Egypt Reserves Steady, Despite “Critical” Warning

Egypt’s central bank said on Sunday its foreign reserves were barely changed in December, despite alarming investors last month by announcing they had reached a critical level.

Political turmoil in late November and early December prompted a rush by investors and ordinary people to switch Egyptian pounds into foreign currency on concerns the government might devalue or bring in capital controls.

In the final two days of December, the central bank auctioned $150 million of its reserves to banks, limited cash withdrawals by companies and charged an administrative fee for foreign currency purchases as it struggled to stabilize the pound, which has fallen to record lows against the U.S. dollar.

On December 29, the bank had said: “The current level of foreign currency reserves represents the minimum and critical limit.”

But on Sunday, the central bank said reserves inched down by only $21 million in December to $15.015 billion.

Economists said they were surprised by the small decline, even after taking into account a $500 million loan the finance minister said Egypt had received from Qatar earlier in December.

“We had expected reserves to drop. The only justification that sounds reasonable is that there has been lower demand for imports, because nothing else has changed,” said one economist.

She said she could not rule out that Egypt may have quietly received assistance from Gulf countries or other lenders.

Central bank officials did not reply immediately to queries.

Egypt’s economy came under intense pressure in November when President Mohamed Morsi moved to grant himself additional powers and fast-track a new, contentious constitution, prompting a political crisis and a wave of sometimes violent protests.

The pound fell again in interbank trade on Sunday, weakening to a record low 6.445 to the dollar from Thursday’s 6.421.

The pound has fallen by about 4 percent since December 29 after having lost 6 percent since the uprising that removed President Hosni Mubarak in early 2011 and chased away tourists and investors, two of Egypt’s main sources of foreign exchange.

Banks snapped up all dollars on offer at Sunday’s currency auction. Some dealers in banks said their customers had been net dollar sellers in the last two or three days, but others said that overall the market was still seeking dollars.

The central bank reduced the size of the auction on Sunday to $60 million after having sold $75 million in each of its four sales since the system was put in place on December 30.

“It means that the central bank wants other banks to begin making a market in foreign currency,” said a Cairo analyst.

“The goal is a normally functioning interbank FX market in which the CBE does not need to intervene. By offering less FX, the central bank is encouraging banks to buy and sell FX to each other.”

The weakening on Sunday was in line with the central bank’s interbank trading band, which it narrowed on Wednesday to plus or minus 0.5 percent a day from the previous 1.0 percent.

Reuters