Achieving Macroeconomic Stability in Egypt: Overcoming Structural Impediments

Wafik Grais, 17 Feb 2015

Since the mid-2000s, Egypt's macroeconomic policies have failed to achieve sustainable  macroeconomic balances, partly because of  structural features. The subsidy system, bloated civil service, and debt servicing constrained the authorities’ ability to tackle the fiscal deficit. The inefficient food subsidy system added to fiscal woes. Total subsidies increased from significantly between 2007/08 and 2011/12. However, shares in GDP of total public spending, the budget deficit, and subsidies declined over the same period (MOF 2013a).

 

Since 2005, fuel subsidies have accounted for an average of 5.8 percent of GDP and food subsidies, 1.3 percent.[1] The budget deficit declined from about 17.2 percent of GDP in 1990/91, to 10.7 percent in 2011/12 (CBE 2013a). The overall balance-of-payment deficit was about US$0.9 billion in 2000/01 and US$11.3 billion in 2011/12, representing 0.9 percent and 4.4 percent of GDP, respectively (CBE 2013b). The size of the domestic component of the national debt remained a major concern.[2]

 

On average, 75 percent of all subsidies are for energy consumption (Handoussa 2010). Fiscal revenues continued to be tilted toward indirect taxation and natural-resource-focused businesses like the Suez Canal. Between 2007 and 2012, tax revenues accounted for around 61 percent of total revenues (MOF 2013b). However, slightly more than one-third of tax revenues are generated from taxes on goods and services.[3] This overdependence on indirect taxation weakens the authorities’ ability to use tax policies as a distributive instrument. As a result, the country faces structural challenges.

 

Indeed, the main sources of Egypt’s forex earnings areworkers’ remittances, tourism, hydrocarbon exports, foreign direct investment (FDI, before 2011), and the Suez Canal. This concentration combines with a difficulty in downsizing the import bill, largely dominated by food imports.

 

In the aftermath of the Arab uprising, the balance of payments turned from a surplus of US$3.4 billion in fiscal year 2009/10, to a deficit of US$9.8 billion in 2010/11. Net FDI reversed the trend, moving from an inflow of 5.8 percent to an outflow of .2 percent of GDP between 2008 and 2012.[4] These developments left their footprint in the rising external debt. However, external debt remained in the range of 13.8 percent of GDP by end of 2012 (CBE 2013b).

 

The Central Bank's independence has, however, been evident, especially during the unstable period in the aftermath of the January 25, 2011 revolution, when the Bank's ability to maintain a stable exchange rate regime was clear. The CBE has prudently managed the forex market to buffer the market against any drastic volatility (CBE 2011). Also, in 2011 the CBE extended liquidity to the system by reducing its level of open market operations, establishing a repo facility for banks to access primary liquidity, and reducing bank reserve requirements (Herrera, Santiago, and Youssef 2013). These policies were reflected in an increase of the banking system’s net claims on government and on the economy of more than 77 percent and 51 percent, respectively.[5]

 

References

 

 

[1] See http://www.imf.org/external/pubs/ft/scr/2010/cr1094.pdf.

[2] This figure is calculated by dividing the gross domestic debt by total debt (external and domestic) (CBE 2013c).

[3] Calculated from Article IV Consultation (April 2010), IMF; http://www.imf.org/external/pubs/ft/scr/2010/cr1094.pdf.

[5] See http://www.cbe.org.eg/English/Economic+Research/Time+Series/.

 

 

Wafik Grais is an International Senior Adviser specializing in Islamic finance, financial regulation, investment financing, private equity management, and corporate governance with expertise in SMEs and green growth financing. He was co-founder and chairman of Viveris Mashrek, a Cairo-based, financial advisory services company specialized in private equity investments in SMEs, licensed by Egypt's Financial Supervisory Authority. He spent 28 years in international finance notably with the World Bank in Washington DC where he held several senior positions both in operations and at corporate levels. He holds a Ph.D. in Economics.

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