Defying the inevitable?

Sherine Abdel-Razek , Tuesday 10 Oct 2023

The government is dealing with the repercussions of a decision to postpone any further devaluation of the pound, reports Sherine Abdel-Razek

Debit cards
Banning the use of debit cards linked to local currency accounts for purchases or withdrawals outside the country


At least nine local banks have announced that they are banning the use of debit cards linked to local currency accounts for purchases or withdrawals outside the country in a move aiming at limiting the depletion of the country’s stock of foreign currency.

Sources from the banking sector said that there have been verbal instructions from the Central Bank of Egypt (CBE) to all players in the sector to follow suit.

The move, according to an anonymous banker quoted by Reuters, partly stems from a growing trend among debit-card holders to use the cards to make expensive purchases abroad to take advantage of the Egyptian pound’s low official exchange rate.

Debit-card transactions are charged at the official rate of about LE31 to the dollar, whereas on the black market a dollar sells for around LE40 to LE41. Egypt has kept its currency fixed against the dollar since March despite a widening gap with the black-market rate.

The ban is the latest in a series of steps taken by the government to contain the foreign-currency crunch the country has been experiencing, the latest of which was last week’s currency-swap agreement with the UAE. 

The banks in recent months have lowered the ceiling of the amount of foreign-currency withdrawals, as well as the amount customers can withdraw or charge their credit cards to pay for purchases abroad. 

Other initiatives aiming at increasing the inflow of hard currency include selling stakes in state-owned companies in dollars, an initiative for adult male expatriates to see a permanent settlement of their military service obligations in return for paying $5,000, and offering incentives to expatriates to import tax-free cars provided they deposit the value of the cars in dollars in local banks. 

Egypt’s net international reserves came to $35 billion in September, almost 20 per cent lower than the level in 2020. The global crisis of Covid-19 and then the Russian-Ukrainian war have represented a double hit for the country’s foreign-currency resources.  

Egypt’s dollar revenues from its main foreign-currency sources, including export returns, transit revenues from the Suez Canal, tourism revenues, remittances, and foreign investments, decreased from $102.46 billion in 2021-22 to about $94.12 billion in 2022-23, according to Dina Al-Wakkad, an economist at local financial house Ostoul Brokerage.

Al-Wakkad said in a research note that the value of the country’s expected debt-service payments has also increased. The CBE estimates that the value of installments and interest on Egypt’s external debt expected to be repaid during the next year amounts to about $29.23 billion. 

While praising some of the reforms introduced by the government, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said on Friday that Egypt will “bleed” precious reserves unless it devalues its currency again, adding that postponing the move is just delaying ‘the inevitable”.

While the country has vowed to liberalise the foreign-exchange market as part of its loan deal with the IMF, the expected inflationary pressures of another devaluation make it hesitant to take the step. 

Egypt’s has devalued the pound three times since early in 2022, with the currency losing almost half its value against the dollar. 

The inflation rate is also spiraling and broke record highs over the last four months to reach 38 per cent in September, climbing from 37.4 per cent in August.  

An earlier-than-expected presidential election will likely postpone any unpopular decisions, especially another devaluation. President Abdel-Fattah Al-Sisi, who is re-running for the presidency in two months’ time, hinted in June that there will not be another immediate devaluation, warning of the toll rising prices would have on Egyptian households. 

Meanwhile, the IMF noted that progress is being made in talks about delayed reviews of the $3 billion loan Egypt acquired in 2022.  

“In the last couple of days, there have been some constructive engagements. There will be more systematic work of our team with Egypt. So, stay tuned. Let’s see what would come out in the next weeks,” Georgieva said on Friday. 

Both the first and second reviews of the programme, scheduled to take place in March and September, have been postponed because of Egypt’s reluctance to stick to a durably flexible exchange rate. The delay means Egypt cannot access the second and third tranches of the loan, amounting to about $700 million.  

On another IMF-related development, an unnamed senior official at the IMF was quoted by the US financial service Bloomberg as saying that the fund’s annual assessment of the Egyptian economy, known as an Article IV consultation, will take place as soon as the delayed reviews of the $3 billion deal take place.  

IMF staff usually make regular visits to the fund’s member states to meet local officials and then provide a report with an analysis of the status of the economy to the fund’s Executive Board. An Article IV consultation concludes with the presentation of the board’s views to the country’s authorities and its public release. 

Both the reviews and the consultation will give the economy a much-needed stamp of confidence and unlock investments and financial support. 

Georgieva’s statements came a few hours after the ratings agency Moody’s downgraded Egypt’s long-term foreign credit rating from B3 to Caa1 ahead of the expected deadline by the end of November. The Caa1 rating falls within the speculative grade, which means Egypt’s debt is considered to be highly speculative. 

Moody’s cited the government’s “worsening debt affordability trend and the persistence of foreign-currency shortages in the face of increasing external debt-service payments over the next two years.” 

Al-Wakkad said that the downgrade in Egypt’s credit rating and Georgieva’s comments would affect its sovereign bonds, indicating higher risk. “This may lead investors to flee from Egypt’s domestic debt instruments, resulting in higher yields on domestic treasury bonds to secure financing needs and further burdening Egypt’s increasing budget deficit,” she said. 

After Moody’s downgraded Egypt’s credit rating, all Egyptian sovereign dollar bonds declined in value, and most are now trading at their lowest levels since May. 

According to Al-Wakkad, the development will push stock market investors to demand a relatively high rate of return on investments, which will raise the discount rates used in evaluation processes leading to a decrease in the fair values of Egyptian stocks.

Meanwhile, Moody’s said it expects the materialisation of asset-sale proceeds at the CBE to help restore the economy’s foreign currency liquidity buffers and placing Egypt’s outlook at stable.

“This stable outlook reflects the Egyptian government’s track record of consistently meeting its obligations regarding debt repayments,” Al-Wakkad said. 

She said that the ratings agency will continue to monitor the economy. 

If the government continues to sell assets, replenish its foreign currency liquidity reserves, and receive support from the IMF under the agreement and from the Gulf Cooperation Council countries, especially in the light of the implemented reforms and the country’s commitment to a more-flexible exchange rate, the situation regarding the external debt and debt repayments will improve, she concluded.

* A version of this article appears in print in the 12 October, 2023 edition of Al-Ahram Weekly

Short link: