Egypt's foreign reserves fell below $15-billion (U.S.) in January, a level the government says will cover just three months of imports, after being run down to try to defend the Egyptian pound.
The drop in reserves to $13.6-billion by the end of January, according to the central bank, from $15.01-billion a month earlier, extended a decline that has continued despite financial support for Egypt from the Gulf state of Qatar.
Economists said the decline would limit Egypt's ability to support the pound and underlined the need for Cairo to conclude a $4.8-billion loan agreement with the International Monetary Fund. Final ratification of the agreement was postponed at Egypt's behest in December because of political unrest.
Foreign reserves have plummeted from $36-billion on the eve of the uprising that swept Hosni Mubarak from power in February, 2011. Finance Minister Al-Mursi al-Sayed Hegazi said on Jan. 19 that they had risen slightly during the month to stand at $15.5-billion, implying a sharp fall toward the end of the month.
The decline has been exacerbated by a run on the Egyptian pound triggered by political turmoil since late November, which has spurred a flight into dollars and other foreign currencies. The instability has continued to pressure the pound despite financial backing from Qatar, which deposited $4-billion with the central bank toward the end of last year.
"It is not a surprise," said Simon Kitchen, strategist for investment bank EFG-Hermes. "Recent measures, such as the increase in [Egyptian pound] deposit rates at local banks, may help to slow – or even reverse – the burn in reserves in February, but much depends on the political scene."
Warning that the reserves had fallen to a critical level, the central bank introduced a new system of foreign currency auctions at the end of December. Since then, the pound has lost 8 per cent of its value against the U.S. dollar, hitting record lows and extending its losses since the 2011 uprising to 13.4 per cent.
On Monday, the central bank tightened the pound's trading band in the interbank foreign exchange market and reduced the frequency of foreign currency auctions, moves seen as an effort by new central bank Governor Hisham Ramez to slow the pound's decline.
Analysts, however, doubt the moves would halt the currency's slide and expect the country to have to continue running down its financial reserves.
"Today's [foreign exchange] reserve figures are a concern and highlight the limited firepower that policymakers have to support the pound," said William Jackson, emerging markets economist with Capital Economics.
An IMF team is due back in Cairo for more talks in coming weeks, but some analysts believe a deal could be pushed back until parliamentary elections expected in April or May.
"It is still unlikely that a deal will be signed before parliamentary elections in April, which means that pressure on the currency will continue, as shown by the emergence of a shadow market in Cairo," said Anthony Simond, investment analyst with Aberdeen Asset Management.
"All of this will mean that foreign investors will continue to sit on the sidelines until there is more stability on the economics side," he said.