Could Egypt depend less on 'hot money' as source to bolster its FX reserves in the short term?

Egypt's prime minister and finance minister asserted on more than one occasion during 2022 the government's intention to focus on attracting more direct investments to avoid shocks caused by any sudden hot money exodus.

Since March 2022, amid the global inflationary pressures triggered by the Russia-Ukraine war, a total of $25 billion of indirect investments in the local debt instruments (hot money) exited the Egyptian market toward higher return on the US dollar after the US Federal Reserve raised interest rates to control inflation at home.

Moreover, Egypt's Net International Reserves (NIRs) have fallen considerably from $40.9 billion in February 2022 – recorded just one month before the onset of the war in Ukraine – but stabilised at $34 billion in December 2022.

Speaking to Ahram Online, banking expert Ahmed Shawky stressed that Egypt cannot do without local debt instrument investments as a supplementary source of foreign exchange and investment along with direct investments.

“The exit of the $25 billion in hot money in 2022 sent shocks in the local market pushing the government to announce that it will aim to lower dependence on this kind of investment as a key source of foreign exchange and liquidity for the Egyptian economy," Shawky said.

"This kind of investment is supposed to be supplementary as a source of foreign exchange - it supplements other actions taken by the government such as the issuing of 'golden licenses' for foreign investors, releasing stranded imports in ports, and depreciating the Egyptian pound against the US dollar," Shawky said.

"We can also add to these actions the efforts made to list the Egyptian pound to be among the currency baskets of other central banks just as the Russian central bank did when it listed the Egyptian pound in its currencies basket," Shawky explained.