CAIRO/LONDON: Egypt dipped deeper into its rapidly shrinking currency reserves yesterday, fighting to slow a sliding pound which is likely to push up inflation and risks reigniting popular unrest.
Economists warned that the 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 bill, well below levels in many of its emerging market peers.
The pound slid further yesterday at the central bank’s fourth auction of foreign currency, with $74.9m sold to banks at a cut-off price of 6.386 pounds, weaker than Wednesday’s 6.351 to the dollar.
Egypt’s currency has lost about 10 percent against the dollar since the start of 2011, just before the Arab Spring unrest spread to the country. But about a third of that has come this week alone, since the central bank began auctioning $75m 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.
Egyptians began the new year in an atmosphere of growing anxiety, with few expecting any quick solutions as political infighting continues before a parliamentary election expected to get underway within two months.
With the crisis deepening and the pound hitting fresh record lows every day, economists believe more financial mess could be in store for the Arab world’s most populous nation. “This is the worst possible way of managing the devaluation, squandering $300m a week to slow the decline,” said one economist based outside of Egypt.
Protracted political wrangling is bad news for President Mohammed Mursi who desperately needs consensus in order to introduce unpopular austerity measures, vital to securing a $4.8bn 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 would soon stabilise.
Businesses say they are factoring in an even bigger decline in the pound’s value and inevitable steep price rises in country which 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 $15bn 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 were 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.
Echoing this anxiety, the cost of insuring Egyptian debt against default has soared. Adding to the uncertainty, it remains unclear when talks with the IMF - originally expected in January - would resume.
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 percent in the 12 months to November from an annual 6.7 percent in October - giving limited leeway.
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.