Current social upheaval in Egypt may send the country’s currency on a downward trend resulting in a sharp depreciation in the coming few months.
The country’s foreign currency reserves slid to $22.1 billion in October down from $36 billion in the same period last year. This currency crisis is directly linked to the social upheavals within the country since the ouster of then president Hosni Mubarak last January, as foreign investment inflows and tourism have dried up. In October alone, Egypt’s reserves fell $1.93 billion, the biggest drop since April, Central Bank data revealed.
The Egyptian pound has shown extraordinary flexibility throughout the upheaval, nevertheless, experts find that pressures on the pound are beginning to show, with the Central Bank’s liquidity potentially drying up faster than expected. Egypt has been struggling to keep its currency from collapsing during the course of the revolution.
Raza Agha, senior Middle East and North Africa economist at RBS, estimates that Egypt’s reserves are large enough to cover about 4.5 months’ worth of Egypt’s imports. But liquid reserves, currencies, deposits and securities that can be mobilized to defend the pound, total approximately $16.1 billion or 3.2 months of imports, she calculated.
“Egypt’s current reserve levels are not alarming but are very situation-dependent and vulnerable to capital flight” she said. She added that on-going unrest continues to hurt the economy as tourism revenues fell dramatically causing a major hole in the country’s budget.
The recent violence, which calls into question whether Egypt can smoothly hold parliamentary elections beginning next week, is likely to increase pressure on the reserves and may result in a full-blown crisis.
Egypt previously turned down a loan offer from the IMF, to keep from further indebting the country. (Source: www.yallafinance.com)
