Egypt formally halted trading in US dollars, a decision that might have a big impact on geopolitics and the world economy.
The country declared on February 15th, 2024, that it will no longer use the US dollar in any of its commercial deals with foreign nations. Rather, it would make use of a currency basket that represents its preferences and trading habits.
The euro, Chinese yuan, Russian ruble, Turkish lira, Indian rupee, and African franc would all be included in the basket. Egypt said that this move would improve its financial stability and trade competitiveness and was supported by economic logic and sovereignty.
Egypt, home to more than 100 million people, has one of the biggest economies in both Africa and the Middle East, with a GDP of over $360 billion. It also receives over $1.3 billion in military aid annually, making it one of the US’s most important regional allies.
However, Egypt has recently had to deal with issues related to rising inflation, national debt, and currency devaluation. These issues have been made worse by the COVID-19 outbreak, as two important sources of foreign exchange—tourism and remittances—have fallen precipitously.
To address these issues, Egypt has been pursuing a series of reforms, including cutting subsidies, raising taxes, and liberalizing its exchange rate regime. In 2016, Egypt floated its currency, the Egyptian pound, allowing it to depreciate by about 50% against the US dollar.
This was done to attract foreign investment, boost exports, and secure a $12 billion loan from the International Monetary Fund (IMF). However, this also increased the cost of imports, especially of essential goods such as food and fuel, which are mostly denominated in US dollars.
To reduce its dependence on the US dollar and diversify its foreign reserves, Egypt has been exploring alternative currencies for trade and investment. In 2019, Egypt signed a currency swap agreement with China, allowing it to exchange Egyptian pounds for Chinese yuan.
This enabled Egypt to increase its trade with China, its largest trading partner, without using US dollars. Egypt has also been strengthening its ties with other emerging markets, such as Russia, Turkey, and India, and seeking to join regional economic blocs, such as the African Continental Free Trade Area (AfCFTA).
