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.


  • Posted January 20, 2013 at 4:15 pm | Permalink

    The Central Bank probably adds categories 1,2,4,5 in the first table of the IMF document in order to arrive to 10.1bn figure as net liquid reserves. The $7.1bn figure excludes category (5) – other reserve assets, of which again the majority (circa 2.4bn) is derived by “other” !

    I guess it all depends if “others” are really liquid or not!

  • Posted January 20, 2013 at 4:18 pm | Permalink

    Thanks Haitham – I understood that gold was excluded when discussing liquid reserves?

  • Posted January 20, 2013 at 4:24 pm | Permalink

    Yes Gold which is cited in category (3) is excluded already. But the $7.1bn also excludes (5) other assets. I dont know if the liquid reserves should exclude it or not, and it is not clear from the name of the asset category if that is liquid or not.

  • Chaker El Mostafa
    Posted January 22, 2013 at 8:27 am | Permalink

    First of all, this is an interesting and insightful piece. Keep up the good work.
    Second, allow me to contribute by sharing some basic findings.

    According to the IMF’s database on Egypt’s official reserve assets, as of Nov 2012:
    -Total official reserve assets = $15.04 bn (1+2+3+4+5)
    -Total official reserve assets net of gold = $10.84 bn (1+2+3+5)
    -Total foreign currency reserves (in convertible foreign currency) = $7.11 bn (1); this category consists of FX denominated securities and deposits.

    Moreover, the IMF states that “monetary gold, SDRs, and reserve positions in the Fund are considered reserve assets because they are owned assets readily available to the monetary authorities in unconditional form. Foreign exchange and other claims in many instances are equally available and therefore qualify as reserve assets.” *

    The keyword here is “readily available” which implies liquidity. Claiming, therefore, that Egypt’s “liquid reserves” only stand at $7.1 billion may thus be misleading.

    A better way to question the CBE’s official reserve assets may be by looking into the liquidity of the CBE’s securities and FX portfolios (category 1 in the IMF table) and its other reserve asset’s portfolio (category 5 in the IMF table),as they may be more susceptible to external factors, which could impede on their liquidity. The IMF, however, stipulates that the mentioned assets be of a highly liquid nature before they are counted as reserves*.

    Hence, all assets quoted in the official reserves are liquid to a satisfactory extent to be readily drawn upon during short term crises. Therefore, using the CBE’s quote, which jives with the IMF’s, may very well be satisfactory enough to gauge the state of country’s ability to meet its foreign obligations.



  • Rebel Economy
    Posted January 22, 2013 at 8:37 am | Permalink

    Dear Chaker, thank you for clarifying this crucial point! I was hoping an economist would correct me. Thanks for your interest. Farah

Post a Comment

Your email is kept private. Required fields are marked *