The Central Bank of Egypt (CBE) announced last week that its foreign exchange reserves dropped to $15.54bn at the end of July from $17.55bn at the end of June—a decline of $2.01bn.
This is the lowest point for foreign exchange reserves since January 2015.
This significant decline in reserve balances raised an important question of whether or not the decline will delay the Egyptian pound’s devaluation or floating it by the CBE.
According to Tamer Youssef, head of treasury at a foreign bank operating in the Egyptian market, the drop in reserves was not surprising to the CBE.
He added that a further devaluation of the national currency will be conducted through a comprehensive programme implemented between the government and the CBE as part of a full package of procedures to reform the economy, starting with setting a value for the Egyptian pound, applying the value-added tax, and reviewing the subsidies system and civil service act. This programme is scheduled to be implemented at certain times with more focus on its social impacts.
Youssef said that negotiations with the International Monetary Fund (IMF) came as one of the solutions bridging the funding gap and as an essential element to enable the government to borrow externally, both from international institutions or by offering US dollar-denominated bonds on global capital markets, in light of the decline in reserves.
In regards to the effect of the reserves on the value of the Egyptian pound, Youssef explained that the timing of this move is in the hands of the CBE alone and is linked to the cash inflow in the coming period, especially the IMF loan, amid the lack of other resources.
He predicted the CBE would devaluate the Egyptian pound in the coming quarter of 2016, especially after the positive IMF report on the government reform programme, which puts it a step closer to the requested $12bn loan, which would be received over a three–year period.
Osama El-Menilawy, the assistant general manager of a financial sector at a private bank operating in Egypt, said floating the Egyptian pound relies on several determinants, including the social aspect and the impact of devaluation on prices and their effects on lower classes.
He noted that the CBE should consider all these factors, as well as inflation rates, in light of the expected procedures that would lead to a certain price hike, such as the latest electricity price increases.
“The low reserves may hinder the decision to devaluate the Egyptian pound,” he said, highlighting earlier remarks of the CBE governor of intervening once the reserves reach good levels.