Net foreign assets held by Egypt’s commercial banks went into a record deficit in June, as a lack inflows drives a deterioration in the finances of a country already struggling with its worst hard-currency shortage in years.

The gap among lenders reached $17.1 billion, compared with $14.5 billion in May, according to data released by the central bank. The shortfall opened up as a result of a $1.7 billion drop in banks’ assets and an around $950 million increase in their liabilities.

The foreign-exchange drawdown reflects the financial cost to Egypt of keeping its currency stable instead of allowing it to adjust and help the economy absorb external shocks, according to Bloomberg Economics’ chief emerging-market economist Ziad Daoud.

Heavily exposed to the fallout from Russia’s invasion of Ukraine, Egypt’s pound is under pressure as authorities seek liquidity to clear a backlog of foreign-currency requests from importers and other companies.

The central bank has devalued the currency three times since March 2022, which helped secure a $3 billion International Monetary Fund rescue package. Egypt is now awaiting a review of the program by the IMF after delays.

Read More: Egypt Races to End Pound Dilemma in Hunt for Gulf, IMF Cash

The pound has been stable in recent months despite authorities saying they are shifting to a more flexible exchange-rate regime after years of managing the currency — a policy that depleted the country’s reserves.

While the pound currently trades at about 30.9 per dollar at banks, it changes hands on the black market at around 38.

What Bloomberg Economics Says...

The Egyptian pound has lost nearly half of its value against the dollar since March 2022, despite significant support from the central bank and the banking system. It would have weakened even further if this support had been absent. Given their open dollar position, banks will likely suffer when Egypt goes through another round of devaluation.

—Ziad Daoud, chief emerging markets economist. For more click here

According to central bank data, the overall net foreign liabilities of the banking system - including the regulator - reached $27.1 billion, which also marks a historical high. The banking system’s overall net foreign assets were last in a positive position in January 2022.

Read More: IMF Awaits More Egyptian Reforms Before First Review

Cairo-based Naeem Brokerage said the deficit “could be explained by a combination of factors including, below-normal remittances, lower exports — with a sharp drop in LNG exports — and higher non-oil imports.”

In a January report, the IMF raised concerns regarding the decline in foreign assets of banks. While the central bank “may occasionally step in during times of excessive exchange rate volatility,” according to the IMF, “there will be no recourse to foreign-exchange interventions or the use of banks’ net foreign assets with the intent to stabilize or guarantee the level of the exchange rate.”

Read More: IMF Says Egypt on Path for Flexible Currency But Challenges Loom

To address the issue, the fund said the central bank “will strictly apply limits on commercial banks’ net foreign-exchange open position.” The regulator will also consult with IMF staff if aggregate banks’ NFAs show a cumulative decline of $2 billion over a three-month period, according to the Washington-based lender.

In an effort to shore up dollars inflows, Egypt’s biggest state-owned lenders last week started offering high interest rate dollar-denominated certificates of deposit to foreigners and locals.

Moody’s Investors Service, which placed Egypt’s rating on review for downgrade in May, warned of risks from the worsening net liability position.

“Given part of the banking system’s role in supporting the economy’s overall foreign exchange reserves, an inability to arrest the deterioration in the monetary system’s NFA position over the review period is indicative of increasing demand on foreign exchange liquidity and is likely to result in continued currency depreciation pressures,” it said.

--With assistance from Farah Elbahrawy.

(Updates with Bloomberg Economics comment in third paragraph.)