In November 2016, Egypt implemented a partial flotation of its local currency, with the parallel market thriving as the exchange rate of the pound against the dollar surged from seven pounds to 17 pounds. This marked the beginning of a new phase in the Egyptian economy. After Cairo had adopted a fixed exchange rate policy, it shifted to a floating exchange rate (currency liberalization) policy, particularly with the succession of crises that began with the Russian-Ukrainian war, leading up to March 2024, when the government decided to adjust the pound’s value against the dollar once again.
This move was part of agreements Cairo had made with the International Monetary Fund (IMF) to secure additional loans, boost confidence in the economy, and attempt to regain foreign investments in treasury bills and attract “hot money.” At that time, the value of the dollar surged against the pound from 30.75 pounds to 47.35 pounds, coinciding with the government’s completion of the Ras El Hikma deal with the United Arab Emirates, which injected billions of dollars into the coffers of the Central Bank of Egypt.
But how did the government handle this, and why did the value of the pound decline again against the dollar, despite only five months passing since its new monetary policy and the influx of foreign currency from this deal and similar ones?
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Global Economic Fluctuations
Amid the current global market fluctuations, Egypt is experiencing a sharp decline in the value of its national currency against the dollar. The local stock market is also suffering significantly due to global stock market volatility. The rapid decline in the currency’s value is causing deep concern among economists, politicians, and citizens alike. Additionally, the geopolitical developments in the Middle East, including armed conflicts such as the war on Gaza, the ongoing conflict between Israel and Iran, U.S. interventions, and the constant fear of regional conflicts escalating beyond the current situation, along with persistent political tensions in countries like Syria, Yemen, and Libya, have led to regional instability. This has directly affected investor confidence and increased risks in financial markets.
Data from the Egyptian Stock Exchange showed significant foreign sales of treasury bills during last Thursday’s trading. Contrary to the trend since the pound’s flotation in March of this year, foreign investors turned to sell Egyptian treasury bills last week, recording a net sale of 14.46 billion pounds ($297 million), according to the Egyptian Stock Exchange.
Hot money is part of the flawed policies adopted by the government in recent years, according to experts we spoke with. It refers to capital that flows quickly into financial markets in search of quick returns, typically being short-term and unstable investments. Hot money quickly moves from one market to another in response to changes in interest rates, inflation rates, or general economic conditions. It usually involves investments in stocks, bonds, and bank deposits and can lead to severe market fluctuations due to its high sensitivity to economic and political events.
Over the past five years, hot money has posed a significant challenge to the Egyptian economy, leading to sharp fluctuations in exchange rates and financial markets. At the first signs of financial or political instability, this money quickly flows out of the country, putting pressure on foreign reserves and exacerbating the decline in the national currency’s value, as has occurred periodically in recent years. It also erodes foreign reserves, as hot money seeks quick profits and exits the country at the first sign of instability, leading to a depletion of the central bank’s foreign currency reserves. This situation makes it increasingly difficult to support the local currency against the U.S. dollar and other foreign currencies.
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Raising Interest Rates
To curb the outflow of hot money, the Central Bank of Egypt recently had to significantly raise interest rates, increasing the cost of domestic borrowing and reducing opportunities for long-term local investment. This also contributed to rising inflation. With the pound’s value declining and import costs rising, inflation rates have soared, severely impacting citizens’ purchasing power and increasing the cost of living.
This situation has added to the economic burden on vulnerable and middle-class segments. The rapid outflow of hot money has also reduced investor confidence in the Egyptian markets, negatively affecting foreign direct investment (FDI), which is crucial for achieving sustainable economic growth and job creation.
Egypt’s struggles are not new, according to economic expert Ali El-Idrissi, who confirms that Cairo’s problem with hot money began early and reached its peak in 2022 when billions of dollars fled following the onset of the Russian-Ukrainian war, which heightened the fears of foreign and local investors regarding the impact of these conflicts on the stability of the Egyptian economy. As a result, hot money, always seeking a stable and secure investment environment, began to rapidly exit the Egyptian market. This money, which heavily relies on short-term profits, prefers to move to more stable and secure markets, adding further pressure to the Egyptian economy.
In May 2022, Prime Minister Mostafa Madbouly revealed that hot money worth $20 billion had left Egypt since the beginning of the year due to the repercussions of the Russian-Ukrainian war. He added that, on the other hand, the state succeeded in securing investments and deposits from Gulf countries amounting to $12 billion.
The government estimated the total direct and indirect cost of the war on the national economy at about 465 billion Egyptian pounds. This included a direct cost of 130 billion pounds, represented by the increase in the prices of strategic goods and fuel, higher interest rates, declining tourism revenues, and other indirect costs of 335 billion pounds, reflected in wage and pension increases, social protection provisions, and tax exemptions.
Russia and Ukraine are important trade and tourism partners for Egypt. Before the war, these two countries were a primary source of grain imports and among the top tourist markets for Egypt, which imported about 42% of its total grain imports from Russia and Ukraine before the war. The trade exchange between Egypt and (Russia and Ukraine) amounted to about $4.4 billion in 2021, and tourists from Russia and Ukraine accounted for approximately 31% of the total tourists arriving in Egypt from July 2021 to January 2022.
El-Idrissi confirms to Zawia3 that Cairo is currently also witnessing a large-scale outflow of hot money, which has increased pressure on the Egyptian Stock Exchange indicators, which have seen declines since last Monday morning. He notes that about $12 billion has already left the Egyptian market due to foreign investor sales following sharp declines in global stock markets, followed by Arab stock markets, as foreign and Arab investors sought to recover losses in the global market.
