Egypt reserves plunge

Dec 30 2012 09:06

Cairo - Egypt's central bank said it would start foreign currency auctions on Sunday to conserve reserves that have fallen to a critical level, pointing to a deepening economic crisis as President Mohamed Mursi tries to calm political turmoil.

The announcement was posted on the bank's website on Saturday just two hours after Mursi used a major policy speech to declare the economy was showing signs of improvement.

"This is a massive, massive setback for them," said an economist based outside Egypt. "If the Egyptian pound is no longer freely convertible, then you're bound to undo eight years of successful and effective currency management."

The central bank has spent more than $20bn in foreign reserves to support the pound since a mass uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors.

Saturday's announcement underlined the scale of the economic test facing Mubarak's successor, whose administration has been grappling with the fall-out of a political crisis ignited by his move to drive through a constitution written by his Islamist allies.

Violent street protests and political wrangling over the last month have prompted a rush by investors and ordinary citizens to switch their Egyptian pounds into foreign currency on concerns the government might devalue or bring in capital controls.

The bank allowed the pound to weaken to an eight-year low of 6.188 to the US dollar on Thursday. On Saturday it urged Egyptians to "rationalise their use" of foreign currency and not speculate against the pound.

Addressing the upper house of parliament on Saturday, Mursi cited positive indicators including a return of tourists and an increase in annual economic growth in the third quarter to 2.6% from 1.8% a year earlier - still well below the rates of 5% to 7% reached before the uprising.

He also cited a $1.1bn rise in foreign exchange reserves to $15.5bn from July to November.

But the central bank said reserves fell by $448m in November to only $15.04bn, 60% down on their level on the eve of the uprising that swept president Hosni Mubarak from power in February 2011.

This is barely enough to cover three months of imports, and bankers said the December figure, due for release in the first week of January, could be even worse.

"The current level of foreign currency reserves represents the minimum and critical limit," the bank said in its statement.

"This requires their conservation for critical uses, as represented in fulfilling foreign debt obligations to preserve Egypt's reputation in international financial markets and to cover imports of strategic commodities," it added.

It said the auction system for buying and selling US dollars would start on Sunday, but gave few details on how it would work.

International help

Egypt won preliminary approval from the International Monetary Fund (IMF) in November for a $4.8bn loan, but delayed seeking final approval until January after it suspended implementation of a series of tax increases.

Finance Minister Mumtaz al-Saeed said on Saturday Egypt had received a final $500m instalment of funds promised by Qatar as budget support and would get another $500m from Turkey at the end of January.

The central bank said Egypt would continue to meet instalments and interest payments on its foreign debt and allow transfers by foreigners who had invested on the stock exchange.

It said the banking system's finances remained "strong and secure" but called on Egyptians to "rationalise their use" of foreign currency and not to speculate.

Mursi, whose speech was televised live, said some economic indicators had improved "despite the government's working in difficult circumstances and the huge challenges facing the Egyptian economy".

He played down the significance of a move by credit agency Standard & Poors' to cut Egypt's long-term debt rating on Monday, saying it was not the first downgrade since the uprising. Standard & Poors' said another downgrade was possible if politics undermined efforts to prop up the economy and public finances.

The economist said the central bank statement could indicate it believed the IMF agreement was not going to happen in January.

"Or it may mean that the central bank is trying to force the government's hand to get the IMF deal done by demonstrating just how catastrophic and precarious a situation they're in."

Elected in June in Egypt's first free and fair presidential election, Mursi said the approval of Egypt's new constitution in a referendum held this month had drawn a line under the transitional period that followed Mubarak's removal from power.

Yet Mursi faced heavy criticism and deadly street protests set off by the way his administration fast-tracked a constitution despite the objections of important sections of society, including the Christian minority. 

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