Sunday, December 30, 2012

Egypt's central bank running "dangerously low" on foreign reserves

Egypt is learning the hard way that free elections by themselves do not produce a democratic state (see discussion). Nor do free elections necessarily translate into prosperity. With the new constitution in place and Muslim Brotherhood consolidating power, capital is flowing out of the country. The Egyptian pound (EGP) is under pressure as it hits new lows, while the central bank is spending foreign reserves to keep the pound from collapsing. It's becoming a losing battle.

EGP per one dollar (EGP weakening)

BBC: - Egypt is grappling with a crippling budget deficit and dwindling foreign reserves. The central bank has spent more than $20bn in foreign reserves to support the pound since a revolution against former President Hosni Mubarak in 2011.
With hard currency reserves running tight, the central bank is now imposing currency controls.

BBC: - The central bank also forbid corporate clients from withdrawing more than $30,000 in cash per day ...
Reuters: - Egypt has banned travellers from carrying more than $10,000 in foreign currency in or out of the country, as officials worry over pressure on its pound currency and a rush by Egyptians to withdraw their savings from banks.

Political turmoil over the past month has raised fears among ordinary citizens and investors that the government - which has pushed back talks to seal IMF funding till January - may not be able to get its fragile finances under control.

The uprising drove away tourists and foreign investors alike, freezing growth, pushing the state budget deficit into double digits as a percentage of national output and worsening its balance of payments.
Egypt has asked the IMF for a $4.8bn loan to keep its government and currency afloat.
BBC: - Egypt will soon resume talks with the International Monetary Fund over a crucial $4.8bn (£3bn) loan to shore up the economy, the prime minister says.

Talks were suspended because of political turmoil over a new constitution.

PM Hisham Kandil was speaking as the Egyptian pound reportedly fell to a record low against the US dollar.

The central bank said the country's foreign reserves have dropped to "critical" levels.
It's not clear at this stage if the IMF will provide the funds needed or whether it will be enough to keep the currency from collapsing. The big concern of course is that weakening currency will exacerbate food inflation (Egypt imports some 40% of its food and nearly two thirds of its wheat consumption), causing further civil unrest.
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