Egypt's central bank on Tuesday said it would offer $1 billion in dollar-denominated one-year treasury bills at an auction next week, its second dollar offering in less than a month, as the government struggles to finance a growing budget deficit.
"Borrowing in foreign currency postpones the deficit problem for one year on hopes that the economy will rebound,” Sherif Osman, head of ABC Bank-Egypt’s Treasury Group, told Ahram Online. “The assistance promised by neighbouring countries should be of great help, but it hasn’t materialised yet."
Egypt’s total deficit for the current financial year is projected at 8.6 per cent of GDP, but some analysts and officials believe it could climb as high as 11 per cent.
Post-revolution Egypt has been promised substantial assistance from Arab Gulf states, the US and the EU. Saudi Arabia, the United Arab Emirates and Qatar earlier promised Egypt $3.7 billion, $3 billion and $1.5 billion, respectively. Of this, however, only $1 billion in total has been forthcoming until now.
Egypt's total state deficit eased to 3 per cent in the first quarter of the current financial year (July-October), down from 3.3 per cent for the same period the year before. The lower deficit has been widely attributed to the cash injection from Saudi Arabia and Qatar.
"The government must ease the pressure on its foreign reserves, which are being strained to cover the budget deficit," said Osman.
Egypt’s finance ministry resorted to borrowing in foreign currency after it had tapped out local banks by borrowing Egyptian pounds. Since August, average yields on 91-day t-bills have climbed by more than 2 percentage points to currently stand at above 14 per cent.
Egypt's finance minister warned in October that an excessive reliance on borrowing from local banks would strain the local economy, thus forcing banks to abandon their traditional role of financing the business cycle.
Foreign borrowing from the IMF is another possible alternative for closing the deficit, and Egypt re-launched negotiations to that end in November. Over the summer, Egypt declined a $3.2 billion loan offer from the IMF, since the ruling military council did not want to raise foreign debt levels.
"Borrowing locally in foreign currency is better than IMF loans because it’s cheaper and doesn’t come with any strings attached," Osman said. “But IMF loans usually have longer tenures.”
The introduction of dollar-denominated t-bills last month comes in line with the finance minister's recent statements. Egypt had offered $2 billion in t-bills at an auction in November, but ended up netting only $1.53 billion. The bills carried a weighted average yield of 3.87 per cent.
The new dollar t-bills will be auctioned on 20 December for settlement on 21 December. They will mature on 18 December, 2012, the bank said.
The finance ministry paid more than 15 per cent this week on nine-month t-bills. Yields on Egypt’s 5.75 per cent dollar bond issue due April 2020 rose 0.53 percentage points to a record 7.6 per cent on Tuesday.
Tuesday’s repo sale raised the amount that banks have borrowed so far this quarter to LE98.4 billion, compared to LE67 billion in the previous three months, according to data compiled by Bloomberg.