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Egypt's foreign reserves will plunge by a third to US$15 billion by the end of January and the budget deficit will grow, possibly leading to a review of sensitive subsidies, a military official said on Thursday, highlighting the nation's dire finances.
Reserves have tumbled since the uprising that toppled Hosni Mubarak as foreigners have fled and tourists packed their bags, hurting two of Egypt's main sources of hard currency.
The central bank put reserves at $22 billion at the end of October, down $2 billion from a month earlier and showing a faster fall than previous months. Economists said even that level left limited firepower to cope with a looming currency crisis.
"By end of January of next year foreign reserves will go down to $15 billion dollars," Mahmoud Nasr, a senior army financial official, said at a briefing on the economy.
"Only $10 billion dollars will be available. That is only enough for two months (imports cover)," Nasr said, adding that $5 billion was already committed in payments to foreign investors or for other obligations.
Nasr is assistant for financial affairs to Field Marshal Hussein Tantawi, the head of the ruling military council.
Egypt's pound has tumbled to seven-year lows and economists predict it may weaken more in 2012 unless a new government can swiftly restore confidence in a country that had been a darling of foreign investors until this year's political turmoil.
"The market has become more conscious of currency risks over the past few months as local borrowing costs have risen and the rate of reserve burn has accelerated," said Simon Kitchen, strategist at EFG-Hermes.
The government turned down a $3 billion financing facility from the International Monetary Fund in the summer. The finance minister at the time said Egypt would turn to domestic financing resources and that military rulers did not want to build up debts.
Deficit to climb
The current finance minister has said Egypt is ready to seek IMF funds again, but Nasr reflected army discomfort with borrowing from the IMF, saying that such funds came with conditions and led to questions over sovereign policy issues.
Nasr said the deficit in financial year 2011/12 was set to climb from the LE133 billion ($22 billion) originally forecast by the government, which represents 8.6 percent of gross domestic product (GDP).
Nasr said the deficit would now climb to LE167 fiscal year 2011/12, a level economists said would represent roughly 11 percent of GDP.
"There are several solutions (to dealing with the deficit). One of them is reviewing subsidies, particularly petrol subsidies. We prefer not to borrow money from abroad. The loans come with strings attached that undermine state sovereignty," Nasr said.
Economists have questioned the ability of Egyptian banks to meet the shortfall without foreign funds. Fuel subsidies represent 20 to 25 percent of total state spending.
"Refusing external financing of the deficit does not seem to be an economically sound decision at the moment," said a Cairo-based analyst. "This is worrying to say the least, especially given the official's statement regarding the expected state of foreign reserves at the end of January."
Nasr confirmed that negotiations for cash from Gulf Arab states had so far only yielded $1 billion in budgetary support. "We only received $1 billion from the Gulf, Saudi Arabia and Qatar. There has not been more money coming to Egypt," he said.
Western diplomats say Saudi Arabia is unhappy with the decision to put Mubarak, a longtime ally, on trial for corruption and over the killing of protesters.