Egypt's foreign reserves lose a fifth of their value .. Why? Where was this money spent?

Abdullah Hamed - Cairo

It is natural for foreign reserves to decrease for most of the countries of the world as a result of the invasion of the new Corona virus, most countries, but what has raised concerns among observers of the economy in Egypt - after the Central Bank announced the decline of the dollar monetary reserve to about 37 billion dollars, a loss of about 19% of its value in two months - It is the failure to provide an accurate explanation of the banks that spent all this money, in light of President Abdel Fattah El-Sisi’s announcement of allocating one hundred billion pounds (six billion dollars) to face the repercussions of the emerging Corona virus. 

In its bulletin, the bank confirmed that the spread of the virus affected the global markets for the second month in a row, and as a result, exits of foreign financial fund investments from emerging markets, as well as the Egyptian market, continued during last April. 

Net international reserves of foreign currency held in the treasuries of the Central Bank declined by a value of $ 3.07 billion at the end of April 2020, to record $ 37.03 billion, compared to $ 40.1 billion the previous March. 

The major importance of the cash reserves is to ensure the flow of basic commodities imported from abroad, for a specified period, and statements by government officials on various occasions reveal that this period ranges between three and six months, on the assumption of the lack of all dollar resources for the country. 

Egypt imports an average of five billion dollars a month in goods and products, with an annual total estimated at more than 55 billion dollars; Consequently, the current average foreign exchange reserves cover about eight months of merchandise imports into Egypt. 

Borrowing
Professor of Economics at Oakland University Mustafa Shaheen explains that the real secret behind this drop that was expected was the exit of hot money, which was estimated at 22 billion dollars, and it became only 13 billion, with a loss of nine billion, of which the Central Bank incurred five billion and four hundred million dollars, and the rest paid it Private banks. 

Shaheen said to Al Jazeera Net that the crisis of the emerging Corona virus struck the Egyptian economy’s resources on more than one level; The tourism revenue decreased to zero, and the Suez Canal revenues decreased.

 Remittances from Egyptians abroad, the largest supplier of hard currency, amounted to about $ 29 billion, and Shaheen expected further declines until the end of the year. 

The spokesman pointed out that the central bank pays an annual debt of about 18 billion dollars, which will be eroded in light of the decline in dollar resources. 

In order for the central bank to maintain the reserve, there is no solution for it other than borrowing, which the government has actually taken to go to the International Monetary Fund to cover imports and raise the interest rate to 14% after reducing it to 10.25% and allocating certificates at interest of 14% to curb the surge to acquire the dollar. 

Shaheen ruled out the erosion of the dollar reserves to Egypt completely, as long as borrowing is always available to the government in all its crises, to the point where debts reached unprecedented numbers, as it jumped from 109 billion dollars last September to 112 billion dollars last December. 

The economist suggested that the consequences of this retreat do not go beyond one of two scenarios, the closest to verification is more borrowing, and the second - the least likely for the speaker - is to float the dollar again partially with floating interest rates; So that the central bank will not defend the pound as the dollar returns to rise and the black market returns. 

Assurances
and analysts linked the decline in the dollar reserve and the government's request to the International Monetary Fund to obtain two loans, which would enhance Egypt's ability to face any expected economic difficulties, and protect the sectors most vulnerable to the damage of the spread of the Corona virus. 

The Executive Board of the International Monetary Fund agreed last Monday to lend Egypt about $ 2.8 billion through the "quick financing tool", which the central bank officials considered as an affirmation of confidence in the future performance of the Egyptian economy and the strength of its indicators after the economic reform program that continued during the period from November / November 2016 to the same month in 2019. 

And Egypt got over the past two years to six segments of the IMF, worth $ 12 billion, as well as huge flows from international institutions. 

Messages of reassurance
In turn, Rami Abu al-Naga, deputy governor of the Central Bank of Egypt, assured citizens that foreign exchange reserves are still within safe limits, despite the marked decline, and covers in his current state commodity imports for about seven months. 

Abul-Naga - who assumes responsibility for monetary stability - alluded to the spending aspects by saying that the central bank manages the crisis in a proactive manner, which prompted him to move early through a large financing package and exceptional measures to support and strengthen the Egyptian economy and support it in the face of the crisis. 

He confirmed in press statements that the repercussions of the spread of the emerging Corona virus on the global markets continued for the second month in a row, albeit at a lower rate than the previous month, which witnessed the peak of exits from investment portfolios in emerging markets. 

The Deputy Governor of the Central Bank ruled out the occurrence of substantial effects as a result of the decrease in foreign reserves on the balance of payments and the exchange market, confirming that the domestic market exceeded the peak of foreign investment exit from the government debt instruments market.