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Egypt net foreign assets deficit narrows in July

Central Bank of Egypt's headquarters in Cairo Reuters/Mohamed Abd El Ghany
Egypt's M1 money supply rose by an annual 33.1 percent in the year to end-July, down from an annual increase of 33.4 percent in June

Egypt’s net foreign assets deficit narrowed by EGP24.9 billion ($808 million) in July to a negative EGP812.4 billion, its first decline since March, according to central bank data.

A persistent shortage of foreign currency accompanied by a sharp expansion in money supply over the last three years have squeezed Egypt’s finances.

The drawdown on net foreign assets (NFAs), which represent both central bank and commercial bank assets owed by non-residents minus their liabilities, has helped the central bank support Egypt’s currency over the past two years.

The central bank has fixed the pound’s official price at about 30.90 against the dollar since early March. One dollar was buying about 38.50 pounds on the street as of Saturday.

NFAs rise or fall when banks increase or decrease their borrowing from abroad. Almost all of the July improvement was caused by an increase in NFAs with commercial banks.

The IMF said in December that Egypt had been financing its current account deficit by drawing down NFAs.

Egypt’s official foreign reserves have been rising in small increments since October 2022, and the figure for August is due to be published this week.

In September 2021, before the decline began, NFAs stood at a positive 248 billion pounds.

Egypt’s M1 money supply, which includes currency in circulation and local currency demand deposits, rose by an annual 33.1 percent in the year to end-July, down from an annual increase of 33.4 percent in June.

M2 money supply, which in addition to M1 includes local currency time and savings deposits and foreign currency deposits, rose by 24.4 percent year-on-year in June.

A rapid acceleration in money supply risks fuelling Egypt’s inflation. It hit an all-time high of 36.5 percent in July, and puts further pressure on the currency, which has fallen by half against the dollar over the last 18 months, analysts say.

Bankers and analysts say the money supply growth has been used to plug widening budget deficits.