Advertisements

Egypt’s Budget good fortunes

The recent plummeting global oil prices will mean Egypt would have spent 30% less on energy subsidies in the first half of the current fiscal year than it did in the same period of last year, an oil ministry source said last week.

The government spent $6.35 bn on energy subsidies in the first six months of the fiscal year that began in July, reaping the benefits from petrol oil losing over half its price.

Benchmark Brent crude was trading below $50 a barrel on last Monday compared with its price in June that was above $115.  Egypt has struggled with soaring energy bills caused by high subsidies it provides on fuel for its population of 86 million.

The government slashed fuel subsidies in July to ease the burden on a swelling budget deficit, raising prices of mainstream fuel products by up to 78%.

It had originally assumed oil prices of $109 to $110 a barrel in its 2014-15 budget and planned to spend about $14 bn on energy subsidies during this fiscal year.

The oil minister said in December that if oil prices remained at below $60 a barrel for the rest of the fiscal year, the government could end up spending less than $10 bn pounds on the subsidies.

 

Egypt’s economy was hit by upheaval triggered by Mubarak’s fall but it has started to recover.  A. Sissi has restored some stability and taken bold steps on the economy that was praised by foreign investors such as reducing fuel subsidies.

The central bank let the Egyptian Pound depreciate for the first time in six months on Sunday, in what analysts view as a move to encourage investment by letting the Pound reach a price that the market sees as fair.

After four years of turmoil, Egypt is trying to secure a nascent recovery by conveying an investor-friendly image in the run-up to an investment conference in March.

Letting the Pound reach its weakest price since currency auctions began in December 2012 could be a way to boost market confidence in the most populous Arab country, while squeezing its seemingly thriving currency black market.

“Allowing the Pound to gradually depreciate to what is perceived by the market as a fair value could promote inflows of foreign currency into the system and build-up of foreign reserves,” said a senior economist of a well-known brokerage house.  The Central Bank says it sold $38.5 mn at a cut-off price of 7.19 Pounds per Dollar on Sunday, weaker than previous sales at 7.14 Pounds.

Egypt began auctioning Dollars in December 2012, which bankers saw as a possible controlled shift towards a free float.  But two years later the Central Bank still plays a powerful role in supporting the Pound.

The rates at which banks are allowed to trade Dollars are determined by the results of Central Bank sales, giving the bank effective control over official exchange rates, although the black market remains still fairly active.

The Pound was quoted at levels around 7.75 on Thursday, and was exchanged at 7.84 to the dollar in the unofficial market on Sunday afternoon, but had strengthened to trade at 7.80 by the evening, one trader said.

The bank’s unexpected depreciation comes days after it surprised the market with a cut to its benchmark interest rates of 50 basis points.

The two moves in tandem are likely meant to maximise investment during the Investment Conference of March by eliminating currency doubts and reducing the cost of borrowing, while buffeting Egypt’s reserves, analysts said.

It is well known that Egypt’s foreign reserves have declined for two months, which economists see continuing due to low investments and no further aid expected from Gulf countries but also as put by a banker at an Egyptian lender as the depreciation to be perceived as a way to gradually price out black market traders.

The central bank introduced a fourth weekly dollar auction in December to curb the flourishing currency black market after the gap between official and unofficial rates was seen as widening.  The move however has so far failed to substantially narrow this gap.

Advertisements
%d bloggers like this: