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Egypt's economy shows new signs of distress

Aya Batrawy, Associated Press

CAIRO (AP) -- Egypt's foreign currency reserves fell nearly 10 percent in a single month in January, according to figures released by the central bank Tuesday that provided stark new evidence of a dangerous deterioration in the economy amid political turmoil on the streets.

The central bank said reserves fell to $13.61 billion in January from $15.01 billion in December, down $1.4 billion.

The central bank had already warned late last year that levels hovering around $15 billion represented a "critical minimum," or just enough to cover three months' worth of imports. In recent months, reserves have been propped up with billions of dollars in transfers from the energy-rich Gulf state of Qatar.

The decline coincided with weeks of political turmoil on the streets of Egypt, a nation of 85 million people, nearly half of them living in poverty.

The political violence has scared away foreign investors and tourists, both key foreign currency earners for Egypt.

The foreign reserves stood at $36 billion before the uprising that ousted longtime authoritarian ruler Hosni Mubarak began in January 2011. The latest central bank figures show a drop of a total of $23 billion in reserves in the two years since, wiping out well over half of the money.

The new figures throw further into doubt Egypt's ability to qualify for a badly-needed $4.8 billion loan from the International Monetary Fund that would shore up investor confidence and free up a wave of loans that it has requested from other lenders.

Egypt is also in talks for a $900 million loan from the European Union, $500 million from the African Development Bank and $450 million from the United States. It is finalizing talks for $1 billion from Turkey.

Egypt has long faced problems of poverty and disparity of income. Nearly half the population lives at or below the poverty line of $2 a day and relies on the government to subsidize basic commodities.

The political turmoil, in part, has held President Mohammed Morsi back from implementing unpopular austerity measures such as raising taxes and cutting subsidies that are key to obtaining the IMF loan.

His government is not expected to carry out the measures until after parliamentary elections to be held sometime in the coming months. Morsi is thought to be holding back for fear of further inflaming violence and perhaps to not risk losing votes for his Islamist group, the Muslim Brotherhood, which now dominates the government.

According to the Fitch debt rating agency, which downgraded Egypt's debt ratings last week, a prolonged delay in implementing an IMF austerity program could lead to a strain on external finances, an abrupt depletion of reserves and a disorderly devaluation of the currency.

The central bank has been using foreign reserves to prop up the Egyptian pound at a level many experts saw as overvalued. But recently, it began a system of auctions that reduced the amount of dollars sold daily.

The new regime was meant to stem the drain on foreign currency reserves, partly from hoarding and speculation by worried residents. The pound has lost more than 7 percent of its value against the dollar in the past two months.

A banker with inside knowledge said the central bank does not have enough dollars to supply the local market's demands. He said the central bank used to sell around $150 million a day, but halved that under the new auction system.

This week, the bank limited its sales to just $75 million twice a week, a fifth of what it used to sell in a week, he said, speaking on condition of anonymity because he was not authorized to speak to media.