Egypt defiant as Arab Spring drains foreign reserves
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Emerging Markets

Egypt defiant as Arab Spring drains foreign reserves

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Egypt still has sufficient foreign exchange reserves to cover its economic activities for six months, its central bank has insisted

Egyptian officials have brushed aside fears that the fallout from the North African revolution would leave Cairo dangerously short of foreign reserves, even though most commitments from G8 governments and other donors have yet to be finalized.

Foreign exchange reserves fell to $27.2 billion at end-May, from $36 billion at the start of January – the month President Hosni Mubarak was ousted – Hisham Ramez, deputy governor of Central Bank of Egypt (CBE) reported in Lisbon. But that figure “is enough to cover six months of imports and is still a very safe figure”, he argued.

Reserves fell by $3 billion in both February and March, and by $2 billion in April, but the drop was less in May at $800 million, showing “the trend is now moderating”, Ramez said.

Local confidence is building and there are signs that tourism, a major employer, will pick up by end-year, and “as the business cycle comes back so will those balances”, he told a press briefing.

He said that after the revolution foreign investors “went out in a very ordered manner. In a difficult situation, “the forex market and Egyptian pound have done extremely well”.

He also insisted there were no plans to alter the Egyptian pound’s long-standing managed float system, even though it is estimated that the CBE has spent $15 billion supporting the currency since January.

“Our currency is based on supply and demand, and at this stage we are not moving towards the level where we will change our policy,” Ramez told Emerging Markets. At CBE, “our main policy instrument is the interest rate, the exchange rate is not our main tool”.

CBE has not intervened in the forex market since early February, Ramez said. Since 5 February – the day after CBE resumed operations following Mubarak’s 25 January ejection – “we did not intervene, we haven’t touched the market”.

The IMF approved a $3 billion 12-month standby arrangement on Sunday and Ramez confirmed that Saudi Arabia had provided $500 million budget support. But despite all the talk of billions generated at the G8’s Deauville summit other commitments have yet to be finalized, even though “we are having talks with other donors”.

The World Bank has discussed an estimated $2.2 billion soft loan. AfDB is discussing a package for Egypt similar to its recent $500 million budget support for Tunisia, bank president Donald Kaberuka said.

Hassan Khedr, Egypt’s executive director at the bank, said it was possible Kaberuka would visit Cairo soon to work out a “plan for support”. Further details may be revealed today when Egyptian ministers attend meetings in Lisbon.

More international support is needed. Finance Minister Samir Radwan this week said that Egypt needed between $10 billion and $12 billion to tide Egypt over until mid-2012.

But Ramez described Egypt’s ballooning budget deficit as “a very temporary issue”. He concluded that “once the economy settles down the government will go back to its normal business and the deficit will come down.”

The CBE is looking towards a gradual return of international investors to the Egyptian T-bill market, Ramez told Emerging Markets. He said while 98% of treasury debt was held by Egyptian investors, foreigners would return when the “situation settles down... and there are signs of that happening”.

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