Concern grew over the level of Egypt’s foreign currency reserves on Wednesday after news that they had dropped below the critical threshold of three months’ import cover.
Egypt’s benchmark EGX 30 index fell by 1.8 per cent on negative sentiment after central bank figures showed that the country’s foreign reserves declined by 10 per cent last month to a new low of $13.6bn at the end of January, down from $15.1bn a month earlier.
Beltone Financial, the Cairo-based investment bank, described the drop as “very alarming” and said it exceeded expectations.
In a note, Beltone said the available policy options for the government and the central bank to deal with the decline included limiting imports and allowing the Egyptian pound to depreciate further.
Hisham Ramez, the new governor of the central bank who took over his post this month, was reported on Tuesday to have instructed local banks to prioritise access to foreign currency for imports of basic foods, industrial inputs, fuel, medicines and fertilisers.
Mohamed Abu Basha, Egypt economist at EFG-Hermes, the regional investment bank, said the situation “could turn to import control. This is the likely scenario.”
The Egyptian pound fell by 9 per cent since the end of December, when the central bank introduced a system of auctions in which it sold dollars to local banks. The move was aimed at shoring up faltering reserves by allowing a gradual depreciation of the pound.
Mr Ramez further tightened the foreign exchange system on Monday by introducing a number of measures, including reducing the number of auctions from three to two a week.
On Wednesday the pound traded at 6.7 to the dollar on the interbank market according to the central bank website. Morsi el-Sayed el-Hegazy, Egypt’s new finance minister, said this week that talks with the International Monetary Fund on a twice-postponed loan would be resumed after the government’s economic plan had been finalised, but he gave no date.
Many doubt the $4.8bn loan would come before parliamentary elections that are expected in April but could be staggered over six weeks. No official date has been set for the poll.
However, there are fears that the continuing political turmoil in Egypt will make any economic reform difficult.
“The escalating political rift between the president and the opposition is likely to further increase the challenges in implementing the much needed economic reforms necessary for an IMF deal to be concluded successfully. The upcoming parliamentary elections are likely to further complicate the policy environment, with rising political and social risks,” said Mr Abu Basha.
Mr Morsi tried to introduce sales tax increases in December but rescinded them almost immediately after widespread popular opposition. The increases were part of an economic programme agreed with the IMF in November. After the tax rises were halted, Egypt asked the fund “to postpone” its loan.
“To stabilise the economy and reduce pressures on the pound, an improvement in the political situation is needed,” said Capital Economics, the London-based consultancy. “This would help first to secure an IMF deal, which would also unblock other official aid, and second to lead to a return of private capital inflows.”
Egypt has lost $23bn in reserves since January 2011, when the revolt which unseated Hosni Mubarak as president erupted.
As the country embarked on a tortuous political transition punctuated by violence, foreign portfolio investors exited the market, fresh direct investment dried up and tourist numbers fell, intensifying the downward pressure on reserves.