This guest post is by Karim Abadir, professor of Financial Econometrics at Imperial College London’s Business School. He is also a founding member of the Free Egyptians Party.
The Who once sang, “We won’t get fooled again”, and this is the message we should keep sending to the individuals mismanaging Egypt. I’ll tell you about just one of their tricks to try and fool you: Egypt’s foreign currency reserves figures.
Egyptian officials may have conveyed an appearance of organisation by releasing to the media monthly figures for gross reserves, but they have been reluctant to tell you the whole truth.
Gross reserves climbed to $16 billion at the end of May 2013, the highest point since February 2012 but look closer and not all is what it seems. This figure has been inflated by massive short-term borrowing and other activities. Behind these headline numbers, Egypt’s effective reserve level tells a very different story.[caption id="attachment_1742" align="alignright" width="214"] Courtesy of Imperial College London[/caption]
Although Egypt reports its gross reserves figure, if you calculate Egypt’s short-term net reserves, you will come up with something very different: Egypt is precariously in the red. Here are some ways to calculate short-term net reserves, depending on how deep you want to go:
1. The simplest calculation you can make is to subtract the total drains due in the short term (within a year), which are detailed in Sections II and III of the IMF’s report, from the gross figure listed in Section I there: you will reach the result that Egypt has basically no reserves left, without even taking into account what it will want to spend on importing wheat, fuel, etc.
2. Before making the subtraction, you can start by digging deeper into what constitutes the gross reserves in Section I. The result is even worse. We’re carrying illiquid assets (like gold) that cannot be transformed into cash without taking a large cut in their book value, so even the big figure totalled in Section I is misleading.
3. There are massive foreign-currency debts that our public sector companies are carrying; e.g., the many billions of US dollars (estimated to be up to $20 billion) owed by our state-run oil company, the Egyptian General Petroleum Corporation. Subtract these, and the country’s reserves position is even uglier.
4. There’s no limit to how ugly this gets! We are now borrowing from Qatar on an 18-month deal. Why do you think we went for this awkward maturity period, as opposed to just a year or maybe something longer term? Because if it’s a year or less, it will appear in Section II and make the net reserves position look more negative; and they wouldn’t want the IMF to see that Egypt has more short-term debt than reserves. And forget about a substantial longer-term loan: with our credit rating deep into junk status and close to default, who would take this risk and at what price?
An economy that’s doing well would generate income for its population, but we are not: our gross domestic productper person is continually shrinking. A successful economy would accumulate wealth and see its gross reserves increasing as a result of real economic growth, not because it is getting much more indebted or because it is relinquishing control of its historical and strategic assets. And net reserves would be increasing too. We haven’t seen this for a while.
Spread the word and monitor NET (not gross) reserves. We won’t get fooled again!