Foreign reserves decline to $15.882 billion

Egypt’s foreign reserves dropped to US$15.882 billion at the end of November, according to the Central Bank of Egypt (CBE), putting it close to a critical threshold of three months of import cover.

Egypt is highly reliant on foreign currency to finance critical imports including oil and food staples such as wheat. It needs roughly $5 billion per month to finance imports.

International financial institutions regard holding reserves sufficient for three months of imports as a key metric for gauging a country’s fiscal health. When a country slips below that limit, it risks having its credit rating downgraded, which in turn raises borrowing costs for the government.

Last month, the figure stood at $16.9 billion. On the eve of the January 2011 uprising, reserves stood at around $36 billion.

Since then, key traditional sources of foreign currency, such as tourism and foreign direct investment have dried up, leaving Egypt with a currency gap that has only been partially filled by grants from foreign governments, remittances by foreign workers and Suez Canal revenues.

Egypt has also maintained its official exchange rate at around 7.14 to the U.S. dollar since May 2014, despite rising black market prices.

Officially, maintaining a steady exchange rate has not been part of the CBE’s mandate since January 2003, when the government announced the Egyptian pound would be allowed to float freely. However, numerous analyses since then have indicated that the Central Bank has repeatedly intervened to hold the pound steady. Doing so requires that the bank draw on its foreign currency reserves to buy Egyptian pounds at inflated prices.

Following a mission to Egypt in November, the International Monetary Fund advised Egypt stop trying to hold the pound steady against the dollar.

 “A more flexible exchange rate policy focused on achieving a market-clearing rate and avoiding real appreciation would improve the availability of foreign exchange,” said mission chief Chris Jarvis in a statement at the conclusion of the trip.