade volume between Russia and Egypt amounts to $6 billion, of which more than half is Russia’s wheat exports. Furthermore, Egypt relies significantly on Russian tourists who are no longer able to travel to Egypt freely due to travel restrictions imposed by Western governments.

During the Forum, the Egyptian Minister for Trade and Industry confirmed Egypt’s intention to set up mechanisms to trade with Russia using national currencies, including accepting the MIR Russian payment system to overcome financial sanctions. Modad described the step as understandable.

“Egypt is a major buyer of Russian and Ukrainian wheat – which will in the future likely be sold in rubles. Egypt is also a major buyer of Russian military hardware, as it diversifies its supply of military kit to deal with emerging regional challenges," he explained. 

"Russian tourists are also among the biggest spenders in the Egyptian tourism sector. From that perspective, it makes sense for Egypt to try to maintain these relations. The only way to do so under the current sanctions regime is to bypass the US-led financial system, which has become unduly restrictive.”

"Egypt is not alone in its willingness to take steps to de-dollarise its debt sources and trade, especially since the conflict broke out in Ukraine"

Egypt is not alone in its willingness to take steps to de-dollarise its debt sources and trade, especially since the conflict broke out in Ukraine. Earlier this year, Saudi Arabia announced its willingness to break with decades-long petrodollar arrangement and announced discussions with China to sell oil in yuan.

Turkey and Iran are actively pursuing plans to de-dollarise their trade with Russia and China. Globally, BRICS countries and the Shanghai Cooperation Organisation members also announced advanced discussions into trading in national currencies instead of the dollar.

Abd Alhadi believes the US will take issue with Egypt’s warmer financial and economic relations with Russia and China, especially as it indirectly offers support to their ongoing efforts to de-dollarise the global economy. He believes that Egypt is incrementally contributing to the deterioration of trust in USD yet is unlikely to threaten the US global financial hegemony.

“Egypt is not turning away from the US, nor is it siding with Russia. It is doing what countries like Turkey are doing – seeking to preserve national autonomy by maintaining good working relations with multiple superpowers," explained Modad.

"However, the US maximalist position on Russia may be a potential factor that can hinder smooth relations. Nonetheless, Egypt’s role as a security partner for Israel remains critical, which will likely limit any fallout from such steps.” 

When the US decided to embark on a global financial war on Russia in retaliation for its war on Ukraine, it failed to account for the cost that will be incurred by its partners in the MENA region and elsewhere as a result.

This has led many to defy the US and refuse to take sides on the matter, which is undermining the US sanctions effectiveness.

Egypt was no exception as it is trying to minimise the cost of the war on its economy even if that means non-compliance with the US sanctions.

The Biden Administration seems to have gone beyond the Trump Administration’s “America First” mantra to push an “America Only” agenda, which is harming its allies and pushing them to seek alternatives that may have long term negative effects on the global standing of the US.

Ahmed Alqarout is a specialist in the political economy of conflicts. His research focuses on the impact of financial and economic policies on regime stability in the Middle East and North Africa.