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

The above table shows continuous fiscal deficits until the amount of trade balance reached -18.3 ($bn) in the year 2008. A large and lasting deficit may crowd out financing to the private sector, stimulate inflationary growth of the money supply, and expand the external debt all problems with which Egypt has faced.
Further reduction of the fiscal deficit would help bring down interest payments because lower deficits decrease government’s financing requirements. Reducing interest and subsidy spending should thus permit expanded public sector capital investment needed for infrastructure improvements.
Egypt has struggled to face inflation but it continued its ups and downs values till it jumped from 4.2% in the year 2006 to 11% in the year 2007. Inflation has been driven by many factors 2006/07; include an increase in administered fuel prices (linked to the decrease in fuel subsidies); rise in food prices (due to global trends as well as local pressures, such as an avian flu outbreak), and growing demand for consumer goods as a result of high growth.
Another source of inflationary pressure has been the rapid pace of money supply growth. Money supply grew at an average of 15.1% between 2002/03 and 2006/07. Rapid expansion in foreign currency reserves was one of the drivers of money supply growth between 2004/05 and 2006/07. Reserves grew as a result of the Central Bank of Egypt (CBE) intervention in foreign exchange markets to prevent appreciation of the Egyptian pound in the face of rising export revenues and major inflows of external capital.
In 2007, Egypt introduced a more flexible exchange rate regime a “managed float” in support of an announced shift to “inflation targeting”, changing the focus of the monetary policy on achieving a target level of inflation rather than on exchange rate stability.
Domestic credit to the private sector’s share of GDP, an indicator of financial institutions’ success in mobilizing funds for private business, has been falling at an average annual rate of 6.9 percent since 2002/03, and the spread between bank lending and deposit rates widened from 4.5 percentage points to 6.6% points between 2002 and 2006, both signs of persistent inefficiency in the banking system.
Egypt did not succeed in controlling inflation further more; financial sector inefficiencies and higher real interest rates represented major constraints facing this period. Egypt’s current account (as a percent of GDP) maintained a healthy surplus throughout the period, this positive balance reached its highest value in 2004 and declined at the end of the period to 0.5%, but the sustained, high inflows of foreign capital that Egypt has attracted during the period from 2005-2007 suggested that such deficits can be financed without difficulty.
The past surpluses on the current account have allowed Egypt to build up strong foreign currency reserves; net international reserves increased from 19.3 $bn in year 2005 to 34.6 us $ bn in the year 2008. Workers’ remittances almost doubled during the same period (from us$ million4329.5 to us $ million 8559.2) which helped keep the current account in surplus.
Suez Canal revenues continued to rise in the mentioned period until it reached 5.1 us $.

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