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Effects of Fiscal Policy on the Conduct
and Transmission Mechanism of
Monetary Policy in Egypt
Prepared by
Dr. Heba Shahin
Mr. Mohamed El Sayed El Sadek
Miss Mona Kamal
Miss Shaimaa Abdul Aziem
Under the Supervision of
Dr. Adel Abdellatif
0
Effects of Fiscal Policy on the Conduct and
Transmission Mechanism of Monetary Policy
in Egypt*
Abstract
This study explores the impact of fiscal policy on the conduct and
transmission channels of monetary policy in Egypt. It utilizes the Structural VAR
method to investigate the impulse response functions to fiscal policy shocks. The
sample covers the period from FY 2002/2003 to FY 2014/2015. Accordingly, the
results are used to address the key challenges facing Egypt in approaching
macroeconomic policy coordination. The main empirical finding is that a shock to
the real government’s expenditure plays a stimulating role to the economy via its
persistent negative impact on interest rate and its continuous positive influence on
output and prices. This represents a dilemma to the Egyptian policymakers given
the high ratios of fiscal deficit to GDP. Therefore, the study suggests a way to
resolve this issue through monitoring this expenditure, setting numerical targets,
and reallocating it to productive capacities and investments.
Keywords: Fiscal Policy, Government Spending, Taxation, Structural VAR
JEL Classification: E62, H50, H20, C32
_________________________________________________
*The opinions that are represented in this study are those of the authors and do not
represent the opinion of the Central Bank of Egypt (CBE).
1
Content
Page
I. Introduction ................................................... 3
II. Literature Review.. ........................................ 5
III. The Interaction between Monetary
and Fiscal Policies(Theory and Practices)...10
A. Theoretical Background…………………………10
B. Legal and Institutional Frameworks…………….13
C. Key Macroeconomic Developments
(Descriptive Analysis)…….………………….......16
IV. Methodology, Data Description, and
Empirical Results........................................ 27
A. Methodology…………………………………......27
B. Data Description………………………………...31
C. Empirical Results………………………………..32
V. Fiscal and Monetary Policies Challenges
Confronting Egypt and the Country’s
Outlook………………..................................40
VI. Concluding Remarks and Policy
Recommendations..……………..…………46
References..…………………….................. 49
Appendix (A): Tables
Appendix (B): Figures
2
I.
Introduction
The overriding objective of any country, regardless of its level of
development, is to maintain a sustainable economic growth. This requires solid
harmonization of macroeconomic policies on the country level. An effective
coordination between the monetary and fiscal authorities is the best practice in this
regard. However, the conflict of interests between the two authorities leads to noncoordinated policies (e.g. Sargent and Wallace, 1981; Woodford, 1995 & 2001;
Wren-Lewis, 2000; Mishkin, 2002; Sims, 2004; Allsopp and Vines 2005) which
hinder any economic progress1.
The fiscal policy dominance in most of the developing countries limits the
central bank’s independence. An expansionary fiscal policy may result in
excessive fiscal deficits. This policy may create a strong temptation for
governments to resort to the central bank’s finance of the deficit through monetary
financing. Consequently, this leads to an expansionary monetary policy, resulting
in fuelling inflationary pressures, causing a possible nominal depreciation of the
currency, and amplifying difficulties related to the balance of payments.
But even if the governments finance their deficits in a non-monetary way via
the markets, other problems may arise such as crowding-out the private sector’s
investments. In fact, this will harm economic development and growth, which will
generate further concerns to central bankers. On the external side, there is a risk
that too much reliance on foreign financing of domestic debt will result in currency
and/or balance of payments risks, which again will be worrying to central banks.
Egypt is not far from these critical issues. The political situation in Egypt after the
25th of January, 2011 and the 30th of June, 2013 Revolutions has had adverse
effects on macroeconomic stability and overall performance.
1
For more details on the interaction between monetary and fiscal policies on both the
regional and country contexts, one can refer to the following studies: (Smith, 1957;
Blinder, 1982; Buti et al., 2001; Hemming et al., 2002; Dixit and Lambertini, 2003; Zoli,
2005; Galí and Monacelli, 2008; Wyplosz, 2011).
