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Global Monetary System (Foreign Exchange & Capital Markets)
Egypt and the IMF
- International Business Dilemma Question
Egypt has faced ongoing political and economic instability in recent years, leading to a worsening financial outlook, including foreign currency problems, leading to import payment difficulties, depleting foreign reserve, collapse in industries such as tourism, rising IMF loans, and challenges around currency stability, and the article explains why”
1. What seem to be the main problems Egypt is facing in the short term and long term? What historical and contemporary factors have led to this financial crisis?
2. How is this crisis impacting trade (exporting and importing) and foreign direct investment (FDI)? Why? Are the IMF recommendations likely to be effective? Why?
(International Business – Seminar Room Questions: Topic 5: Global Monetary System (Foreign Exchange & Capital Markets, 2018)
- Literature Review
- International Business: Competing in the global marketplace, Chapters 10 to 12 (Hill, Charles W. L., 2017).
- Egypt and the IMF: IB Dilemma Case Study.
- Egypt and the IMF: Overview and issues for congress (Nelson and Sharp, 2013).
- https://www.Arab Republic of Egypt and the IMF.
- Topic 5 power point slides summarising chapters 10, 11 and 12.
- What were the main issues, points, theories and arguments raised?
- Since 2011, the economy of Egypt has gradually deteriorated, already adding further tensions to a divided government.
- The government at the time was not able to restore confidence in the economy.
- Lack of security and decline in law has had an effect on investment.
- Prior to 2011, Egypt’s economy was strong, the government introduced a number of structural reforms, which included, reductions in tariffs, privatisation of state-owned enterprises and a number of incentives to attract foreign investments.
- The incentives and reforms contributed to an increase in foreign capital and foreign direct investments (FDI).
- The economy GDP went from 1.2% in 2000 to 9.3% in 2006.
Despite the strong economic performances and capital inflows during the early 2000’s, a number of issues were still being experienced, namely:
- Employment was high at 9.9 %, with youth being a major contributor.
- The average Egyptian was living on less than $2 per day.
- The government at the time was running a large deficit, 8.2% of GDP.
- Inflation had increased from 2.8% in 2000 to 11.7% in 2008.
- The issues contributed to a number of political uncertainties with capital outflows causing a reduction in Egypt’s currency.
- To offset the reduction in currency the central bank started selling foreign exchange reserves to manage the decline. In addition, interest rates had increased.
- The major impact was downstream to households, wealth and wages were worth less, and imported goods were more expensive.
- In 2016, Egypt had to seek US $12 billion financial support from the International Monetary Fund (IMF) to restore macroeconomic stability and return sustainable growth.
- What were the limitations of the classroom discussions?
- Egypt’s position before the IMF program, the issues with the exchange rate, the rise of activities on the black market, drop in foreign exchange reserves associated with the central bank running out of reserves.
- The structure of IMF loan and conditions. And reviews by the IMF
- Social impacts and no discussion on the introduction of the value-added tax (VAT) to contain fiscal costs.
- What programs or measures were put in place to transform/restore investor confidence.
- The relationship with the IMF and what role did the US play.
- Discussions on structural reforms prior to the financial support from the IMF and what the ongoing issues were, e.g. poverty, unemployment, corruption.
- What growth opportunities were available and what improvements to living standards were achieved with the introduction of the IMF.
- Analysis of the issues raised in the classroom discussion
Class discussions were based on:
- Economic stability.
- Lack of confidence on President Morsi and his unwillingness to work with the IMF and the US government.
- Liberalization of foreign exchange to stimulate investments and exports
- Implementation of management systems based on best practices.
- Ways to reduce the government’s spending and what subsidies were available.
- Capital inflows and the effect on growth.
- Egypt’s introduction of the smart card and the benefits towards reducing corruption and providing transparency on the distribution of products.
- Floating of the Egyptian pound causing the foreign exchange market to stabilise.
- Individual answer to dilemma question
It can be argued that before the 2011 Egyptian revolution, the economy of Egypt was strong, with a growth rate of 5%. Key structural reforms were introduced, such as tariff reductions, introductions of privatisation reductions in regulations to attract private investors and improve confidence and make the economy more competitive. Egypt was considered to be a leader in economic reform, this attracted foreign investment and the FDI increased to 9.3% of GDP. The strength of the Egyptian economy and the government’s fiscal and monetary policies shielded it from the effects of the global financial crisis (GFC) during 2008 to 2009. However, despite the strong growth and capital inflows, Egyptians were not benefiting:
- Unemployment was high, at 9.9%, with youth being the major factor
- Poverty was high.
- The high population growth and exhausted education system meant that youth was not unprepared for jobs.
- In sufficient housing and affordability continued to be a major issue.
Although the government floated the pound to entice foreign investment, the currency lost more than half of its value, causing cost of living to increase, fuel, food and utility charges reached a record high. In 2010 the government commissioned a value added tax (VAT) to contain and stabilise fiscal costs. Introduced a number of laws to improve the business environment. In 2017 the inflation rate had increased to 34%, although the inflation rate had dropped to 17% the introduction of the VAT meant that Egyptians could not afford common goods. In addition, political uncertainty caused a lack a confidence in investors resulting in a reduction of capital inflows having a major impact on tourism and revenue. A reliance on domestic markets to finance the deficit had increased the public debt from 73% of GDP in 2010 to 80% in 2012.
The structured and programmed $US12 billion loan from the IMF on 11 November 2016 and recommendations allowed Egypt to implement much needed structural economic reforms to achieve:
- Stabilising in the economy and stimulate growth
- Exchange rate increase
- Allow fiscal consolidation to reduce expenditure, lower taxes, lift import regulations, restore confidence in foreign investment and stimulate economic growth
- An increase in inflows
- An increase in employment and job opportunities – ability to offer training.
The stimulation of growth will improve the economy, reduce GDP and improve Egypt’s ability to service the IMF loan.
Key recommendations were:
- Strengthening foreign business relationships and attracting foreign investment.
- Increasing employment across its youth and women population.
- Cutting fuel subsidies to reduce the economic debt.
- Provide financial assistance to SME’s and rationalise industrial licensing.
The attached table 1” Condition of IMF’s 2016 loan to Egypt (refer to attachment 1) gives a detailed overview of the economic issues, the conditions imposed by the IMF and the what Egypt has implemented.
- Arab Republic of Egypt and the IMF (no date). Available at: https://www.imf.org/en/Countries/EGY (Accessed: 21 November 2018).
- Egypt’s IMF program: Assessing the political economy challenges (no date). Available at: https://www.brookings.edu/research/egypts-imf-program-assessing-the-political-economy-challenges/ (Accessed: 21 November 2018).
- Hill, Charles W. L., and G. T. M. H. (2017) ‘International Business : Competing In The Global Marketplace’, in Engineering. New York, NY : McGraw-Hill Education, 2017.
- International Business – Seminar Room Questions: Topic 5: Global Monetary System (Foreign Exchange & Capital Markets). Available at: https://lo.unisa.edu.au/mod/book/view.php?id=57863&chapterid=11235 (Accessed: 21 November 2018).
- Nelson, R. M. and Sharp, J. M. (2013) ‘Egypt and the IMF: Overview and issues for congress’, Congressional Research Service, pp. 53–74. Available at: https://fas.org/sgp/crs/mideast/R43053.pdf.
- Ozdemir, O and Upneja, A. (2016) The role of internationalization on the IPO performance of service firms: Examination of initial returns, long-run returns, and survivability
Source: (https://www.brookings.edu/ Egypt’s IMF program: Assessing the political economy challenges, accessed on 19 November 2018)
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