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There’s a new deficit in Egypt's finances and matters are likely to get worse

January 16, 2024 at 12:20 pm

This picture taken shows a view of the exterior facade of the new headquarters of Egypt’s Central Bank at the New Administrative Capital megaproject about 45 kilometres east of the current capital Cairo on August 1, 2023 [KHALED DESOUKI/AFP via Getty Images]

Money transfers to Egypt by citizens living abroad have declined by 30 per cent for the first quarter of the fiscal year 2023-2024 as per data from the Central Bank. This continued decline is leading to a new deficit in Egypt’s financial portfolio and putting great pressure on the budget, which relies on five main sources for foreign currency: exports, tourism, the Suez Canal, transfers from Egyptians abroad, and foreign investments.

Egypt is the largest recipient of money transfers in the Middle East and Africa, and the fifth largest in the world after India, Mexico, China and the Philippines. It recorded its highest level in 2021-2022 at about $31.9 billion, according to the World Bank.

The fiscal year in Egypt begins in July and ends at the end of June the following year, as per the Egyptian Budget Law. According to the Central Bank of Egypt, money transfers from Egyptians working abroad were about $4.5bn for the first quarter (July, August, September) of the current fiscal year, compared with $6.4bn in the same period of the fiscal year 2022/2023, and $8.1bn in the same period in 2021-2022.

This decline is not surprising, as the transfers themselves declined during the last fiscal year, 2022/23, by 30.8 per cent, with $22.1bn compared with $31.9bn in the previous fiscal year.

The decline comes at a time when the Egyptian government is planning to grow transfers from Egyptians working abroad by 10 per cent annually over the next six years, to reach $53bn by 2030. If the decline continues at the same rate, though, such transfers will hit a record low, which will certainly make it harder for the Egyptian government to obtain foreign currency, which is already scarce in the markets.

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There are an estimated 14 million Egyptians working abroad, estimates the Minister of Immigration and Egyptian Expatriate Affairs, Soha El-Gendy. Just over 68 per cent of transfers from abroad come from Egyptians working in Arab countries, followed by those in the US and Canada at 17.9 per cent, and then the EU with 10.1 per cent, according to government data.

The decline in the value of transfers is due mostly to the large gap between the official exchange rate of the dollar set by the Central Bank of Egypt, and the unofficial rate, set by the black market. This has pushed money transfers from Egyptians abroad to use other, unofficial transfer methods.

The official exchange rate in Egyptian banks is about 31 Egyptian pounds to the dollar. On the black market, though, it trades at 55 pounds to the dollar, and may hit 57 pounds, if a large sum is to be traded with merchants, importers and dealers in the exchange market.

Egyptian financial expert Mohamed Mostafa told me that this decline is expected, and will increase every year, if there continues to be two or three exchange rates. He added that the difference is large, reaching about 90 per cent between the official and unofficial rates and that it does not make sense for anyone to give up 24 or 26 pounds as a difference in the exchange rate of each dollar.

According to Mostafa, what’s more important is the development of financial technology, digital transformation and electronic banking systems, which provide more advanced paths for selling and transferring currency, without being subject to government restrictions. These include digital platforms such as the B2B system, which is popular among Egyptians, and the Forex market, and others. The government is not keeping up with these financial variables.

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Egyptians working abroad have also reported that they’re keeping their savings in Gulf and European banks until the exchange rate stabilises in Egypt. They fear being exposed to banking restrictions that prevent them from withdrawing their dollar deposits, or imposing taxes and fees on them.

According to such testimonies, there are many ways for Egyptians to transfer money outside the banking system, the most prominent of which is trading dollars with merchants abroad who, through intermediaries, deliver the money in Egyptian pounds at the black-market price to the families in Egypt. They do so to benefit from the difference between the official and the unofficial exchange rates.

Money transfer trade is active in the Gulf countries, where merchants receive foreign currencies from Egyptians abroad and deliver them in local currency to their families at a higher price than the official price, without having to transfer them through banks.

One economic researcher, speaking on the condition of anonymity, said that the huge difference between the two rates has created increased activity in Forex trading within Egyptian communities in different countries, thus avoiding bank transfers. Those who transfer their money in dollars to Egyptian banks have a hard time withdrawing it in dollar bills and, in some cases, are forced to accept it in Egyptian pounds.

Credit rating agency Fitch predicted this decline months ago, attributing it to the continuing gap between the official and unofficial dollar exchange rates. It said that money transfers from Egyptians abroad going through official channels are tied to reducing fluctuations in the country’s exchange market.

Experts believe that government initiatives to encourage Egyptians to increase money transfers have backfired. For example, the initiative to bring the cars of Egyptians’ working abroad into the country in exchange for exemptions from paying customs has led to withholding about $900 million, according to unofficial estimates. Under this initiative, Egyptians working abroad have the right to import a car without any customs or fees, provided that the value of customs and fees is deposited in the account of the Egyptian Ministry of Finance in dollars, with depositors recovering the value of the deposit after five years in Egyptian pounds, at the dollar exchange rate on the date of withdrawing the deposit.

Others are trying to avoid cash transfers altogether and are buying gold instead, and benefitting from Government Resolution No. 1801 of 2023, which grants a customs exemption for gold imports until 10 May this year.

Government initiatives have included offering high-interest bonds in dollars, offering land and real estate for purchases made in dollars, and exemption from conscription in the army in exchange for $5,000 or €5,000. The amount pumped into these initiatives amounted to a deduction from the value of the total transfers of Egyptians abroad.

There are other reasons behind the decline in transfers. According to one Egyptian engineer working abroad, some Egyptian workers have lost their jobs because of the Covid pandemic, and others are being dismissed because the Egyptian government has refused to extend their vacations, as they are state employees. This led to the government losing the value of the annual insurance these workers used to pay for in dollars to the treasury.

More serious than all of the above is the widespread mistrust in the Egyptian economy; the loss of credibility in government policies and decisions; the anticipation over the date of freeing the exchange rate; the growing fears of selling government banks; and the country’s inability to pay its external debts of about $165bn and perhaps declaring bankruptcy.

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The mistrust is reinforced by statements that raise concern and suspicion among Egyptians working abroad, perhaps the most concerning of which was a statement issued last March by Counsellor Bahaa El-Din Abu Shaqa, representative of the Egyptian Senate, regarding allocating part of the salaries of Egyptians working abroad to the state, out of loyalty and returning the favour to their country. His words sparked widespread criticism at home and abroad.

Egyptians working abroad are also losing trust in the Egyptian government because they expect it to take any number of decisions to get foreign currency which it needs to pay back the huge foreign debt and interest, which amount to $42.3bn for 2024, according to the Central Bank.

With the decline in transfers from Egyptians abroad, as well as the fall in tourism revenue due to the Russian-Ukrainian war and the war in Gaza; the decline in traffic in the Suez Canal due to escalating tension in the Red Sea following Houthi attacks on ships heading to and from Israel; and the continuation of huge government spending on useless megaprojects, it is likely that Egypt’s financial and economic problems will worsen in the coming years.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.