Egypt's banknote issuance increased in August by LE10 billion ($1.45 billion), recording LE274 billion ($39.8 billion) from LE264 billion ($38.35 billion) in June, according to the latest monthly bulletin by the Central Bank of Egypt (CBE).
The issuance of banknotes has been increasing significantly since the second half of 2012 as the government could no longer borrow from local banks, Hany Genena, chief economist at Pharos Holding, told Ahram Online.
"Banks have reached the maximum limit of lending the government, which each bank sets independently,” Genena added. “The average of the maximum limit for lending the government is 30 percent."
Accordingly, the government resorted to borrowing from the CBE that had no other alternative than printing cash, said Genena.
Genena has attributed government borrowing from banks to the shortfall in liquidity alongside an increase in public spending.
“Deteriorating tourism revenues and capital outflows have contributed to the liquidity fall-off,” Genena added.
Genena estimated capital outflow in Egypt since the second half of last year at roughly LE120 billion ($17.4 billion).
The tourism industry, once worth more than a tenth of economic output, had been improving since the January 2011 uprising but suffered a fresh blow from political tension in the lead-up to the ouster of Islamist president Mohamed Morsi in July, and its aftermath.
Egypt expects to see revenues bounce back to $11 billion a year by the end of 2014, announced the minister of tourism a month ago.
Currently, the transitional government aims at boosting the ailing economy through a stimulus package worth LE29.6 billion ($3.4 billion).
Arab Gulf countries have pledged an aid package worth $12 billion in an attempt to improve Egypt's liquidity.
If the government is to avoid an excessive issuance of banknotes, which drives price inflation, it will have to find other sources of revenue. Until then the CBE has no alternative but to issue banknotes, said Genena.