Arabs increasingly relying on the US dollar

13th, 2012

Arabs are increasingly relying on the US dollar to escape some of the economic repercussions of the Arab Spring. According to a study by New York's International Peace Institute, Egyptians and others are choosing to use dollars rather than their own currencies. Iraq's central bank says that its dollars are sustaining Syria's black market in currency, and in Libya, people line up at banks every morning to purchase dollars.

A year after leaders were toppled throughout North Africa, the transitions in governments has not managed to ease economic hardships. Two-thirds of Egyptians see the economy as the country's primary challenge, and since the West's promised aid has not yet materialized, saving in foreign currencies has increased and government borrowing costs have skyrocketed.

Foreign currency deposits in local banks in Egypt increased 15 percent in 2011 after the downfall of Hosni Mubarak. The Egyptian pound could be devalued by as much as 16 percent, foreshadowed by non-deliverable forward contracts, which provide insight into investor expectations. Additionally, economic growth slowed to 0.2 percent in the third quarter of 2011, compared with 5.5 percent in the same period of 2010.

Egyptian Treasury bills also lost out, as foreigners sold $7.5 billion in the first 9 months of 2011, after purchasing $8.6 billion the year prior. Egypt's foreign currency reserves fell 50 percent in 2011 to $18.1 billion, and fell an additional $2 billion in January 2012.

Egypt's benchmark stock index fell 49 percent last year, making it the worst year since the world-wide economic slump in 2008. As the stock market begins to recover, government borrowing costs increase and the yield on one-year treasury bills has risen 5.32 percentage points to a record 15.91 percent.

In Tunisia, the dinar, which is linked to a basket of currencies, dropped by 4.4 percent and the arrival of a balance of payments deficit running 7 percent put further pressure on the exchange rate, according to a statement by the Governor of the Central Bank of Tunisia. According to the International Monetary Fund (IMF), savings and currency deposits of foreign currency increased by 8.3 percent during the first 11 months of 2011. Additionally, the stock index fell by 7.6 percent last year, the first annual loss since 2002.

Also according to the IMF, in Libya, the dinar dropped 20 percent against the dollar on the black market because the Central Bank could not sell enough of the foreign currency, despite the fact that Libya has the largest oil reserves in Africa.

In Syria, which is still at the height of its revolution against the regime of Bashar al-Assad, demand for the dollar has increased so sharply that the Iraqi Central Bank Governor claims traders buy dollars in Iraq to sell illegally in Syria.

A common complaint in many of these nations is that the promised Western aid is not arriving. However, political uncertainty is most likely to blame. As Liz Martins, a Dubai-based senior economist at HSBC told Bloomberg, "How do you lend over the long term to a government that may not be there in a few months?

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