A STUDY OF THE MAJOR CONSTRAINTS ON EGYPTIAN ECONOMIC GROWTH DURING THE PERIOD 1998-2008: Foreign Direct Investment

A STUDY OF THE MAJOR CONSTRAINTS ON EGYPTIAN ECONOMIC GROWTH DURING THE PERIOD 1998-2008: Foreign Direct InvestmentForeign direct investments (FDI) played an important role in the GDP trend during this period. From 2002/03 to 2006/07, FDI inflows increased from 3.4 percent of GDP to 8.2 percent. In 2005/06, 70% of FDI targeted activities outside the energy sector. The above figure shows that unemployment rates have declined at the end of the period, which was a result of the increase in the economic growth during the mentioned period. The value of industrial investments increased during the period from 7.3 L.E bn to 41.9 L.E bn. This increase have contributed to the economic growth in the mentioned period, since during a period of two years only the share of finished goods in total exports increased from 28% to 37.2%, which made the non-oil manufacturing, increase in the Suez Canal’s revenues, and tourism among the fastest growing sectors. The year 2008 witnessed a credit crunch at world level, which caused a decline in foreign direct investment (FDI) inflows, tourism receipts, Suez Canal proceeds, as well as the Egyptian abroad remittances. Egypt reached higher rates of inflation (11.7%), at the same time the accelerated money supply in the market, led to an increase in consumption, which was not met by sufficient production levels, resulting in higher local prices. Inflation rate reached 16.9% in the year 2009. The Net foreign investments declined as shown in figure to 5.2 Us $ bn after 11.3 Us $ bn (2007/2008), followed by a decline in Net international reserves which declined by 1.3%, as they reached US$34.1bn as of December 2008. This could be attributed to the effects of the global financial crisis on capital inflows. Foreign currencies were the major contributor to gross official reserves in Egypt, as they represented a share of around 95%, while the rest of reserves came from gold, Special Drawing Rights (SDRs) and loans from the IMF.
The banking system remains liquid with a loan-to-deposit ratio of 53%. Bank credit is still growing sharply (16.5% in Jan 2009), but driven by lending to the government (27.3%). Bank credit to the private sector is often argued to be a more superior measure of financial development. Since the private sector is able to utilize funds more efficiently. Furthermore Egypt’s banks have few outlets for basic banking services with fewer bank branches and ATM coverage is less than one-seventh that of the typical developing country. The large majority of Egyptian manufacturers rely exclusively on their own funds; only 17.4% have access to finance from the financial sector. Only 13% of small firms have access to finance, as opposed to 36% for large firms.

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