ESCWA Publication: E/ESCWA/EDID/2019/WP.14
Country: Arab Republic of Egypt
Publication Type: Working papers
Cluster: Shared Economic Prosperity
Focus Area: Financing for development
Initiatives: Social Expenditure Monitor for Arab States
SDGs: Goal 1: No Poverty
Keywords: Debt management, Economic reform, Fiscal policy, Monetary policy, Public debt, Social capital
A Fiscal-Monetary Interaction Model for Inclusive growth in the Middle-income Arab Countries: Application to Egypt’s Economy
January 2019
The initial analysis of Structural Vector Autoregressive (SVAR) model suggests that inflation in Egypt appears to be less influenced by monetary policy as hikes in interest rates do not show significant intended impact on inflation, rather causality appear to be other way through cost-push. Clearly, exchange rate depreciation found to be inflationary in the short term, however, in the medium term it is inconclusive.
The results of the structural macroeconomic model suggest that Egypt could still have space for fiscal policy even within the constraints of reducing public debt. Various simulations suggest that a policy mix of higher resource mobilization together with enhancing social investments could help in reaching the debt targets by 2022. The model also took into fiscal-monetary coordination such that in this case, the inflation remains within the range suggested by the inflation targeting framework and fiscal deficit remains in a stabilizing condition in the medium term. However, reaching the debt target of 74.5% by 2022 is too stringent, which necessitates sharper adjustments on both revenue mobilization and social investments. Alternatively, the analysis suggest that Egypt could target achieving debt stabilization of about 90 per cent with less stringent adjustments on revenues and social sector expenditures. The paper argues that a debt-stabilizing scenario is more realistic to achieve without significant reforms in expenditures and revenues that may urge hardships for people. In either case, there is a need for major policy reforms to support inclusive growth with a more sustainable fiscal space.
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Financing for development
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The initial analysis of Structural Vector Autoregressive (SVAR) model suggests that inflation in Egypt appears to be less influenced by monetary policy as hikes in interest rates do not show significant intended impact on inflation, rather causality appear to be other way through cost-push. Clearly, exchange rate depreciation found to be inflationary in the short term, however, in the medium term it is inconclusive.
The results of the structural macroeconomic model suggest that Egypt could still have space for fiscal policy even within the constraints of reducing public debt. Various simulations suggest that a policy mix of higher resource mobilization together with enhancing social investments could help in reaching the debt targets by 2022. The model also took into fiscal-monetary coordination such that in this case, the inflation remains within the range suggested by the inflation targeting framework and fiscal deficit remains in a stabilizing condition in the medium term. However, reaching the debt target of 74.5% by 2022 is too stringent, which necessitates sharper adjustments on both revenue mobilization and social investments. Alternatively, the analysis suggest that Egypt could target achieving debt stabilization of about 90 per cent with less stringent adjustments on revenues and social sector expenditures. The paper argues that a debt-stabilizing scenario is more realistic to achieve without significant reforms in expenditures and revenues that may urge hardships for people. In either case, there is a need for major policy reforms to support inclusive growth with a more sustainable fiscal space.
