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Egypt fights to prop up ailing currency as anxiety grows
Egypt's economists are anxious as the country's foreign currency reserves fall further amid a slow but steady devaluation
Reuters , Saturday 5 Jan 2013
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Central Bank of Egypt (Photo: Reuters)

Egypt dipped deeper into its rapidly shrinking currency reserves Thursday, fighting to slow a sliding pound that is likely to push up inflation and risks reigniting popular unrest.

Economists warned that the Egyptian Central Bank had little room left for manoeuvre with its readily available foreign currency reserves enough to cover just over two months of Egypt's import bills, well below levels in many emerging market peers.

The pound slid further Thursday at the Central Bank's fourth auction of foreign currency, with $74.9 million sold to banks at a cut-off price of 6.386 pounds, weaker than Wednesday's 6.351 pounds to the dollar.

Egypt's currency has lost about 10 per cent of its value against the dollar since the start of 2011, just before Arab Spring unrest spread to the country. But about a third of that has come this week alone, since the Central Bank began auctioning $75 million a day out of its reserves on Sunday.

"The pound is extremely vulnerable," said Raza Agha, chief economist for the Middle East and Africa at VTB Capital.

"This auction system should have been done months ago to stem the decline in reserves, rather than using them to defend an arbitrary level of the pound, which has gotten them to where they are now."

Egypt's once-booming economy was thrust into turmoil after the 2011 revolution that ousted Hosni Mubarak. But weeks of renewed political unrest at the end of last year dealt it another heavy blow.

Egyptians began the new year in an atmosphere of growing anxiety, with few expecting any quick solutions as political infighting continues before parliamentary elections expected to get underway within two months.

With the crisis deepening and the pound hitting fresh record lows every day, economists believe more financial turmoil could be in store for the Arab world's most populous nation.

"This is the worst possible way of managing the devaluation, squandering $300 million a week to slow the decline," said one economist based outside of Egypt, who spoke on condition of anonymity due to the sensitivity of the matter.

Protracted political wrangling is bad news for President Mohamed Morsi who desperately needs consensus in order to introduce unpopular austerity measures, vital to securing a $4.8 billion loan from the International Monetary Fund.

To conserve reserves and restore confidence, Egypt has imposed new rules involving daily foreign currency auctions and has promised that the situation will soon stabilise.

Factoring in a fall

Businesses say they are factoring in an even bigger decline in the pound's value and inevitable steep price rises in a country that imports most of its food.

Unnerved by the events, Egyptians have rushed to buy dollars for fear of a messy devaluation, and banks have been forced to impose limits on dollar withdrawals to prevent a run on deposits.

The Central Bank alarmed Egyptians further when it announced last weekend its foreign reserves had fallen to what it said was a critical level, at around $15 billion as of late November. December figures are due out in the coming days.

This equates to about three months' worth of imports. However, one Cairo-based analyst said that if the gold bullion portion of reserves was subtracted, end-November reserves coverage were equivalent to 2.1 months of imports.

By contrast, Turkey holds reserves equal to about six months of imports, or five months when gold reserves are stripped out.

Whereas currency reserves can be used rapidly to fund imports, gold first has to be sold to raise cash, and dumping large amounts on the bullion market can be disruptive.

Political trouble 

Egypt's economy came under intense pressure in November when Morsi moved to grant himself additional powers and fast-track a new, contentious constitution, prompting a political crisis and a wave of sometimes violent protests.

Echoing this anxiety, the cost of insuring Egyptian debt against default has soared. Data from Markit showed Egypt's five-year credit default swaps (CDS) jumped 27 basis points on Wednesday to 4-1/2 month highs from the previous close to 515 bps.

Adding to the uncertainty, it remains unclear when talks with the IMF — originally expected in January — will resume.

The IMF said Wednesday no date had been set for the resumption, but a day later an Egyptian government spokesman told Reuters that an IMF delegation would visit Cairo this month.

"January is a pretty critical month," said Richard Fox, head of Middle East and Africa sovereigns at Fitch Ratings. "The important thing now is to build confidence to prevent capital flight and dollarisation from gaining momentum. The ideal situation would be an agreement with the IMF as soon as possible."

VTB's Agha said, however, it would be hard for Egypt to invite the IMF for talks before the election, as continued instability meant it had yet to build a strong enough political consensus to be able to sell the IMF programme to the Egyptian people.

Egypt has already committed to a reform plan in line with IMF recommendations, but asked to delay the loan agreement due to the political crisis over the new constitution.

Importers are finding their purchasing power curtailed because of the pound's declining value. Inflation is relatively low — urban consumer inflation declined to 4.25 per cent in the 12 months to November from an annual 6.7 per cent in October — giving limited leeway.

"Inflation will be an issue because in Egypt 25 per cent of the currency shock is translated to prices," Jean Michel Saliba, Middle East economist at Bank Of America/Merrill Lynch. "But inflation is low at the moment so they can take a bit of shock there."

Though the prices of state-subsidised basics will stay the same, the cost of other imported goods is about to go up, further stoking anger and resentment that is never far from the surface and increasing the potential for unrest.

"This could cause much more political instability, but it's hard to say how much it will take to push towards a new uprising," Hassan Nafaa, professor of political science at Cairo University, said. "If there is no imagination for a solution to get out of this political polarisation, I think the government will face a deep economic crisis."



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ashraf sabrin
06-01-2013 03:04pm
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UNLIKE JAPAN
Egypt is not like Japan. Japan is an Exporter. Therefore having a weak currency is In Japan's favor. But Egypt imports over 80% Of it's food supply. Therefore having a weak Currency serves only to hinder The economy.
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7



omar
05-01-2013 05:28pm
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currency
the central bank should stop supporting the egyptian pound and allow it to devalue sharply. the government should put reserves aside to subsidise bread for the poor and make sure inflation doesn't affect them. after a while the low currency will reap the reward of export led growth. this is the best thing that could happen to egypt right now if only our bankers understood this.
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6



Khofoo, Giza
05-01-2013 04:10pm
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Payback Time
We are now paying back the price for electing BH/Salfies who have no idea about modern economy. We are in a financial trap. Let go back to work and stop eating.
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5



Mona Abdel-Aziz, Alex
05-01-2013 04:08pm
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Proof of Failure
Mixing relgion with poltics is a disaster. Arab countires are breakingup and their economy in nose dive. Arab will never rise unless they realize this fact of modern time.
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mohammed moiduddin
06-01-2013 06:31pm
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What is Islam?
You have to follow the sunnah otherwise you are not a Muslim.
mohammed moiduddin
06-01-2013 06:30pm
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What does Islam mean?
Islam is not something you do on Friday or sunday. Allah has made
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Khalid Masoud
05-01-2013 03:56pm
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Infidels
Go to the infidel China and begg for money to build rapid train trnasit between Cairo and Alex. It will creates lot of jobs. BH/Salafies: Keep praying.
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3



Ameer Oadah, Suez
05-01-2013 03:48pm
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Salafies's Economic Plan
I hope our brother Salfies to comeup with solution. LOOL.
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2



Yaseen Deep, Alex
05-01-2013 03:45pm
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Money Talks
It means that wold economy does not trust Egyptian gov. to pay abck. Our ability to produce does not guaranttee payment of debts. It is very sad for ordinary people to suffer. Please do not print paper money or the situation will be worse.
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1



Aladdin, Egypt
05-01-2013 03:41pm
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Work, work, work, ...
I am not economist, but any currancy dependes on the ability of people to work not consume only. We need to burry our hatchetand go back to work. BH/Salafies brought all of these on us by their Utopia concept of economy. Allah AKber.
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