Egypt formally halted trading in US dollars, a decision that might significantly impact geopolitics and the world economy.
On February 15th, 2024, the country declared it would no longer use the US dollar in commercial deals with foreign nations. Instead, it would use a currency basket representing 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 over 100 million people, has one of the biggest economies in 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 dealt with rising inflation, national debt, and currency devaluation. The COVID-19 outbreak has worsened these issues, as two important sources of foreign exchange—tourism and remittances—have fallen precipitously.
Egypt has pursued several reforms to address these issues, including cutting subsidies, raising taxes, and liberalising its exchange rate regime. In 2016, Egypt floated its currency, the Egyptian pound, which depreciated by about 50% against the US dollar.
This attracted foreign investment, boosted exports, and secured 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, primarily denominated in US dollars.
Egypt has been exploring alternative currencies for trade and investment to reduce its dependence on the US dollar and diversify its foreign reserves. 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).
