Egypt’s Central Bank yesterday published a strangley frank statement that sheds light on the country’s terrible spending habits and signals how the Morsi administration is losing its grip on the economy.
Just hours after the country’s president Mohammed Morsi made a speech to declare the economy was showing signs of improvement, the Central Bank said it plans to start foreign-exchange auctions in order to preserve foreign reserves after they plunged to “minimum and critical” levels.
The new mechanism, which comes into effect today, will support the dollar interbank market.
The Egyptian pound is subject to a managed float but these auctions will mean the exchange rate is determined by the market rather than the Central Bank. It is a clear response to the depreciation of the pound, which fell to 6.1858 a dollar on Friday, near the lowest level in eight years.
A wave of dollarization, where the public have swapped their pounds for dollars, has exacerbated the pressure on the currency and the ability for the Central Bank to manage the pound’s fall. If you want to read more about Egypt’s currency situation, Rebel Economy put this guide together a few days ago.
$14 billion for the import of petroleum products and foodstuffs.
$8 billion for the payment of premiums and interest on foreign debt.
$13 billion to cover the exit of foreign investors from the local debt market.
The Central Bank said the total of $35 billion was financed from reserves plus other foreign exchange inflows.
It is the clearest sign yet of how Egypt’s costly energy subsidies have eaten up some of the country’s reserves to fund petroleum imports. Just this morning the ministry of finance said it has prepared $50 million to cover “urgent” petroleum import needs.
Debt service payments in foreign debt is also significant considering the country boasts about low external debt.
Even so, the renewed transparency from the finance ministry, central bank and the presidency is a positive step toward communicating to the public the situation on the ground, something that has been missing for several months. With it, Egyptian officials have explained that the country is not in danger of going bankrupt as several media reports have signalled. This morning Mumtaz el Saeed, Egypt’s finance minister said it was all an “illusion” and a “myth”.
It is unlikely that Egypt will go bankrupt simply because it is too big to fail but also because of the large amount of domestic debt Egypt has which can be rolled over easily unlike foreign debt which carries expensive penalties if not paid on time.
However, the country could get stuck in a perpetual cycle whereby debt is always rolled-over with no fear of default, supported by a cushion from foreign donors such as Qatar, Saudi Arabia and Turkey.