Egypt’s foreign reserves plunged to the lowest level in at least 15 years, adding new pressure on President Mohamed Mursi to secure an International Monetary Fund loan his government says is key to reviving the economy.
Net foreign-currency reserves plunged to $13.6 billion in January, the central bank said today. The $1.4 billion monthly drop in reserves, which include currencies, gold and so-called special drawing rights, is partially due to the payment of $619 million in Paris Club debt, the regulator said. The reserves are equal to three months of imports, according to Bloomberg calculations based on central bank data.
Egypt, which is seeking a $4.8 billion loan from the IMF, has seen its foreign reserves lose 62 percent since the start of the uprising that ousted Hosni Mubarak amid unrest that’s curtailed investments and hurt tourism. The central bank started auctioning dollars to local lenders in December to limit their access to hard currency after it said reserves dropped to a “minimum and critical” level, causing the Egyptian pound to fall the most since its devaluation a decade ago.
“All those pressures on outflow aren’t being offset and it underscores the urgency of IMF funding and all the funding that will follow,” said Liz Martins, senior economist at HSBC Middle East. “These pressures come from a combination of heavy import costs, oil and food primarily, foreign outflows, and deposit dollarization.”
Foreign currencies fell to $9 billion from $10.4 billion a month earlier, the data show. The central bank sold $882.3 million at currency auctions to local banks in January, according to data compiled by Bloomberg.
The pound has declined 7.6 percent since the central bank started dollar auctions Dec. 30. Pressure on the currency has been compounded by violence that started on the second anniversary of the country’s revolt last month, killing more than 50 people and prompting Mursi to declare a state of emergency in three provinces.
The fall in reserves underlines “the limited firepower” Egypt’s government has in stemming depreciation pressures on the pound, William Jackson, emerging markets analyst at London-based consultancy Capital Economics, said in an e-mailed statement today. Capital expects the pound to fall in the coming months to 7.5 to the dollar, he said.
The pound was unchanged at 6.702 a dollar as of 5:24 p.m. in Cairo after the central bank issued regulations yesterday capping the interbank trading rate at 1 piaster over the weighted average at the most recent auction of the U.S. currency. That compares with a previous spread of 0.5 percent.
Egypt’s economy is struggling to recover from the turmoil that followed the revolt, growing at about 2 percent a year in the last two years, the slowest pace since the early 1990s. The IMF loan, which both sides came to a preliminary agreement on in November, has been on hold as the government revisits its economic program in light of the unrest.
The drop in reserves “will put upward pressure on the official exchange rate and increase the gap between the official and parallel rates,” Wael Ziada, head of research at Cairo- based EFG-Hermes Holding SAE, said by phone. “This may result in an increase in interest rates to raise the attractiveness of the Egyptian pound and prevent attempts of dollarization. The concern is that may lead to an increase in borrowing costs and hinder economic recovery.”