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Egypt’s Real Reserve Level – Behind The Headline Numbers

The monthly announcement of Egypt’s net international reserves figure has become more of a spectacle of the country’s economic woes than a reflection of recovery.

Egypt’s foreign reserves have tumbled more than 60% from $36 billion before the uprising that toppled Hosni Mubarak in early 2011 and as the country’s key sources of hard currency – investors and tourists – have dried up.

Reserves rose slightly to $15.5 billion helped by a deposit by Qatar to support the economy, Egypt’s minister of finance said yesterday, but they remain at a dangerous level after being run down to defend Egypt’s currency.

Though sporadic official announcements convey seemingly unwavering optimism that reserves will be back to normal levels, behind these headline numbers is a more worrying figure.

In reality, liquid reserves, or convertible foreign currencies including securities, cash and deposits that can be used to defend the Egyptian pound, are at $11.8 billion, according to Egypt financial consultancy Dcode, which used data from the Egyptian Central Bank.

According to Dcode:

Liquid Net International Reserves (net of Gold reserves) declined from $21.3 billion in September 2011 to $11.8 billion in November 2012, covering only 2.2 months of commodity imports.  This figure includes past debt repayments, including a $1.6 billion debt repayment in July, but does not include any other repayments post-November 2012.

That suggests the Central Bank’s monthly announcement is extremely misleading and in fact Egypt is well below the three months of cover for imports that the IMF recommends its members retain.

But not only have economists suggested liquid reserves are falling at a faster rate than net international reserves, but that the $11.8 billon could be even lower in reality.

In a November 2012 note, Capital Economics economist William Jackson suggested liquid reserves are under $10 billion:

[caption id="attachment_1154" align="aligncenter" width="453"]Capital Economics Capital Economics[/caption]

Jackson writes:

The CBE has intervened aggressively in the foreign exchange market to defend the pound against the backdrop of capital flight. As a result, FX reserves have fallen from a peak of $36.2bn to just $15.5bn at present (and liquid reserves have fallen even further). (See Chart 1.) The good news is that the CBE’s reserves have stabilised in recent months, mainly thanks to the drip feed of aid from the Gulf. And so long as the IMF deal is ratified by the Fund’s board next month, the Bank’s reserves should receive a more sizeable boost in the coming months.

As liquid reserves run dry, the Central Bank’s ability to defend an already overvalued pound has become untenable.

With no sign of a final agreement on the IMF loan, the Bank’s decision to launch dollar auctions (which many regarded as a late reaction) to effectively depreciate the pound makes a lot of sense.

Even more intriguing is the IMF’s own breakdown of Egypt’s reserve level.

The IMF figures suggest that the bulk of Egypt’s liquid reserves, excluding gold and other non-convertible assets, stand at about $7.1 billion.  That’s in stark contrast to the Central Bank, which says foreign currency reserves are $10 billionThat $7.1 billion figure may not represent the only liquid reserves but economists say they are unsure of what this level could be at the moment.

The Central Bank’s late decision to allow the pound to fall has cost the country and the Morsi administration.

Now Egypt has little choice but to rely on immediate, easy aid from the Gulf, and a long-term (and very contentious) loan from the IMF before it can recover to its original reserves level.