Egypt's foreign reserves will plunge by a third to $15 billion by the end of January and the budget deficit will grow, possibly leading to a review of sensitive subsidies, an army official said.

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 in 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)," he 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 Mohamed Hussein Tantawi, the head of the ruling army 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.

Allowing a slow, controlled fall of the Egyptian pound could stimulate growth and reduce pressure for further depreciation, analysts said. But it may now be too late to take such action without causing currency market panic and instability.

"We have a plan regarding the Egyptian pound vs. the dollar ... the mechanisms of the central bank will not allow for a further fall of the pound," Nasr said.

Industry leaders favour a devaluation to make exports more competitive, but say it should have begun long ago.

"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 the army did not want to build up debts.

"We do not want to seek foreign loans ... the only useful means is relying on ourselves. Foreign authorities and governments have offered us loans but with political conditions," Nasr said.      He said public support was crucial for the new government, currently being formed, to succeed in setting policy to deal with Egypt's economic troubles.

Deficit to climb

The current finance minister has said Egypt is ready to seek IMF funds again, but Nasr's comments reflect army discomfort with borrowing.

Nasr said the deficit in financial year 2011/12 was set to climb from the 133 billion Egyptian pounds ($22 billion) originally forecast by the government, which represents 8.6 percent of gross domestic product (GDP).

He said the deficit would now climb to 167 billion pounds in 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.

Egypt spends 19 billion pounds on food subsidies, 95.5 billion on petrol subsidies and 5 billion for subsidies on electricity, 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.

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.

"Some Arab governments are angry over Egypt taking their investors (who have invested in Egypt) to court," Nasr said, referring to cases in which Arab investors were embroiled in corruption charges. – Reuters