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The Crisis of the U.S. Dollar

Recently, and at an accelerated pace, the Egyptian pound’s value has significantly depreciated against the Dollar. This decrease happened mainly after the Central Bank of Egypt announced the liberalization of the exchange rate of the Egyptian pound against the Dollar, where the CBE allowed banks operating in Egypt to determine the exchange rate through the interbank mechanism; a matter which will reflect the value of the EGP against other foreign currencies, leaving the forces of supply and demand to determine the value of the EGP.

In order to prevent the possibility of inflation; CBE raised the rate of interest by 200 points (2%), whereby the deposit and lending rates became 13.75% and 14.25 % respectively.

The Central Bank also raised the price of the bank’s main operation by 200 points to reach 13.75%, and the credit and discount rate was raised by the same amount, to reach 13.75%.

Undoubtedly, the aforementioned decisions reflect the CBE’s attempt to overcome the challenges facing the Egyptian economy, however, the exportation process shall remain the main solution to remedy the trade balance deficit, raising the value of the national currency and increasing the strategic reserve, which leads to limiting loans and reducing the budget deficit.

As a matter of fact, the Egyptian government is focused on a short-term strategy to support the various Egyptian industries which have a competitive advantage; for example, but not limited to.

    • Tourism; Egypt enjoys a great comparative advantage in such an industry which requires to be well-developed and marketed by specialized agencies.
    • Ceramics and Porcelain; A labor-intensive industry that contributes to providing the needs of the local market and exporting to foreign markets. It enjoys a great competitive advantage, as the proportion of the local component in the ceramic industry reaches 90%, and therefore the state seeks to support this industry.
    • Export of fruit and flower products; Egypt enjoys a competitive advantage in the cultivation of these plants and a global reputation and high demand, Egypt seeks to double what it earns by supporting the cultivation of these products.
    • Egyptian cotton; Where Egyptian cotton is in the highest demand level, the most widespread and profitable in the world as it enjoys a global reputation, while the area of cultivated land for the Egyptian cotton crop is very modest; therefore, the state seeks to increase cotton cultivation to meet export demands.
    • Manufacture of active pharmaceutical ingredients; As Egypt imports the active ingredient used in the pharmaceutical industry, the state is now seeking to support this industry to meet the needs of the local market and export to foreign markets.

On the other hand, the state seeks to support the local investor by increasing export incentives, increasing tax exemptions, besieging bureaucracy, and combating corruption, all of which will attract foreign investors.

To conclude, the aim of this article is that, despite the decisions of the CBE being necessary to face the global economic repercussions, the country’s strategy of supporting industries with a competitive advantage and attracting external investors shall reduce the need for loans to obtain foreign currencies (Dollar).

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Written By

Noor Mahdy - Attorney at Law

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