Fears for the Egyptian economy mount on the back of depleting foreign reserves, reports Ahmed Kotb
The Central Bank of Egypt (CBE) announced on Sunday that the country's foreign reserves lost $1.95 billion in November to stand now at $20.1 billion.
The announcement of the worst drop in reserves since April, as described by CBE, followed an official statement last week by a member of the Supreme Council of the Armed Forces (SCAF) predicting that Egypt's foreign reserves will drop to $15 billion by the end of January 2012.
What is alarming about the figure, according to Major General Mahmoud Nasr, assistant for financial affairs to Field Marshal Hussein Tantawi, head of the SCAF, is that $5 billion of the reserves will be used for payments to foreign investors and other obligations. The remaining $10 billion will cover imports for two months only, he said.
Egypt's international reserves stood at $36 billion in December 2010, but started to plunge drastically after the 25 January Revolution.
"Political and security instability in the wake of the revolution have led to losing the two main sources of foreign currency; tourism and foreign investments," said Salwa El-Antari, a member of the board of directors at Nasser Social Bank and former director of research at the National Bank of Egypt (NBE).
Unfortunately, the old regime, which ruled Egypt for 30 years before the revolution toppled former president Hosni Mubarak, made the economy depend heavily on tourism revenues and foreign investments, El-Antari said. Besides, she added, Egypt relies on imports to cover its basic needs of food. "Although revenues from Egypt's exports of goods and services have grown significantly in recent years, they are still far from covering the import bill."
El-Antari stated that the mismanagement of Egypt's economy for the past 30 years has been weakening it, and that if the government continues to withdraw from the foreign reserves, the situation will soon become catastrophic.
Some experts say that SCAF will not let the international reserves reach $15 billion because they understand the critical situation the economy will be in then. Already this week, SCAF pumped $1 billion out of its own pocket to the Central Bank of Egypt.
"I suspect the reason the military announced that the reserves will drop may be to prepare Egyptians and the markets for an announcement of moves, perhaps unpalatable to some, that will address the issue," said Mike Millar, regional director of research at Naeem Brokerage. He explained that the moves might include the acceptance of a loan from the International Monetary Fund (IMF) and further support from other international organisations with all the conditions attached.
The Egyptian government rejected a $3.2 billion loan from IMF in May after months of negotiations due to public opinion that denounced the role of IMF during the rule of Mubarak. Talks with IMF about the loan were renewed recently through former minister of finance, Hazem El-Beblawy, but he was replaced by Momtaz El-Said this week who said in a press statement that it is too early to know the fate of this loan.
Major General Mahmoud Nasr had told a press conference late last week that SCAF had refused financial aid offers from the Gulf and other foreign countries because of the political conditions attached.
Notwithstanding, Millar believes that the Egyptian government has still got "a little bit of room" for manoeuvre, but if the reserves approach the $15 billion level, more radical actions will be required if the government wants to be able to engineer a controlled depreciation of the pound in early 2012. Millar also stated that $15 billion can cover Egypt's imports for three months only, which is generally internationally recognised as a safe minimum.
"Although foreign reserves have fallen to $20.1 billion, they have not reached a critical level just yet, with still around four months import cover," Millar pointed out.
Salama El-Khouli, an economic expert at NBE, agrees that the situation is not yet critical. "The announcement made by the military official was more of a warning than reflecting an actual crisis," El-Khouli said, adding that the military is trying to convey an indirect message to the people that the economy has reached a critical line and that full force production is the only solution.
El-Khouli noted that the CBE's continued intervention to support the pound against the dollar in the local market contributes to the drop in reserves. The pound was being sold until Tuesday at LE6.03 against the dollar, its lowest value since 2005.
"It is important to keep the reserves at a high level because it gives a sense of comfort to both foreign and local investors," El-Khouli stressed.
To avoid foreign borrowing, the government has been borrowing heavily from the domestic market, pushing yields to unprecedented heights of around 14 per cent.
The financing is needed to cover a gaping budget deficit in the 2011/12 budget. Nasr had said the deficit was actually set to climb from original forecasts of around nine per cent of GDP, equalling LE134 billion, to LE167 billion, around 11 per cent of GDP.
To avoid the crisis of the dropping reserves, El-Antari stressed that restoring full security on the streets as well as attaining full-capacity production are the most important options because only then will tourism and other vital sectors return to their normal levels and foreign currency starts flowing in again. "Accepting foreign loans should be our last resort," she believes.