At its latest discussion on the impact of regional developments on Egypt, the Egyptian Center for Economic Studies (ECES) invited assistant professor of economics at the American University in Cairo (AUC) Diaa Noureldin who explained in which direction Egypt’s economic policies are moving and how to achieve actual macroeconomic stability.
Does Egypt have a consistent policy framework on the macroeconomic level?
Probably not. If there were one, we would know and be confident about how the government and the Central Bank of Egypt (CBE) will react if the economy overheats in the middle of a business cycle or if the country goes into a recession. Business cycles and crises come and go. What’s important for investors, governments and populations is confidence that these crises are managed wisely and properly. Certainty about policy actions gives confidence in outcomes.
There are three pillars to a country’s economic policy: the fiscal, monetary and exchange rate policies.
Egypt’s current monetary policy is unclear. The only sign we got was when the CBE floated the Egyptian pound, but we were not informed about alternatives. All we got was a statement that read that the CBE is aiming for an inflation rate of 13 percent, plus or minus 3 percent, by end-2018. The monetary policy seems to be contractionary, since interest rates are very high. But Egypt’s fiscal policy seems to be perfectly expansionary.
The exchange rate policy seems to be a step devaluation, not floatation, since the fluctuation level is very low. We – for whatever reason – are determined to tie our local currency to the US dollar although Egypt’s trade with the US amounts to only 10-12 percent, as opposed to 30 percent with Europe for example.
Egypt’s growth rate stands at 5 percent at the moment, but we need to take a look at the potential output because this could be inflationary growth. The CBE should be monitoring the indicators that tell us exactly whether this is real or inflationary growth.
Did Egypt achieve macroeconomic stability?
No, because we have a budget deficit that is high among emerging markets, one of the highest inflation rates in the world and a very inflexible exchange rate. The point is how are we going to deal with this going forward. Banks usually undergo a process of stress testing to see how changes in the exchange or interest rates may affect their portfolio. If the government would undergo a stress test today, we would find three variables that could easily have severe effects: the interest rate, the price of the US dollar and the price of oil. This means that the room for fiscal maneuvering is extremely limited. Can we avoid that? That would be difficult.
Banks usually undergo a process of stress testing to see how changes in the exchange or interest rates may affect their portfolio
We entered the economic reform program under the assumption that we could fill our external financing gap through foreign direct investments (FDIs). But that did not happen – we were able to have a primary budget surplus, but the budget deficit remained. We should have worked on investments and FDIs, but we did not do that.
Is macroeconomic stability enough?
Having a macroeconomic framework and stability is not enough. The missing part in our economic reform program is structural adjustment. Back in 1991, when Egypt negotiated with the International Monetary Fund (IMF), the program was called “economic reform and structural adjustment”. Egypt has some grave structural problems, such as one of the lowest saving rates in the world. What happens to savings? Households and companies put their money in the bank and the government takes 70 percent of it to use at its own disposal. The private sector gets 22 percent. The bulk which the government takes should be used for production-oriented projects.
Our policy environment today is not attractive. Two or three years ago, the Doing Business reports used to identify the problems facing investments in Egypt as bureaucracy, red tape, uncertainty about policies etc. The interest rate used to come at rank 6 or 7. Today, it is the first or second concern for investors.
If interest rates drop, will investment flourish?
No, because the bureaucracy, red tape and policy uncertainty still exist. We did not try to fix those. On a policy-level, I hope to see a policy that is looking five to seven years into the future to understand the consequences of today’s decisions.