© 1998 International Monetary Fund
Cover design, charts, and composition: In-Ok Yoon, Julio Prego, and IMF Graphics Section
Cataloging in-Publication Data
Egypt: beyond stabilization, toward a dynamic market economy / by a staff team led by Howard Handy. – Washington, DC : International Monetary Fund, [1998]
p. cm. – (Occasional paper, ISSN 0251–6365 ; 163)
ISBN 1–55775–720–8
I. Egypt – Economic conditions – 152 2. Egypt – Economic Policy. 3. Economic stabilization – Egypt. I. Handy, Howard. II. International Monetary Fund. III. Series: Occasional paper (International Monetary Fund); no. 163.
HC830.E383 1998
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Contents
Preface
List of Abbreviations
I Introduction
An Assessment of Stabilization
The Challenge of Structural Reform
II A Historical Examination of Growth, Investment, and Saving
The Growth Record
The Investment Record
Factor Productivity
Investment Financing: National and Foreign Savings
Egypt’s Medium-Term Growth Challenge
III Current Fiscal Situation and Medium-Term Outlook
Current Situation and Regional Comparisons
Medium-Term Outlook
IV Inflation
Main Variables Influencing Egypt’s Inflation Record
Monetary Developments
Estimation of Money Demand
Monetary Policy Objectives with Moderate Inflation
V Capital Inflows: Managing Success
Capital Inflows in Egypt During 1991/92–1993/94
The Interregnum, 1994/95–1995/96, and Current Phase, Post-1995/96
Policy Dilemma of Capital Inflows
Synthesis
VI Sustainability of the Exchange Rate Regime
Nominal and Real Exchange Rate Developments
Equilibrium Real Exchange Rate
Results
Summary of Results
VII Poverty, Social Safety Net, and Human Development Issues
Overview of Social Indicators
Social Safety Net Mechanisms
VIII Privatization and Restructuring the Public Sector
Scope and Operations of Public Sector
The Reform Agenda
The Public Enterprise Sector, Law 203
Review of Privatization
Outstanding Issues in Privatization
IX Modernizing Egypt’s Financial Markets
A Historic Overview of Egypt’s Financial System
Role of Egypt’s Banks in Intermediating Saving
Financial System Reforms, 1991–95
Reinvigorating the Reform Process, 1996–97
Banking Soundness
Recent Banking Sector Developments
X Trade Liberalization
Overview
Reinvigorating the Momentum of Reform
Appendices
I Tax Summary as of July I, 1997
II Prudential Requirements for the Banking System
References
Boxes
Section
III
1. Corporate Tax Incentives
VI
2. Determinants of the Real Exchange Rate in Edwards’s Model
VIII
3. Impact of Privatization on Increasing Saving
IX
4. Financial Markets and Economic Growth
5. The Capital Market Law of 1992
Tables
Section
I
1. Key Economic Indicators
II
2. Illustrative Scenarios of Real GDP Growth and Investment Rates
III
3. Cross-Country Comparisons of Central Government Operations
4. Regional Comparison of VAT and GST Rates
5. Regional Maximum Corporate and Personal Income Tax Rates
6. Summary of Government Operations
IV
7. Summary Growth Rates of Variables Affecting Inflation
8. Contributors to Inflation
9. Factors Affecting Money Supply
10. ARDL Long-Run Estimates of Money Demand, 1973/74–1996/97
V
11. Summary Balance of Payments
12. Comparison of Capital Inflow Phases
13. Price-Earnings Ratios for Selected Emerging Market Economies
VI
14. Short-Run ARDL Estimates Dependent Value: Real Effective Exchange Rate Sample Period, February 1987-December 1996
15. Long-Run ARDL Estimates Dependent Value: Real Effective Exchange Rate Sample Period, February 1987-December 1996
16. Contribution of Economic Fundamentals to the Equilibrium Real Exchange Rate, January 1991-December 1996
VII
17. Regional Human Development Indicators
VIII
18. Gross Domestic Product by Ownership
19. Size and Composition of Public Sector by Type of Entity
20. Financial Transactions Between Public Entities
21. Indicators of Public Enterprises’ Financial Performance
22. Indicators of Public Enterprises’ Economic Performance
23. Privatization Program, January 1993-September 1997
24. Cross-Country Privatization Record
25. Performance of Employee Shareholder Association-Held Companies
IX
26. Commercial Banks’ Balance Sheets, 1985–96
27. Indicators of Financial Intermediation
28. Indicators of Stock Market Development
29. Performance Indicators for the Banking System
30. Banks’ Foreign Currency Assets and Liabilities
31. Distribution of Credit Extended by Commercial Banks to the Private Sector
X
32. Weighted Average Tariff in Southern Mediterranean Countries and Other Regions
33. Merchandise and Service Trade in Selected MENA Countries
34. MENA Region: Exports of Services