The economic expert reveals the main reasons for the pressure on the exchange rate and the decline in the stock market, confirming that the IMF’s conditions that require the state to make the exchange rate flexible and responsive to supply and demand, with the central bank only intervening in case of significant deviations, along with the geopolitical tensions in the region, are driving the state to maintain already high interest rates.
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Hot Money
Former Finance Minister Mohamed Maait agreed with this in a television interview he conducted in 2022. He said the world is facing a major crisis, and Cairo’s government is working to mitigate its effects internally, explaining that the Egyptian citizen should not bear the full burden of the global financial crisis. He pointed out that $22 billion had left Egypt amid the current crisis, which is known as the phenomenon of hot money.
In the same year, the former finance minister said the state should no longer rely on hot money—i.e., foreign investments in treasury bills and bonds to finance its budget—but should work on boosting foreign direct investment. At that time, in his speech before the American Chamber of Commerce, he confirmed, “The lesson we’ve learned is that we cannot rely on this type of investment; it only comes for high returns, and when a shock occurs, it leaves the country.”
He added, “Over four years, I’ve dealt with three shocks caused by this hot money,” noting that about $15 billion left Egypt during the emerging markets crisis in 2018, nearly $20 billion left during the COVID-19 pandemic in 2020, and in 2022, Cairo faced a similar crisis when Russia invaded Ukraine and the United States began raising interest rates, leading to a portfolio outflow estimated at about $22 billion. He emphasized, “We need to rely on foreign direct investment and improve the investment environment and increase private sector participation.”
International Monetary Fund
Economic analyst Hanan Ramez believes that the two main reasons behind the sudden rise of the dollar against the pound are “the escalating geopolitical tensions in the region and the continued pressure from the IMF on Cairo to liberalize the exchange rate,” explaining that this is not due to the strength of the dollar but rather the weakness of the pound against it.
“For the first time since the exchange rate was liberalized last March, the Egyptian pound has fallen against the dollar, reaching around 49.36 pounds per dollar in some banks. This decline is attributed to the escalating geopolitical tensions in the region due to fears of an Iranian response, which would further ignite the situation in the region since the events of October 7. Additionally, the decline is linked to the IMF’s demands for a complete liberalization of the pound’s exchange rate against the dollar,” Ramez adds in her conversation with Zawia3.
Furthermore, according to the economic analyst, foreigners still hold investments in treasury bills worth nearly $35.5 billion as of the end of June, with many of the short-term treasury bills issued after the flotation maturing soon. Foreigners purchased these bills with better offers than those from local banks and investment funds, which adds to the challenge.
Foreigners’ investments in 273-day treasury bills, maturing in December, are the largest, estimated at 271 billion pounds, followed by 182-day bills worth 100 billion pounds.
Gulf Investments
Finance Minister Ahmed Kojak acknowledged that his country had been affected by the exit of some hot money but is dealing with the situation through various measures, including diversifying financial instruments and considering issuing sukuk in the local market. He explained that Egypt, as an emerging and open country to the world, attracts foreign investors, noting a government direction to facilitate investment, enhance capital flows, and improve services for exporters. He mentioned that these measures would be announced soon, adding that the coming period would see greater inflows of Gulf investments, confirming close cooperation with Saudi Arabia. He pointed out that he had recently met with the Saudi finance minister, and there is ongoing coordination to reach the best forms of cooperation.
Kojak explained that addressing inflation requires a precise mechanism, noting that the central bank and the economic group are closely monitoring the situation and analyzing matters accurately. He assured that Egypt’s financial indicators are reassuring and that the country has great flexibility in dealing with shocks. He added that quick and correct crisis management is positive.
The minister revealed that the reduction in external debt was achieved through the divestment program and the Ras El Hikma deal. He announced that the government had decided to open new markets in Japan and China and was considering issuing sukuk in the local market, noting significant interest in this matter. He emphasized that the government focuses on concessional financing from international institutions due to its favorable terms and comfortable grace periods.
According to the minister, the ministry’s priorities during this period revolve around three main axes: measures and reforms for the financial and business community by improving services and creating partnerships with specialized entities to assess performance, enhancing fiscal policy by contributing more effectively to development and economic activity with a strong focus and alignment with the economic group, and ensuring debt reduction to improve spending on social protection programs.
The finance minister confirmed that financial performance is good and on the right track. He also stressed the importance of setting and implementing financial policies that stimulate investment, production, exports, and private sector growth to improve economic performance. He pointed out that the state aims to create a competitive business environment to boost local manufacturing capacities across various sectors, contributing to increased production and export capabilities.
The Future of the Pound
Regarding the future of the Egyptian pound in the coming period, economic expert and President of the Egyptian Forum for Economic and Strategic Studies Rashad Abdo told us that the rise in the dollar’s value against the pound is not alarming, as the percentage has not yet exceeded 2%, so it is natural. He warned that continued geopolitical tensions in the region would lead to economic disruptions in Egypt, affecting prices.
The economic expert had previously explained in a television interview that the United States influences all economies worldwide, and Egypt is part of the world, so it is also affected, which is precisely what happened in the stock market, with stock market crashes due to U.S. economic problems, including inflation and unemployment.
Abdo continued in his conversation with us: “The worst thing we suffer from is the phenomenon of hot money, which we have warned about repeatedly. Hot money flows in when interest rates are high, and things are stable, but with the onset of any tensions or concerns, it quickly exits the market, worsening our problems and suffering. We do not learn the lesson. The former finance minister said we would not try this again, but when hot money began to flow, he welcomed it and raised interest rates to attract it.” He noted that the amount of hot money that has left Egypt has reached $12 billion, adding, “This deepens our suffering and economic problems.”
Between the government’s optimism and some economists’ pessimism, citizens try to cope with the economic crisis and the sharp decline in the value of the local currency while suffering from rising prices amid a lack of market regulation.
