To diversify its basket of currencies, the Central Bank of Egypt (CBE) and the Central Bank of the United Arab Emirates (CBUAE) inked a bilateral currency swap agreement last week.
According to the agreement, the CBE will be able to exchange LE42 billion for 5 billion United Arab Emirates dirham (AED) ($1.36 billion). The deal is calculated according to the official exchange rate of LE8.4 per one AED.
The deal will contribute to mitigating the pressure of the demand on the US dollar in the Egyptian market, banking expert Ahmed Shawki told Al-Ahram Weekly.
Badly affected by the fallout from the Russia-Ukraine war and the subsequent hike in global inflation, Egypt is facing a shortage of foreign exchange revenues.
A currency swap agreement is a deal between two central banks to exchange cash flow in one currency against a cash flow in another currency according to predetermined terms and conditions. It allows a central bank to secure foreign currency liquidity from the central bank that issues it.
Shawki explained that the agreement addresses two main issues: alleviating the pressure on the US dollar and lowering the balance of payment (BoP) deficit. Egypt’s current account deficit stood at $5.3 billion between July and March of fiscal year 2022-23.
The agreement will especially support Egypt’s oil imports from the UAE which exceed $800 million, according to Shawki. Trade exchange between Egypt and the UAE grew by 6.5 per cent in the first 11 months of 2022 to record $4.6 billion, compared to $4.3 billion posted in the same period in 2021, according to the latest figures published by the Central Agency for Public Mobilisation and Statistics (CAPMAS).
The breakdown in the figures shows Egyptian imports from the UAE standing at $2.9 billion, down from $3 billion, while Egyptian exports to the UAE increased to $1.9 billion, up from $1.8 billion.
According to CBE Governor Hassan Abdallah, the deal aims to enhance joint relations binding Egypt and the UAE on all fronts and contributes to boosting the volume of trade exchange between the two countries.
CBUAE’s Governor Khaled Mohamed Balama said the bilateral currency swap agreement between Egypt and the UAE reflects the strong relationship between the two countries and serves as an opportunity to promote cooperation and develop respective economic and financial markets.
Balama also noted that the deal is in line with the efforts of the leadership of the two countries to collaborate more broadly across multiple areas, adding that the CBUAE is keen to deepen its cooperation with the CBE to achieve common interests, positively impact the trade, investment and financial sectors, and enhance financial stability.
This is not the first currency swap deal for Egypt. In 2016, the CBE reached a swap agreement with the People’s Bank of China with a value of $2.6 billion and a tenor of three years.
That deal was reached while Egypt was close to securing a $12 billion loan deal with the IMF at the time, under which Egypt had significantly devalued its local currency against the US dollar.
More recently, during a visit by the CBE governor to Beijing last week, the possibility of a currency swap was also discussed. The President of the China Development Bank (CDB) Tan Jiong agreed to explore expanding the use of China’s yuan in local projects and joint financing activities during talks with Abdallah, a CBE statement said.
* A version of this article appears in print in the 5 October, 2023 edition of Al-Ahram Weekly