Halting the decline in foreign currency reserves

Two years of political upheaval have increased tensions over the country’s financial health and left the economy in an uncertain situation. After tourists and many foreign investors departed following the 2011 revolution, foreign currency reserves declined. Egypt’s average monthly current account deficit stands at between $400m and $500m. With over $20bn spent since the collapse of the regime of Hosni Mubarak on defending the value of the country’s currency, declining reserves mean authorities will need to take action to seek financial assistance and halt the erosion of foreign exchange reserves. At the same time, foreign exchange reserves, which have mainly been used since the fall of the Mubarak regime to defend the Egyptian pound, have declined by around $20bn since January 2011 to $16.8bn as of October 2014, which is considered the minimum safe level by authorities and bankers to cover three months of imports. The pound has also reached record lows, losing as much as 20% of its value against the US dollar since January 2011.

Currency Drop 

The crisis worsened after President Mohammed Morsi rushed through a new constitution in December 2012, opposed by liberals and leftists, raising more concerns among Egyptians who feared a further devaluation of the pound on the back of political unrest. On December 27, the pound traded at 6.42 to the dollar, a considerable decline considering the pound fell from 6.02 in January 2012 to 6.11 at the beginning of December 2012.

As a result, Egyptians stepped up purchases of dollars from banks. Households are estimated to account for over 70% of deposits in the banking system with around LE600bn ($85.2bn) in local currency bank savings. At the end of October 2012, the household dollarisation ratio (the level of foreign currency holdings as a proportion of money supply) stood at 15.5%, according to Bank of America. Although below the ratio of 33% reached in 2004, the run on the pound was a major source of concern, and the Central Bank of Egypt (CBE) moved to control withdrawals through restrictions.

Stabilising Measures

The central bank imposed currency controls banning private individuals from leaving the country with more than $6000 in cash, imposing transaction fees on dollar purchases and limiting withdrawals to $10,000 a day. Corporate clients were limited to withdrawals of up to $30,000 a day. The dollarisation ratio among companies as of October 2012 was estimated at 41%.

In an effort to manage the decline in the value of the pound, the CBE introduced a new currency regime in December 2012. Daily foreign currency auctions were launched with the aim of stabilising the pound and stemming the decline in foreign reserves to ensure there were enough funds to pay for key imports and external debt, as well as to boost the economy’s competitiveness and bring the value of the pound in line with supply and demand. However, the auctions seemed to only accelerate the pound’s devaluation. The CBE had maintained a balanced exchange rate since 2003 with the pound trading at between 5.50 and 6 per dollar, but in the spring of 2013 the currency continued to fall, dropping from 6.72 in early March to 6.95 by late May. The drop had a knock-on effect on the prices of imported goods, particularly the food bill, as Egypt relies on imports to meet some 40% of its food needs.

Gulf Aid 

Over the past 12 months, however, a degree of stability has returned to the Egyptian currency. Although the pound depreciated by 15.9% in 2013, its precipitous drop was halted by significant inflows of aid from the Gulf in June 2013. The subsequent improvement in investor sentiment helped to boost confidence in the pound, and in January 2014 the CBE was able to relax its controls on foreign currency transfers of up to $100,000.

In May 2014 the Egyptian pound fell again before levelling out the following month. As of late October 2014 it was trading at around 7.12 to the dollar.