Turmoil hits Egypt's foreign currency reserves

Egypt has lost a third of its foreign currency reserves since the beginning of the year as a result of the turmoil accompanying the revolution, which swept Hosni Mubarak, former president. out of power.

Foreign currency reserves fell from $29.8bn in February to $19.4bn at the end of September, according to figures published by the Central Bank of Egypt. The current reserves are estimated to cover 4.8 months of imports, down from 6.9 in April 2011.

Analysts say they are worried by the deterioration in the country’s external position, which is likely to continue for as long as the transition to elected rule drags on and remains shrouded in uncertainty. The military council, now the highest political authority in the country, promised in February to leave office within six months, but according to a schedule announced on Saturday, a new president is not likely to be elected before late 2012.

“This [deterioration in reserves] is significant,” said Mohamed Abu Basha, economist at EFG-Hermes, the regional investment bank. “The decline is likely to continue because of the fall in tourism, the absence of foreign direct investment and portfolio inflows. The picture will not be reversed with the current political timetable. We are now talking about a longer transition, not just six months, so there is little visibility.”

The economy ground to a near halt during the first three months of the year, as tourists and investors shunned the country while strikes and stoppages disrupted production and exports. The economy contracted by 4.2 per cent in the first quarter of 2010, having grown at 5.6 per cent in the last quarter of 2010. Although tourist numbers have risen through the year, foreign investment has yet to return.
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Reserves declined by $1bn in September, probably the result of foreign investors dumping Egyptian debt because of worries over the widening deficit and the country’s faltering political transition, according to Beltone Financial, the Cairo-based investment bank. “It is very likely that foreigners could have decreased their holdings further in September 2011, on worries over the Egyptian government’s ability to finance its deficit and on latest disagreements between the military council and political parties,” said the bank in a report on Wednesday.

Beltone said foreign holdings of Egyptian treasury bills fell by 60 per cent since December. At the same time, the government has had to increase spending to meet demands for better pay as Egyptians embarked on industrial action to press for an economic dividend from their revolution.