3
This study assesses the concurrent interaction between the Egyptian
government and the Central Bank of Egypt (CBE) through both descriptive and
quantitative analysis. The empirical section of the study examines the dynamic
effects of fiscal policy on the Egyptian economy. It utilizes quarterly data for the
period from FY 2002/2003 to FY 2014/2015. It identifies the fiscal policy shocks
by adopting a Structural VAR approach. It was initiated by Perotti’s (2005).
In order to derive empirical evidence in this respect, three scenarios of the
response of macroeconomic and monetary variables to fiscal policy shocks have
been estimated. The short-term nominal interest rate, real monetary aggregates
(M2), and nominal exchange rate are used interchangeably in each scenario. The
analysis of the impulse response functions of main variables to fiscal policy shocks
are used to evaluate the direct and indirect impacts of such policy on the Egyptian
economy. Additionally, the investigation of these responses will provide an
indication whether fiscal and monetary policies do move together or in opposite
directions and are interrelated or not.
This study is structured as follows; section 2 reviews the literature on the
identification of fiscal policy shocks in Structural VAR models. Section 3
highlights the interaction between monetary and fiscal policies from the theoretical
basis, presents the legal and institutional frameworks, and analyzes the key
macroeconomic developments through a descriptive analysis before and after the
25th of January Revolution. Section 4 presents the methodology, data description,
and the empirical results. Section 5 summarizes the key challenges facing Egypt
from the fiscal and monetary policies perspectives and Egypt’s prospects. Finally,
section 6 concludes and delivers some policy recommendations.
4
II. Literature Review2
There has been a consensus among researchers and scholars about the
transmission mechanisms of monetary policy on the economy. Nevertheless, the
role of fiscal policy in influencing the economy is still controversy in theoretical
as well as empirical research3. This can be attributed to several identification
approaches of fiscal policy shocks that have been utilized throughout the
empirical literature4.
The identification approaches of fiscal policy shocks include: first, the
recursive approach that has been introduced by Sims (1980) and applied by Fatás
and Mihov (2001); second, the Structural VAR method, which has been proposed
by Blanchard and Perotti (1999 & 2002) and has enclosed monetary policy
variables through the extension by Perotti (2002 & 2005); third, the signrestrictions approach, which has been developed by Uhlig (2005), Mountford and
Uhlig (2005 & 2009) to impose restrictions on the sign of the impulse responses of
specific variables; fourth, the event-study approach, which studies the effects of
unexpected increases in government defense spending (e.g. Ramey and Shapiro,
1998; Edelberg et al., 1999; Eichenbaum and Fisher, 2005; Ramey, 2011 (a)); and
fifth, the Bayesian Structural VAR that accounts for the posterior uncertainty of
the impulse-response functions and the dynamics in debt (e.g. Afonso and Sousa,
2009 (a) & (b)).
2
This section of the study focuses on the identification of fiscal policy shocks in the
Structural VAR method (e.g. Blanchard and Perotti, 1999 & 2002; Perotti 2002 & 2007
(a); Caldara and Kamps, 2008).
3
More examples for the various empirical outcomes can be found in Pappa (2005), Henry
et al. (2004); Fernández and De Cos (2006); Perotti (2007 (b)); Caldara and Kamps
(2008); Tenhofen et al. (2010); Abdurohman (2011); Lozano and Rodríguez (2011);
Wyplosz (2011); Ramey (2011 (a)).
4
Since the introduction of the Vector Autoregression (VAR) systems by Sims (1980) in
the macroeconomic analysis, the idea of the feedback effects of monetary and fiscal
policies has been widely employed in the empirical literature.
5
Many reasons lie behind the numerous concluding remarks regarding the
response of macroeconomic and monetary policy variables to fiscal policy shocks5.
These results are conditional on the methodology of identification (Perotti, 2005;
Caldara and Kamps, 2008; Ramey, 2011 (a)), the variables that are incorporated in
the VAR system, any possible adjustments to the discretionary or cyclical
responses of the budgetary components (Khalid et al., 2007), and the specification
of the Structural VAR system (e.g. whether it identifies joint monetary and fiscal
policy shocks or it just identifies one policy shock apart from the other’s) (Neri,
2001; Pappa, 2012)6. The appropriate identification approach of the fiscal policy
shocks will lead to a deep understanding of the genuine impacts of this policy on
the economy.
