Egypt foreign exchange reserves on the rise

August 13, 2017

Cairo - The recent increase in Egypt’s foreign currency reserves is expected to improve the country’s credit rating, resulting in a boost in investors’ and interna­tional financial institutions’ confi­dence in the economy and helping the country meet the needs of its people, analysts said.

“The presence of enough foreign currency reserves at the central bank means that our country is ca­pable of honouring its financial ob­ligations,” said economist Ali al-Id­risi. “This automatically raises the national credit rating and increases the confidence of international fi­nancial institutions.”

By the end of July, foreign cur­rency reserves totalled $36.3 bil­lion, the highest since 2011. A few days before the 2011 uprising that ended the rule of autocrat Hosni Mubarak, Egypt’s foreign currency reserves were nearly $37 billion.

The reserves started to drop, however, as revenues from tourism and exports fell due to the unrest. Reserves totalled less than $12 bil­lion by the time Islamist President Muhammad Morsi was ousted in July 2013.

This was catastrophic for import-dependent Egypt. Cairo needed more than double the amount of its foreign currency reserves to secure the needs of its people for at least six months, including to provide wheat necessary for making tens of millions of loaves of bread eaten every day.

Finance Minister Amr el-Garhy attributed the recent increase in reserves to economic reforms the government has initiated since last November 2016.

“The reforms have been effec­tive in addressing problems in the economy and gaining international applause,” Garhy said. “The rise in the reserves is a sign of improving economic conditions and this im­provement will translate into high­er economic growth in the future.”

The reforms included the flota­tion of the Egyptian pound, a sig­nificant slashing of fuel, water and electricity subsidies and raising taxes on non-essential imports.

The flotation of the pound, made to eradicate a rampant foreign cur­rency parallel market, caused the national currency to lose most of its value, leading to an unprecedented surge in commodity prices.

Cutting fuel subsidies raised the cost of transport and consequently the price of commodities in the market. These decisions prompted a backlash from the public but the rise in foreign currency reserves shows the measures paid off.

The slashing of the subsidies and the pound flotation reduced the budget deficit 10.9% by the end of the 2016-17 fiscal year, which ended in June, compared to 12.5% in the previous fiscal year, state figures indicated.

The economic growth rate rose to 4.9%, compared to 4.5% in the cor­responding period of the previous fiscal year.

Egypt’s exports rose 8% in the first half of 2017, reaching $11.1 bil­lion, compared to $10.3 billion in the first half of 2016, Foreign Trade Minister Tarek Qabil said. Imports fell 30% in the first half of 2017, reaching $24 billion, he said.

Those improvements boosted confidence in the economy, espe­cially among entrepreneurs and businessmen looking for invest­ment opportunities.

“Improving economic indica­tors will inevitably reflect on the total volume of investments,” said Sherine el-Shawarby, a former as­sistant finance minister and a pro­fessor of economics at Cairo Uni­versity. “Countries with strong and promising economies are the ones investors always look for.”

Egypt has revamped its invest­ment laws with an eye on procuring investments from other countries, especially oil-rich Gulf states with whom the Egyptian leadership en­joys strong ties.

In the 2016-17 fiscal year, Egypt received $8.7 billion in foreign di­rect investments compared to $6.9 billion in the previous fiscal year, the Investment Ministry said. In­vestment Minister Sahar Nasr said she expected Egypt to receive $10 billion in foreign direct investments in the fiscal year that began July 1.

Egypt still needs to translate those indicators into better stand­ards of living for its people, econo­mists said. This can only be done by reining in runaway commodity prices and bringing inflation down.

Commodity prices have risen al­most 200% since the pound flota­tion in November and core inflation was 31.95% in June, compared to 30.6% a month earlier.

“This very high inflation rate eats away at people’s income and makes most of them incapable of satisfying their basic needs,” Idrisi said. “This opens the door for an increase in the number of the poor, which can have serious social and security implications.”