Over the past three years, public finances in Egypt have been under great pressure, in light of a persistent shortage of foreign currency accompanied by a sharp increase in the money supply.
Drawdowns in net foreign assets, which are the assets of the central bank and commercial banks owed by non-residents minus liabilities, have helped the central bank support the pound over the past two years.
The central bank has fixed the official exchange rate for the pound at about 30.90 against the dollar since early March. The dollar was unofficially traded at 38.50 Egyptian pounds on Saturday, according to a Reuters report.
The rise and fall of net foreign assets occurs when banks increase or decrease their borrowing from abroad. Almost all of the improvement in July was due to the increase in net foreign assets of commercial banks.
The International Monetary Fund said in December that Egypt is financing its current account deficit by drawing on net foreign assets.
Egypt’s official foreign currency reserves have witnessed limited increases since October 2022, and what they reached in August is scheduled to be published this week.
And in September 2021, before the decline began, net foreign assets recorded positive 248 billion pounds.
Money supply (M1), which includes currency in circulation and demand deposits in local currency, recorded an annual increase of 33.1 percent in the year to the end of July, down from an annual increase of 33.4 percent in June.
Money supply (N2), which includes local currency time deposits, savings and foreign currency deposits in addition to money supply (N1), rose 24.4 percent year on year in June.
Analysts say the sharp acceleration in the pace of money supply increases risks fueling inflation in Egypt, which reached an all-time high in July of 36.5 percent, and puts additional pressure on the currency, which has lost about half its value against the dollar over the past 18 months.
Bankers and analysts said the growing money supply was being used to fill widening gaps in the budget.
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