An employee counts dollar bills at a bank in Cairo. Egypt’s 2011 uprising drove away tourists and foreign investors, starving it of hard currency it needs to pay for imports of everything from food to gasoline to raw materials.

Reuters
Cairo

A shortage of foreign currency in Egypt, still struggling to revive its economy in the political turmoil following its 2011 uprising, will make the central bank’s December 17 interest rate decision particularly tricky.
Some economists say rates need to rise to bolster the Egyptian pound and curb near double-digit inflation. Pressure to raise could intensify if the Federal Reserve lifts US interest rates on December 16, as expected.
But Egypt’s lending and deposit rates are already high at 9.75 and 8.75%, respectively. An increase would further hit investment and economic growth. It would also be expensive for the government - debt servicing accounted for 22% of spending last year.
“The decision is more difficult this time. So far, we know there are efforts to prevent a massive devaluation in the currency,” said Ziad Waleed, an economist at Beltone Financial.
Since Tarek Amer became its governor in November - a month after his appointment, a month where he was working behind the scenes - the central bank has supported the pound by indirectly raising interest rates and supplying banks with dollars. But dwindling foreign reserves—down from $36bn in 2011 to $16.423bn in November—means it lacks the firepower to stay on that path.
Egypt’s 2011 uprising drove away tourists and foreign investors, starving it of hard currency it needs to pay for imports of everything from food to gasoline to raw materials.
That forced the central bank to ration sales of its dwindling stock of dollars to banks as it sought to defend its the pound against intensifying downward pressure.
Last month, Egypt’s top two state banks, National Bank of Egypt and Banque Misr, also raised interest rates on Egyptian pound savings certificates to 12.5% from some 10%.
But that increase has yet to be reflected in higher government debt yields. Bankers say state banks have been aggressively pushing yields lower at regular treasury bill auctions to keep government borrowing costs down.
A central bank rate increase would immediately raise treasury yields. For now, it seems the central bank prefers profitable state banks to bear the cost of its policy.
“We believe the (central bank) will likely opt for a soft rate hike - 50 bps,” said Hany Genena, the head of research at Pharos Securities Brokerage. “(That) will likely achieve the dual objective of minimizing the impact on government and corporate borrowers whilst enabling banks to raise their deposit rates to increase the allure of the Egyptian pound.”
Bankers and economists say the central bank may be hoping a rate hike will make government debt more attractive to foreign investors. But the move will succeed only if investors are confident they can repatriate their dollars.
In February, the central bank limited dollar deposits to $50,000 a month and forced banks to give priority to imports of food and medicine when distributing dollars. That made it difficult for foreign investors to convert their investments back to dollars and take them out of Egypt.
On December 1, Egypt repaid a backlog of $546mn owed to foreign investors in stocks and securities. At the same time, it encouraged foreigners to invest through a repatriation scheme operated by the central bank to ensure they get fast access to foreign exchange.
It has yet to be seen whether that move reassured foreign investors. And despite the central bank’s moves to support the pound, foreign investors still expect a currency devaluation. Many are waiting to see the pound stabilise nearer its market value.
“If I were a foreign investor, putting in $100mn to be invested in Egyptian treasury bills that are offering 10% - I will not invest in Egypt if I am going to lose that same 10% in a devaluation and then be stuck in Egypt for three months after my investment matures,” said Hany Farahat, an economist at CI Capital.