Egypt’s Money Supply Expansion Risks Inflation and Currency Pressure
Introduction
Egypt risks exacerbating its record inflation and putting more pressure on the pound if it does not slow down the pace of money supply expansion, which bankers and analysts say is being used to cover a growing budget deficit.
Money Supply Growth
Central Bank data shows that the money supply (M1), which includes the local currency in circulation and demand deposits in Egyptian pounds, jumped 31.9% during the year to the end of May 2023 after it increased by 23.1% in the fiscal year ended June 2022 and 15.7% in the fiscal year 2020-21.
Impact on Public Finances
Money supply growth accelerated sharply over a 3-year period during which fundamental weaknesses in the Egyptian economy came to light following a series of shocks, including the COVID-19 pandemic and the war in Ukraine.
The state’s public finances are also under pressure from persistent foreign exchange deficits and mounting debt that needs to be refinanced or paid off, $20 billion of which over the next twelve months.
Infrastructure Spending
Meanwhile, spending has skyrocketed as the country embarks on massive infrastructure projects, including new cities and major expansion of the road network, in an attempt to continue providing some support in light of declining living standards.
Projected Budget Deficit
The Treasury Department expects the budget deficit to reach £824.4bn ($26.7bn) in fiscal year 2023-2024, which began on July 1, compared to an estimated deficit of £723bn in 2022-23 and £486.5bn in 2021-22.
The data from the ministry also show that overall spending is expected to rise to £2.07 trillion this year from £1.81 trillion in 2022-23.
Inflation and Currency Weakening
Analysts say the rapid printing of pounds is driving up inflation and weakening the currency.
“In light of limited external financing opportunities and the high exposure of the banking sector to public debt, failure to curb the budget deficit could lead to further financing of the deficit by expanding the money supply and exacerbating inflation and foreign exchange problems in Egypt,” Patrick Curran of Tellimer said.
The central bank and finance ministry did not respond to requests for comment.
