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.
What happens when a president of a newly democratic country decides to act more like a tyrannical than post-revolutionary leader?
It’s clear that it leads to a severe crisis of confidence from the public; the same people that elected this president (albeit, by a narrow margin) to his place less than six months ago.
President Morsi’s decision to issue a decree that granted him far-reaching powers effectively began an avalanche of economic mayhem not seen since the revolution broke out in early 2011.
The swift backflip on this decision did not make any difference, because Morsi had decided to go ahead with a referendum on the constitution, despite calls to delay it. That has now been passed but there was no landslide victory and Morsi must accommodate a slim mandate that will make it difficult to enforce any economic reform measures.
Above all, the political turmoil that has ensued over the last month has prompted fears that the government is not in control of its finances and the economy.
As a result, fears have grown over the pressure on the pound currency and there has been a rush by Egyptians to withdraw their savings from banks. Initially, the Central Bank sent out a cryptic message of reassurance that it would protect the public’s bank deposits.
Al Arabiya flashed a headline two days ago:
Then the bank made its move in an attempt to nip in the bud a dangerous path of dollarization, which would put increasing pressure on the pound and the nation’s dwindling international reserves.
Egypt banned travelers from carrying more than US$10,000 in foreign currency cash in or out of the country. It was part of a presidential decree that modified the central bank law in order to tighten foreign currency transfers amid another wave of dollarization that hasn’t been seen since last year.
The anxiety over the economy was visible at currency exchanges in the upscale Cairo neighborhood of Zamalek, which ran out of dollars by midday and offered only euros — a rare occurrence. Some banks, too, said they had run out of cash dollars, forcing people to seek foreign currency from exchanges around the city.
There were also reports from the local media that an Emirati aircraft delivered cargo loads of cash amounting to $30 million to Egypt to help plug the shortage of dollars. In another blow, the ratings agency Standard & Poor’s cut the government’s credit rating citing the political turbulence and warning that another cut could come if political problems persist.
The panic prompted a full-scale media management.
The Central Bank of Egypt issued a statement on Monday calling on banks not to listen to rumours circulating about the fiscal health of the nation.
The official English website of the Muslim Brotherhood published an interview with the Freedom and Justice Party’s economist Mohammed Gouda “refuting rumours” about the economic health of Egypt:
Dr. Mohamed Gouda refuted rumors being persistently reported in print and broadcast media about the poor economic situation in Egypt, pointing out that there is a difference between explaining the economic situation and spreading panic.
“Economic problems can be solved. There is nothing impossible about them. But security and political stability are essential to help the economy and implement the reform plan.”
Well, those aren’t rumours. Egypt is in a dire economic situation and denying this will only prolong the pain.
Finally the prime minister, Hisham Qandil, pointed out the obvious saying political stability was crucial to luring back foreign investors and tourists to help plug the budget deficit and heal the country’s struggling economy.
Meanwhile, Morsi is taking advice from a man that the New York Times described as someone who “frightens most economists”: Hamdeen Sabahi, an outspoken opponent of free-market economic moves in general as well as of a pending $4.8 billion loan from the IMF.
The president made a terrible decision just over a month ago, and now the nation is paying for it. It’s time we saw Morsi making some sacrifices and leading a nation rather than his Brotherhood colleagues.