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E GYPT : Reforms for Promoting Economic Growth The Dollar to Pound Parody 2004-2010

E GYPT : Reforms for Promoting Economic Growth The Dollar to Pound Parody 2004-2010. By: Dr. Khaled F. Sherif. Inflation under control. Fiscal deficits manageable. Debt profile sound. Growing exports, including non-oil and services. High levels of reserves. Background: Economic Strengths.

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E GYPT : Reforms for Promoting Economic Growth The Dollar to Pound Parody 2004-2010

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  1. EGYPT: Reforms for Promoting Economic GrowthThe Dollar to Pound Parody 2004-2010 By: Dr. Khaled F. Sherif

  2. Inflation under control • Fiscal deficits manageable • Debt profile sound • Growing exports, including non-oil and services • High levels of reserves Background: Economic Strengths • Large GDP = 38th in world (2001) • Sound macro fundamentals: • Large pool of educated and skilled workers

  3. Background:Economic Weaknesses • Low gross national income, even by regional peer group. Examples: • Among 13 MENA countries reviewed, higher only than Morocco, Syria and Yemen • Lower than Algeria, Iran, Israel, Jordan, Lebanon, Oman, Saudi Arabia, Tunisia, UAE • Only 14% relative to Portugal (lowest among EU) • High levels of underemployment • Weak human development indicators • Low levels of literacy, particularly among women (40%) • Problems with health care access and affordability

  4. Imports Subsidies Spare parts Repatriation Travel Hedging Capital Investment The Egyptian Pound vs US Dollar(Dollar Supply and Demand) Dollar Demand Dollar Supply $4.2 bln $3.1 bln $1.1 bln $800 mln $1.4 bln --------- $10.6 bln+ • Remittances • Oil/Natural Gas • Tourism • Foreign Investment • Exports • Interest rate spread $3 bln $1.2 bln $2.7 bln $400mln $1.2 mln --------- $8.5 bln

  5. Imports • Subsidies Spare parts • Repatriation • Travel • Hedging ? • Capital Investment Dollar Demand Trends

  6. Remittances • Oil/Natural Gas ? Tourism • Foreign Investment ? • Exports ? • Interest Rate Spread Dollar Supply Trends

  7. Current Trend Implications • As it stands, Egypt maintained a dollar deficit in excess of $2.6 billion in 2003* • This serves to explain the recent surge in the price of the US dollar; and suggests increasing further declines • Moreover, there has been an inability on the part of Egypt to fulfill its potential in attracting dollar inflows • Example: At $400 million, FDI represents a shocking $5.7 per capita * Figures for hedging and interest rate spread were not available

  8. P' D' Q' Demand Increase Projecting Dollar Demand vs Dollar SupplyThe Impact of Current Trends Price Supply (S) LE 7.00= US$ 1.00 Demand (D) Q Quantity Current Outlook

  9. S' P' Q' Decrease in Supply Projecting Dollar Demand vs Dollar SupplyThe Impact of Current Trends Price Supply (S) LE 7.00= US$ 1.00 Demand (D) Q Quantity Current Outlook

  10. Projecting Dollar Demand vs Dollar SupplyThe Impact of Current Trends Price S' Supply (S) P' LE 7.00= US$ 1.00 LE 7.00= US$ 1.00(P) D' Demand (D) Q' Q Quantity Resultant Outlook: Increase in Price; Decrease in Quantity

  11. The Impact of Current Trends:Case Example: Subsidization • Currently, the Egyptian government subsidizes a number of goods, including: • Cooking Oil • Sugar • Bread • Lentils • Meanwhile, as the population continues to increases, subsidies are likely to increase in greater proportion:

  12. Price S' Supply (S) P' LE 7.00= US$ 1.00 Demand (D) Q' Q Quantity The Impact of Current Trends:Case Example: Subsidization • Increasing subsidization decreases the supply of dollars within the system, resulting an increase in its price:

  13. 1995: $1= LE 3.30 2000: $1= LE 5.20 2005*: $1= LE 7.20 Increasing value of the US Dollar 1980: $1= LE 0.73 1985: $1= LE 1.10 1990: $1= LE 2.30 * Estimate

  14. Diminishing value of the Egyptian Pound 1980: 1LE= US$1.36 1995: 1LE= US$0.30 1985: 1LE= US$0.91 2000: 1LE= US$0.19 1990: 1LE= US$0.43 2005*: 1LE= US$0.13 * Estimate

  15. Diminishing value of the Egyptian PoundNet Worth Comparisons • The following table and graph illustrate the decline in value of LE 100,000 between 1980 and 2005: * Estimate US$ Equivalent

  16. Diminishing value of the Egyptian Pound Capital Flight Implications • The substantial damage experienced by the Egyptian pound is reflected in the following example: • An individual/organization who held $100,000 in 1980 and converted that to Egyptian pounds would have approximately the equivalent $10,000 today • Meanwhile, an individual/organization who purchased $100,000 in 1980 and maintained it in US currency would have increased their investment by almost ten-fold (from LE 73,000 to approximately LE 700,000) • Meanwhile, The IMF estimates that the value of deposits held by Egyptians overseas is approximately US$ 77 billion • By placing this currency in the Egyptian financial system, it would have a multiplier effect of 5! • The fear is that if this continues, this will spur increased dollarization, as has been the case with dramatic capital flight from Mexico and Argentina

  17. I. Financial Sector Reform Program • II. Investment/ Tourism Promotion Reform Strategy: 2004-2010

  18. Financial Sector Reforms:Privatization • Finalize privatization of state banks by 2006 • 4 large commercial banks • 2 specialized financial institutions • 11 joint venture banks • Use subsequent years for post-privatization resolution as needed • Non-performing and restructured loan collection

  19. Financial Sector: Strengthening Intermediation and Achieving Stability Strengthen the banking environment to reinforce public confidence in deposit safety Combine privatization and deposit safety efforts as part of investment approach • With a floating exchange rate regime, this means ensuring hedges are properly used • More efficient banks will be able to pay higher real rates to depositors if they need the funds • Risk-seeking banks have greater need for funds, making creditor rights essential for increased intermediation • Minimum capital increasing • Prudential norms tightening • Stricter loan classification and tougher asset valuation standards means banks will have more pressure to sustain adequate capital adequacy ratios • Increased investment will be needed for increased efficiency to bolster earnings and exceed minimum capital and CAR requirements

  20. Strengthen CBE mandate and stress testing capacity Monitor banks’ risk management systems, internal controls, and internal audit Financial Sector: Prudential Framework and Enforcement Raise minimum CAR to 12% in 2007 Articulate clear thresholds that trigger specific corrective actions as CARs fall below prudential requirements Ensure tax rules for provisioning are consistent with international standards

  21. Investment/Tourism Promotion Policy and Institutional Checklist  • Macroeconomic stability  • Good governance  Effective judiciary and legal enforcement  • Open trade and investment regime  • Low barriers to entry AND exit  • Credit, investment and financial sector policiesthat promote intermediation  • Labor market flexibility

  22. The Way Forward… • Devaluation is not a choice- it is a reality (an outcome) • Even with the best economic reform scenarios, the pound will fall sharply against the dollar • To stem the tide of devaluation, we have to act now: • A serious financial sector reform program is needed • Renewed investment will be required in trying to push exports • Tourism must take the lead in the development effort • Foreign direct investment must be tapped to its potential and cannot persist at $5.7 per capita

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