Egypt's foreign currency reserves shrivel

In a fresh sign of continuing pressure on Egypt's economy, the country's foreign reserves declined 10 per cent last month to fall below the critical threshold of three months import cover.

The central bank said foreign exchange reserves reached $13.6bn at the end of January, down from $15.1bn a month earlier.

A note by Beltone Financial, the Cairo based investment bank, on Wednesday said the drop in reserves was "very alarming" and exceeded expectations.

It said the available policy options for the government and the central bank to deal with the decline included limiting imports and allowing the Egyptian pound to depreciate further. Another possibility, it said, was for Qatar to speed up the disbursement of $2.5bn in debt purchases pledged last month.

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The currency fell 9 per cent since the end of December, when the central bank introduced a system of auctions in which it sold dollars to local banks. The move was aimed at shoring up faltering reserves by allowing a gradual depreciation of the pound.

Hisham Ramez, the new central bank governor who took over this week, further tightened the foreign exchange system on Monday by introducing a number of measures, including reducing the frequency of the auctions from three to two a week.

At Wednesday's auction the pound weakened slightly to 6.7 to the dollar, down from 6.69 on Monday.

Morsi el-Sayed el-Hegazy, Egypt's new finance minister, said this week that talks with the International Monetary Fund on a twice-postponed loan would be resumed after the government's economic plan has been finalised, but he gave no date.

Many doubt the $4.8bn loan would come before parliamentary elections that are expected in April but could be staggered over three months, although no official date has been set.

Some analysts suggest the IMF could agree to a programme designed to leave difficult austerity measures until after the election, adding that Mohamed Morsi, the Islamist president, is reluctant to adopt measures that could damage the electoral chances of his Freedom and Justice party. They argue that the Egyptian economy is too important for regional stability to be allowed to fail.

"To stabilise the economy and reduce pressures on the pound, an improvement in the political situation is needed," said Capital Economics, the London-based consultancy. "This would help first to secure an IMF deal - which would also unblock other official aid - and second to lead to a return of private capital inflows."

Egypt has lost $23bn in reserves since January 2011 when the revolt which unseated Hosni Mubarak as president erupted.

As the country embarked on a tortuous political transition punctuated by violence, foreign portfolio investors exited the market, fresh direct investment dried up and tourist numbers fell, intensifying the downward pressure on reserves.