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

A STUDY OF THE MAJOR CONSTRAINTS ON EGYPTIAN ECONOMIC GROWTH DURING THE PERIOD 1998-2008: IntroductionIn studying the major factors and constraints that affect the growth trends of the two countries we begin by analyzing the growth trends of Egypt, illustrating its major economic variables during the mentioned period getting close to major constraints and obstacles facing the Egyptian experience. Then we analyze those factors facing the Malaysian experience illustrating differences between the two countries.
The paper uses the inductive methodology through collecting data of the two countries during the mentioned period analyzing trends of key economic variables of each country, then illustrating the differences between them concluding the major factors that contributed to the trend of economic growth of each country. From the above table, the growth trend in Egypt in the mentioned period can be divided into three intervals:
In 1998 Egypt marked the highest real GDP annual growth rate in this period reaching 7.5%, followed by continuously decreasing until reaching 3.2% in years 2002 and 2003.
It has been observed that in the mentioned period many factors might have affected the rate of GDP growth.
Egypt’s main revenue sources are mostly: oil exports, tourism, Suez Canal revenues remittances from Egyptians working abroad. The following table represents the values of these indicators in the mentioned period. In 1998, the financial crises that hit many emerging markets, caused the oil prices to drop (from an average $18.97 per barrel in year 1997 to $11.91 per barrel in1998), Egypt’s oil export revenues declined by about one-third in 1998 contributing to a deterioration in Egypt’s current account balance. However after the year 1998, the oil exports increased gradually during the period after prices of oil started to increase.
The financial crises caused the decline in Suez Canal revenues and remittances from workers abroad. Furthermore, the number of tourists went down by about 16.6% in 1998, after the terrorist attack in 1997.
The privatization program slowed down. By 1999 close to 145 public enterprises were privatized out of a total of 314.
Successive devaluations have redressed some foreign exchange imbalances, hard currency shortages have persisted.
The government initially supported the pound, by spending foreign reserves, tightening credit and restricting imports, the result of which was a notable economic slowdown. It was not until May 2000 that the government let the pound slide in small increments, finally allowing a free float as of January 2003. The real effective exchange rate (REER) increased considerably up to year 2000.This overvaluation rendered expectations about future depreciations more credible, and undermined Egypt’s competitiveness.
The growth rate of imports has reached 26.2 percent in 1998 which has put enormous pressure on foreign currency reserves. Foreign reserves in the CBE have declined by $900 million between March 1998 and 1999. Exchange rate speculations led to higher demand for cash in the form of dollars. The speculation in the foreign exchange market and the rise in the imports bill caused a shortage of dollars in the economy and eventually the Egyptian pound had to depreciate against the US dollar to reach LE 3.79 in June 2000. As for external transactions, table shows that the BOP current account percentage to the GDP revealed a surplus during the period under review. Trade deficit also narrowed mainly as a result of the rise in oil exports as shown in table. However the improvement in the external sector performance did not support the economic growth during the period and was overwhelmed by the economic slow down, the decrease in Suez Canal revenue, and workers remittances, as shown in table.
The jump in the budget deficit was mainly financed by banking finance and through accumulating arrears against business sector. Such arrears transferred the problem to the business sector and caused severe liquidity problem to the contractors and suppliers doing business with government. Currency overvaluation caused manufacturing exports to decline by almost 2.8% annually; also the loss of reserves that were spent on supporting the currency between 1998 and 2001 caused the process of maintaining an exchange rate not backed by fundamentals to be double costly for Egypt Despite the liberalization of the pound in 2003, the CBE has continued to maintain exchange rate stability as one of its key objectives during the following years 2004 and 2005; therefore the CBE played an important role in stabilizing exchange rate using reserves and interest rates. Economic growth slowed significantly in the year as a result of tight credit conditions, causing unemployment rate to increase from 8.2% to 10.2% during the period 1998-2002. At the same time the government’s revenue position and Egypt’s balance of payments are under considerable pressure.

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