CAIRO (AP) — Egypt’s central bank reported Monday that foreign reserves reached $18.8 billion, their highest level in almost two years, but economists cautioned the jump was a reflection of aid from oil-rich Arab Gulf nations and not the result of an improved economy.
The July reserve figures, which were released on the central bank’s website, represent a nearly $4 billion increase — or about 26 percent — from $14.9 billion at the end of June.
It came after Saudi Arabia, the United Arab Emirates and Kuwait pledged a total of $12 billion dollars in aid to Egypt’s military-backed interim government in the wake of the July 3 coup that deposed Islamist President Mohammed Morsi. His ouster followed several days of protests by millions of Egyptians against Morsi’s presidency. The three Gulf countries had also been at odds with Morsi and his Muslim Brotherhood group.
Some $9 billion of the Gulf aid is a mix of grants and cash deposits, and the remaining $3 billion is in oil and gas products. It was not immediately clear how much of that was deposited last month or by which countries.
While the new reserve figures are their highest since November 2011 and represent a significant boost in Egypt’s coffers, they are still roughly half of what they were before the January 2011 uprising that ousted longtime President Hosni Mubarak.
Egypt’s continued political instability also puts it further from securing a $4.8 billion loan from the International Monetary Fund, which could encourage a return of foreign investments. Tourism and direct foreign investment — two of the country’s foreign currency mainstays — have been decimated while manufacturing and productivity have been hard hit by strikes and ongoing demonstrations over the past 2 ½ years.
Economist Ashraf Swelam said that while the Gulf aid provides a financial cushion and gives Egypt’s new leaders “breathing space,” problems facing the country’s economy remain the same.
“The only way to address these is to take necessary deep structural reforms that put the Egyptian economy on a path to sustainability,” he said.
Prime Minister Hazem el-Beblawi’s government is facing unemployment of around 13 percent, widespread poverty and a burdensome and ill-distributed subsidy system. Half of the country’s 90 million people live at or below the poverty line of $2 a day and rely on government subsidies of wheat and fuel for survival.
Throughout the crisis, the country’s foreign reserves have largely been spent on vital imports, paying off debts, keeping the local currency from plunging against the U.S. dollar and salaries for millions of government employees. The Egyptian pound has lost more than 10 percent of its value to the U.S. dollars since late last year.
El-Beblawi’s Cabinet is a caretaker government tasked with overseeing a transition period until elections are held sometime next year and its mandate may not allow it to execute dramatic economic reforms and painful subsidy cuts. Also, any changes, such as an IMF push for Egypt to hike sales tax, could enflame an already volatile situation and provoke more protests, which in turn affect the business climate.
Swelam said el-Beblawi’s government should use the next six months to rebalance the budget and spend more on improving health care, education and fixing the country’s physical infrastructure, such as bridges and canals.
It should also try to “improve the business environment for the market to be attractive to a host of investors, not just in the oil and gas sectors,” he said. “Otherwise, Egypt will remain a primitive economy with a focus on a very limited number of sectors.”
Ahmed el-Sayyed el-Naggar, an economic expert at the Ahram Center for Political and Strategic Studies, warned that using the aid money to pay off debts or prop up the currency puts Egypt in a vicious cycle.
The foreign aid is just a “stop-gap” because the budget has not been overhauled to address critical shortages, el-Naggar said.
Also pointing to deterioration in the economy, the London-based Capital Economics said Monday that the Egyptian monthly purchasing managers’ index — a broad gauge of economic activity — declined to 41.7 in July from 47.5 in June.
A PMI reading below 50 generally indicates a contraction among the majority of private sector companies regarding their view of the market.
The firm said this indicates that the Egyptian economy has “weakened further” against the backdrop of the latest political turmoil brought on by Morsi’s ouster.