Egypt’s foreign reserves drop 19% due to economic crisis caused by Russia-Ukraine war

CAIRO — Egypt’s net foreign reserves decreased by $236 million in July compared to June 2021, reaching $33.14 billion, according to an official statement issued by the Central Bank of Egypt.

As a result of the global economic crisis and Russia's war on Ukraine, the country’s foreign exchange reserves have dropped by $7.8 billion over the past seven months, registering a 19% decrease, compared to $40.93 billion at the end of December 2021.

The Egyptian government had to take measures to reduce the budget deficit and deal with the decline in the cash reserve.

An informed political source close to the decision-making circles in Egypt told Al-Monitor on condition of anonymity that the government decided to take some measures to face the economic crisis, mainly postponing some national projects such as the establishment of the new administrative capital and halting expansion plans and construction of new cities.

The source said that the government also deferred the implementation of some decisions such as imposing major fines on building violations and squatting public lands, as well as postponing a measure to increase bread prices and electricity bills.

“The government is also considering how to gradually lift subsidies on bread and electricity by the beginning of next year in such a way not to cause a public outcry. The economic crisis has affected all of the state sectors,” the source said.

He added that the government already increased the prices of drinking water and sewage for home consumption by 40% in May.

“On July 13, the prices of gas and fuel were increased by 10%, for the third time this year, following the increase in prices globally as a result of the global economic crisis,” the source noted.

During a May 9 parliament session, member of parliament Mustafa Bakri called on government agencies to halt major national projects until the country could overcome the repercussions of the war in Ukraine.

“Some major national projects should be suspended temporarily despite their importance. Priorities must be taken into account as well as people’s needs, especially amid the state of social tension, with the middle class suffering,” Bakri said.

He stressed that the increase in the global price of a ton of wheat from $230 to $490 and a barrel of oil from $60 to $115 have greatly affected Egypt’s public budget and created a deficit.

The anonymous source said via phone that the government is trying to balance between two measures: the gradual lifting of subsidies and increasing the prices of some services without raising the ire of citizens, and postponing the inauguration of some national projects, in an attempt to reduce the budget deficit and decline in cash reserves.

Hassan Nafaa, professor of political science at Cairo University, told Al-Monitor via phone, “The state’s decision to look into postponing the opening of some national projects and delaying measures to increase prices on some government services reflects the state’s good political sense and its desire to focus on priorities, something that was missing for years.”

He said that the global economic crisis resulting from Russia's war on Ukraine and the US Federal Reserve’s continuation of raising interest rates have exacerbated the economic crisis in Egypt, causing further depreciation of the national currency and draining the cash reserves.

“This prompted the state to try and think outside the box in a bid to mitigate the crisis, such as giving up on plans to expand cities, roads and highways and to postpone the inauguration of some megaprojects that had been ongoing for years,” Nafaa noted.

He explained that some figures close to the government have publicly called for postponing the implementation of some national projects until the crisis recedes.

He noted that the inauguration of the administrative capital has already been deferred more than once before: the first time in the wake of the coronavirus pandemic in April 2020, and then in June 2021 because some construction and infrastructure works had not been completed.

Economist Hani Tawfiq told Al-Monitor that the government’s approach to postpone raising the prices of some services and delaying fines for building violations “is an attempt to try to balance between boosting the state treasury by increasing state service prices, at the same time not angering citizens or burden them with more than what they can handle.”

He said that the state believes that citizens can endure an increase in the prices of some services, which would help it to revive its treasury that has faced a major deficit due to increased expenditures and the depreciation of the national currency, in addition to the decline in reserves and the flight of some $20 billion of foreign money, which were considered investments in debt instruments.

“The government does not wish to anger citizens, especially in the current period. This is why it is opting for halting some major national megaprojects, including the inauguration of the administrative capital and the construction of new cities,” Tawfiq said.

He concluded, “Egyptian citizens are suffering greatly from the dire economic conditions and the high cost of living, as well as the floating of the pound that resulted in slashing the citizens’ salaries and savings. This is why the government decided to take another approach to try and mitigate the crisis."