Egypt’s foreign reserves will plunge by a third to $15 billion by the end of January and the budget deficit will grow, possibly leading to a review of sensitive subsidies, an army official said.
Reserves have tumbled since the uprising that toppled Hosni Mubarak as foreigners have fled and tourists packed their bags, hurting two of Egypt’s main sources of hard currency. The central bank put reserves at $22 billion at the end of October, down $2 billion from a month earlier and showing a faster fall than in previous months. Economists said even that level left limited firepower to cope with a looming currency crisis.
“By end of January of next year foreign reserves will go down to $15 billion dollars,” Mahmoud Nasr, a senior army financial official, said at a briefing on the economy.
“Only $10 billion dollars will be available. That is only enough for two months (imports cover),” he said, adding that $5 billion was already committed in payments to foreign investors or for other obligations.
Nasr is assistant for financial affairs to Field Marshal Mohamed Hussein Tantawi, the head of the ruling army council. Egypt’s pound has tumbled to seven-year lows and economists predict it may weaken more in 2012 unless a new government can swiftly restore confidence in a country that had been a darling of foreign investors until this year’s political turmoil.
Allowing a slow, controlled fall of the Egyptian pound could stimulate growth and reduce pressure for further depreciation, analysts said. But it may now be too late to take such action without causing currency market panic and instability.
“We have a plan regarding the Egyptian pound vs. the dollar … the mechanisms of the central bank will not allow for a further fall of the pound,” Nasr said. Industry leaders favour a devaluation to make exports more competitive, but say it should have begun long ago.
“The market has become more conscious of currency risks over the past few months as local borrowing costs have risen and the rate of reserve burn has accelerated,” said Simon Kitchen, strategist at EFG-Hermes.
The government turned down a $3 billion financing facility from the International Monetary Fund in the summer. The finance minister at the time said Egypt would turn to domestic financing resources and that the army did not want to build up debts.
“We do not want to seek foreign loans … the only useful means is relying on ourselves. Foreign authorities and governments have offered us loans but with political conditions,” Nasr said. He said public support was crucial for the new government, currently being formed, to succeed in setting policy to deal with Egypt’s economic troubles.