Despite a significant improvement in macroeconomic indicators over the past five years, foreign exchange liquidity remains a major source of vulnerability for the Egyptian economy.
The net external position of commercial banks has steadily deteriorated over the past year and posted a deficit of USD 10 billion in December 2021, by far its lowest level in a decade. At the same time, gross foreign exchange reserves at the central bank increased only very slightly during the year. This deterioration in the external position of the banking system as a whole reflects that of the external accounts. The current account deficit is widening following a sharp rise in imports. As regards capital flows, since last September, the increase in the spread on Eurobonds and the less dynamic portfolio flows have exerted additional pressure on external accounts.
The situation is sustainable in the short term, thanks to satisfactory reserves at the central bank and a modest service of the foreign currency debt due in 2022. However, the outlook is deteriorating. The economic recovery will continue to stimulate imports, while monetary tightening in the United States should negatively affect capital flows to emerging economies. Egypt’s vulnerability to external shocks therefore continues to increase.
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