Egypt resorts to China to reduce pressure on greenbacks
Cairo - Egypt is shifting east, especially to China, to reduce pressure on foreign currency reserves it has at its central bank, ease trade with Beijing and attract Chinese investment.
A recently signed currency swap deal between Cairo and Beijing should help Egyptian importers use the Chinese yuan in transactions with China.
Cairo hopes that the $2.6 billion deal, which will last three years, will stop the drain on US dollars it has at its central bank and bring the exchange rate of the American currency against the national currency, the pound, down.
“This is a very important deal because it will help our banks offer importers who do business with China an alternative to the US currency,” said Yasser Gaber, spokesman for the Trade and Industry Ministry. “The deal will help Chinese investors and importers do more business with Egypt.”
Gaber described the deal as “manna from heaven” for the economy, which is struggling after years of turmoil in the aftermath of the 2011 uprising.
China, whose currency was added to the International Monetary Fund’s (IMF) reserve basket in September, sent Egypt the value of the deal in yuan to use in transactions with it. Egypt, whose national currency is not part of the IMF’s reserve basket, sent China the equivalent amount in pounds to use in transactions with it.
In 2016, Egypt’s importers and manufacturers bought $90 billion worth of goods from other countries, including $11 billion from China.
While trade with China amounts to a little more than 12% of its overall trade, Egyptian officials said they hope the currency swap deal will rein in demand for greenbacks and bring the dollar exchange rate down while spurring Chinese investments in Egypt.
Foreign currency reserves in Egypt amounted to $23 billion in December, after a low of $15.5 billion in July.
The reserves rose after Egypt signed a $12 billion loan agreement with the IMF, the first $2.7 billion of which it received in November. Cairo also received billions of dollars in deposits from Saudi Arabia and the United Arab Emirates.
Gaber said the deal would help Egypt diversify its foreign currency basket and reduce dependence on the US dollar.
“We depended on the US currency to finalise trade deals for a long time but this policy is proving very costly,” he said.
A greenback trades for 19 pounds about two months after Egypt floated its currency against foreign currencies. The Egyptian pound flotation aims to boost foreign currency reserves and end a decades-long controlled foreign currency exchange rate regime.
Local banks have bought nearly $5 billion from ordinary citizens, US dollars that would have been sold at the parallel market where traders used to buy the American currency at double the price paid by the banks before the pound flotation.
Some in Egypt, including importers, say the deal will do little to reduce dependence on the dollar and raise exports to China.
“So far, the banks are incapable of making the Chinese currency available to importers,” export and import businessman Ahmed Shiha said. “Importers have to pay in US dollars for deals with China.”
Egyptian exports to China amounted in 2016 to $500 million and people such as Shiha cast doubt on the ability of the currency swap deal to raise the value of exports.
Gaber said, however, importers should look at the long-term effects of currency swap deals.
“The Chinese currency will take the stead of other currencies in the future after it was added to the IMF’s reserve basket,” he said. “For a country like Egypt, the presence of alternatives to the US dollar is an economically empowering factor.”
Before China, Egypt looked to hammer out a currency swap deal with Russia.
However, the deterioration of trade ties between the two countries after the bombing over Egypt’s Sinai of a Russian passenger plane in late 2015 prevented the deal from closing.
Finance Professor Khaled Zakaria, of the American University in Cairo, said the inclusion of the Chinese currency in the IMF’s reserve basket would raise demand for the currency, which will raise the exchange rate of the yuan.
“This will automatically raise the value of Chinese goods,” said Zakaria “So, we are shifting demand from the dollar to the yuan, which will create another problem in the future.”