The recently pledged $12bn in Gulf lifelines to Egypt will be earmarked towards increasing the state’s fiscal budget and bolstering Egypt’s net foreign currency reserves, said Finance Minister Ahmed Galal in a press conference on Thursday.
Galal said $9bn will go towards boosting the country’s foreign currency reserves and the remaining $3bn will go towards financing the state’s budget.
Foreign currency reserves, which are necessary for the purchase of basic imports such as wheat, decreased to $14.9bn this June compared to $36bn on the eve of the 2011 revolution.
Last week, the Central Bank of Egypt confirmed it had received a total of $5bn from the UAE and Saudi Arabia combined.
Following the military’s ouster of former president Mohamed Morsi, a number of Arab countries announced new financial aid packages to Egypt, including $5bn from Saudi Arabia, $3bn from the United Arab Emirates and $4bn from Kuwait, in addition to a Bahraini aid package which is expected to be put forward soon.
“Directing this Gulf aid towards foreign reserves and the budget should offset pressure on the exchange rate of the Egyptian pound and increase finances to purchase the strategic goods needed by Egyptians,” he said.
However, Alaa Mostafa, CFO at ElSewedy Cables and a financial expert, said any increase in foreign reserve levels is “unlikely as long as political instability remains.”
Mostafa said the recent injections of Gulf aid are likely to bolster reserves temporarily, but the value of the aid will remain “economically misleading.”
“We must first look at factors such as tourism revenues, production and exportation before we say we have substantial foreign currency reserves,” Mostafa said.
In a report published 15 July, credit rating agency Moody’s stated that despite the positive effect the Gulf lifelines will have in increasing foreign reserve levels and reducing the budget deficit, real risks remain.
“The funding provides only temporary relief from the political and economic challenges in Egypt,” it stated.
“Aid from the Gulf states alone, unless accompanied by a strong economic policy framework, is unlikely to bolster confidence enough to reinvigorate domestic and foreign investment to pre-revolution levels,” the report explained.
It stated that although the total Gulf support surpasses the proposed $4.8bn loan package from the International Monetary Fund (IMF), fiscal reforms associated with the program are still essential to reduce deficit and debt refinancing requirements.
The release cited continued sectarian violence “triggered by heightened political uncertainty amid the recent regime change – a credit negative.”
Moody’s also pointed out that country’s weak economic growth and fiscal position, and its elevated unemployment and inflation rates remain “alarming”.
Egypt’s annual inflation jumped significantly to 9.8% in June compared to 8.2% in May and 8.1% in April, raising consumer prices to 0.9%, the Central Agency for Public Mobilisation and Statistics reported. This month’s inflation level is the highest since 2011, when levels registered 10.4% in July.
In March, Moody’s cut Egypt’s credit rating by one level from B3 to Caa1, which it said meant it now sees nearly a 10% chance of Egypt defaulting on its debt over the next year and slightly less than a 40% chance of a default within five years.
On Wednesday, the agency affirmed the Caa1 rating, classifying it as very high credit risk.
“The maintenance of the negative outlook on Egypt’s Caa1 rating is driven by Moody’s view of the country’s considerable economic and political challenges,” said a statement issued by the agency, which noted “the deepening political divide” since Morsi’s ouster.
Earlier this month, Fitch Ratings, the global rating agency, downgraded Egypt’s issuer default ratings and country ceiling from B to B-, following the unrest that took place after the military deposed Morsi amid mass demonstrations.