Complex Made Simple

China signs 3-year 18bn yuan bilateral currency swap with Egypt

* The currency arrangement between China and Egypt could be extended by mutual consent

* The move aims to promote trade and investment and maintain financial stability in both countries

* No details were provided on how the currency swap would work

 

China and Egypt on Tuesday concluded an 18 billion yuan ($2.62 billion) three-year bilateral currency swap, a move that importers and economists said would facilitate trade and improve foreign currency liquidity in Egypt.

Egypt’s central bank, which signed the deal with the People’s Bank of China, said the arrangement could be extended by mutual consent.

“This bilateral currency swap is a mutually beneficial arrangement between both countries,” it said in a statement.

The People’s Bank of China said the move was aimed at promoting trade and investment and maintaining financial stability in both countries.

 

(Egypt, China trade exchange reaches $9.6 billion)

 

Neither bank gave details on how the currency swap would work but analysts and businesspeople expect it to have a positive impact on Egypt’s financial position.

“The position of the central bank is definitely increasing, with more firepower denominated in foreign currency to stabilise the Egyptian pound when needed. So this is definitely something positive,” said Hany Farahat, senior economist at Cairo-based CI Capital.

 

Push to Egypt’s economy

Egypt has struggled to revive its economy since a popular uprising in 2011 drove away tourists and foreign investors, major sources of foreign currency.

Reserves tumbled from $36 billion in 2011 to around $16.56 billion at the end of last August.

 

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But Egypt has since pressed ahead with a reform programme that has seen it abandon its currency peg, cut subsidies and introduce a value-added tax.

The measures helped Egypt clinch a $12 billion three-year loan from the International Monetary Fund last month. It has already received the first $2.75 billion IMF instalment, helping push foreign reserves above $23 billion in November.

Egyptian importers said the deal with China would allow them to source yuan directly, facilitating imports from China whilst reducing demand for dollars and easing pressure on the Egyptian pound.

 

(Egypt’s long-awaited investment law to go before cabinet)

 

They said the deal made sense for China as a Chinese developer will be involved in the construction of Egypt’s new capital at a cost of $20 billion, and would require pounds.

Egypt’s pound has roughly halved in value against the dollar since the central bank abandoned its peg on Nov. 3. The central bank had blamed currency pressures on its large trade deficit.

“I expect the exchange will be done immediately with the full amount, and then the two countries can spend the local currency of the counter-party in whatever way they want. And then, at a later point, after the period of the swap, which is three years, they would exchange it back,” Farahat said.