35. Summary Impact of the Uruguay Round in 2005
Figures
Section
II
1. Real GDP Growth
2. Real Per Capita GDP Growth
3. Investment Rates
4. Private Investment
5. Savings-Investment Balance
6. Components of National Saving
7. Gross Domestic Saving
III
8. Actual and Projected Debt Stock and Interest Payments
IV
9. Rates of Consumer Price Inflation
V
10. Financial System Confidence Indicators
11. Sterilization Indicators
12. Monetary Indicators
13. Gross Official Reserves
VI
14. Nominal and Real Effective Exchange Rate, January 1987-December 1996
15. Terms of Trade
16. Capital Account Balance
17. Estimates of Total Factor Productivity Growth
18. Debt-Service Ratio
19. Actual Versus Equilibrium Real Effective Exchange Rate, January 1988-December 1996
20. Difference Between Actual and Equilibrium Real Effective Exchange Rate, January 1988-December 1996
IX
21. Cumulative Number of Securities Intermediaries Licensed
X
22. Share of World Exports
23. Share of World Imports
The following symbols have been used throughout this paper:
… to indicate that data are not available;
n.a. to indicate not applicable;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1994–95 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g.. 1994/95) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not States, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
This occasional paper is a collection of studies focusing on economic developments in Egypt during the 1990s, a period of transformation toward a dynamic market economy. The studies were prepared in conjunction with the Article IV review of the Egyptian economy undertaken in October 1997.
The paper is a collaborative work coordinated by Howard Handy. The principal authors of the sections are Christopher Lane (Section I), Amer Bisat (Section II and Section IV, with Joannes Mongardini), James Daniel (Sections III and VII), Arvind Subramanian and Robert Khan (Sections V and X), Arvind Subramanian (Section VIII), Joannes Mongardini (Section VI), and Peter Allum (Section IX).
The authors would like to acknowledge the contributions of Mohammed El-Erian, V, Sundararajan, and Luca Ricci. The paper also benefited from assistance given by officials of the Egyptian Ministry of Economy and the Central Bank of Egypt, and also Mokhtar El Khatab, Ahmed Galal, and Heba Handoussa. The authors would like to thank Wilma Gonzalez Buenaobra and Anne-Barbara Hyde for excellent secretarial assistance, Rusty Hall for technical assistance, Nada Massoud, Nahed El-Tantawy, Rafik William for research assistance, and Juanita Roushdy of the External Relations Department for editing the manuscript and coordinating the publication.
The views expressed here are solely those of the authors and do not necessarily reflect the opinions of IMF Executive Directors or the Government of Egypt.
List of Abbreviations
| ARDL | autoregressive distributed lag |
| ASEAN | Association of South East Asian Nations |
| BOT | build-operate-transfer |
| BCCI | Bank for Credit and Commerce International |
| CAA | Central Auditing Agency |
| CBE | Central Bank of Egypt |
| CMA | Capital Market Authority |
| ECES | Egypt Centre for Economic Studies |
| ECM | error correction model |
| EGPC | Egyptian General Petroleum Corporation |
| EISA | Egyptian Insurance Supervisory Authority |
| ERER | equilibrium real exchange rate |
| ESA | Employee Shareholder Association |
| EU | European Union |
| GDP | gross domestic product |
| GDR | global depository receipt |
| G-7 | Group of Seven, industrial nations |
| GST | general sales tax |
| HIPC | highly indebted poor countries |
| IAS | international accounting standards |
| M2 | broad money |
| MEMR | multilateral exchange rate model (of the IMF) |
| MENA | Middle East and North Africa |
| MULTIMOD | multicurrency macroeconomic model (of the IMF) |
| NAIRU | nonaccelerating inflation rate of unemployment |
| NDA | net domestic assets |
| NEER | nominal effective exchange rate |
| NGO | nongovernmental organizations |
| NIB | National Investment Bank |
| NIR | net international reserves |
| OECD | Organization for Economic Cooperation and Development |
| OIN | other items net |
| PEO | Public Enterprise Office |
| QR | quantitative restriction |
| REER | real effective exchange rate |
| repo | repurchase operations |
| SCA | Suez Canal Authority |
| SFD | Social Fund for Development |
| SUMED | Suez-Mediterranean (oil pipeline) |
| TFP | total factor productivity |
| TOT | terms of trade |
| USAID | U.S. Agency for International Development |
| VAT | value-added tax |