Reserves situation not yet critical and no funds were smuggled after revolution, says CBE

Ahmed Feteha, Thursday 26 May 2011

The Central Bank of Egypt is optimistic over the country's foreign reserves and the exchange rate, and denies that $7 billion were smuggled out after 25 January

(Photo: Reuters)

The Central Bank of Egypt (CBE) held a press conference today wherein its deputy governor touched upon several hot issues and responded to other concerns raised by the media lately.

On Foreign Reserves

Hisham Ramez assured his audience that current foreign reserves are sufficient to cover the country's needs in the coming six months.

Foreign reserves declined from $36 billion before the January 25 Revolution to $28 billion in April, inciting fear among the public of a serious crisis in the coming months.

According to Ramez, Egypt's foreign currency needs are around $51 billion annually, which translates to $4.25 billion monthly.

"The rate at which we're tapping into the reserves is declining. We used $3 billion in February, $3 billion in March, but only $2 billion in April," Ramez said. "May's figures will show even less usage of reserves" he added.

Ramez highlighted that the main reasons behind the decline in Egypt's foreign currency income are the deterioration of the tourism sector and the exit of foreign investment, especially in treasury bills after the revolution. He added that the reserve's situation should not be of concern if the security situation improves in the coming several months. 

"Security and stability will bring tourists back, and will return confidence in the Egyptian economy, which should prevent the situation from getting critical," he indicated.

On smuggling $7 billion out of Egypt

On allegations that money was smuggling out of the country, "Banks did not allow $7 billion to flee out of Egypt after the revolution," Ramez stated. He affirmed that banks were given strict instructions to restrict all cash transfers abroad for individuals to $100,000. Government officials, and anyone associated with them, were not allowed to transfer any funds abroad. 

"Such huge amounts couldn't have gotten out of the country … we inspect banks on a weekly basis to ensure they abide by the rules," he added. 

Ramez showcased this point by indicating that total deposits in Egyptian banks grew from LE942 billion on 27 January, one day before the Egyptian Day of Rage, to LE946 billions on 19 May. Specifically, foreign currency deposits grew by LE22 billion in the same period to reach LE238 billion. 

When asked about the Arab International Bank (AIB), Ramez said its business volumes are very small to be a gateway for money laundering. AIB's exemptions from laws regulating banks, credit, and exchange control led many to doubt its involvement in channeling illicitly obtained funds abroad.

Ramez also added although the CBE does not have enforcement authority on the bank, AIB was given the same instructions as other banks after the revolution.

On Gamal Mubarak and the CBE

Ramez indicated that Gamal Mubarak, the younger son of ousted president Hosni Mubarak, was never on the board of directors of the CBE. 

He said that is not aware of the reasons why Mubarak was assigned to the board of directors of the Arab African International Bank, as that happened in 1996.

On the foreign exchange market

"We only interfered in the FOREX market once … and it was with only $300 million," Ramez assured his audience. 

He explained that the Egyptian pound was relatively stable on the first two working days following 28 January. On the third day, however, the CBE sensed that the $/LE rate was rapidly growing. That’s when they decided to intervene.

"It turned out that there was speculation in the market; because we placed bids but there was no real demand to cover it," Ramez explained.

He also indicated that they haven't intervened in the market since. The deputy governor said that because the Egyptian market is confident that foreign currency is always available, there are no speculation attempts.

On inflation

Ramez denied that the CBE resorted to printing currency to cover Egypt's financial needs. CBE Governor Farouk El-Okda had announced earlier that LE22 billion was injected into the Egyptian economy.

"Monetary policy naturally involves controlling the money supply. The LE22 billion were printed to cover client's cash needs in the period following 28 January. We haven't deviated from our initial plan for 2011," he explained.

The deputy governor did not comment on expected interest rates movement, saying that the Monetary Policy Committee in the CBE will announce their direction in the coming days. 

On the situation for banks

Ramez said that the management of banks in Egypt are currently reluctant to take major decisions, fearing accusations of corruption, describing them as "shaky hands".

"When corruption accusations are floating around without proper proof, how do you expect decision makers to do their job?" he asked.

Ramez called for an act to protect law abiding decision makers and investors from malicious accusations.

As for the deterioration of certain sectors in the economy and its effect on banks, Ramez said that banks are heavily provisioning their facilities against default risks, which adversely affects their profitability.

The Commercial International Bank (CIB), Egypt's largest private bank by assets, lately announced a 42 per cent drop in its net income due to provisioning. 

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