The pioneering effort by Blanchard and Perotti (1999 & 2002) for the USA
has paved the way towards extensive exploitation of the Structural VAR in the
analysis of fiscal policy (Fatás and Mihov, 2003; Henry et al., 2004). Moreover,
the financial crisis in 2008 has revived the interest in assessing the short-term
effects of fiscal actions (Ramey, 2011 (b)). Furthermore, the debates about the
effectiveness of fiscal policy in an individual country and regional contexts (e.g.
De Arcangelis and Lamartine, 2003; Lane, 2006; Fernández and De Cos, 2006;
Arestis, 2011) have contributed in this massive investigation. Accordingly, broad
body of the literature has analyzed the macroeconomic effects of fiscal policy in
advanced economies7. A similar consideration of this topic in developing countries
as well as emerging market economies is seldom8.
5
Table (A1 in Appendix A) summarizes the main outcomes of the literature on the
identification of fiscal policy shocks in Structural VAR models that adapt (Blanchard and
Perotti, 1999 & 2002).
6
In reality, the interaction between fiscal and monetary policies may lead to different
macroeconomic outcomes than those predicted by the analysis of one policy in isolation
from the other (Dixit and Lambertini, 2003, p. 1522).
7
Examples are: Höppner (2001) for Germany; Perotti (2002) for the USA, West
Germany, the United Kingdom, Canada and Australia; De Arcangelis and Lamartine
(2003) for the USA, West Germany, France and Italy; Fernández and De Cos (2006) for
Spain; Badinger (2006) for Austria; Giordano et al. (2007) for Italy; Caldara and Kamps
(2008) for USA; Tenhofen et al. (2010) for Germany; Franta (2012) for the Czech
Republic.
8
Examples are: Restrepo and Rincón (2006) for Chile and Colombia; Ravnik and Žilić
(2011) for Croatia; Lozano and Rodríguez (2011) for Colombia; Ben Slimane and Ben
Tahar (2013) for Tunisia and Egypt.
6
Blanchard and Perotti (1999 & 2002) have assessed the effects of fiscal policy
shocks through using three main variables (i.e. the government’s expenditure, tax
revenues, and the level of output). They have demonstrated a positive impact of an
expenditure shock on output and consumption. On the contrary, a positive tax
revenues shock has a negative influence on the other two variables. In the same
context, Höppner (2001) has adapted Blanchard and Perotti’s (1999) work for
Germany and has found similar reactions of output and private consumption to
fiscal policy shocks9.
Perotti (2002) has expanded Blanchard and Perotti’s model via encompassing
other monetary policy variables (e.g. the price level and nominal interest rate). He
has used data for the USA, West Germany, UK, Canada and Australia. Generally,
his results are in harmony with Blanchard and Perotti’s concerning the direction of
the influence of the fiscal policy shocks. Nevertheless, his remarks about the
magnitude and the timing of the fiscal effects are different.
Perotti (2002) has obtained very low spending and tax multipliers10. Perotti has
ascribed these outcomes to the increased openness of the economies, the switch
from a fixed to flexible exchange rate regimes and the central banks’ changes in
the monetary policy regimes11.
9
Tenhofen et al. (2010) have obtained similar results since a positive shock to the
government’s spending in Germany increases output and private consumption, but the
effect is relatively small.
10
A fiscal multiplier is defined as the ratio of the response of macroeconomic variable to
an initial fiscal policy shock (Blanchard and Perotti 2002).
11
Ilzetzki et al. (2009) has suggested that the magnitude of the fiscal policy multipliers
depends on (i) whether the economy is closed or open; (ii) whether the exchange rate
regime is predetermined or flexible; (iii) whether the debt is high or low; and (iv) on the
fiscal policy variable being considered in the analysis (government consumption or
government investment). In general, Capet (2004) has demonstrated that the higher the
degree of the economy’s openness, the lower the fiscal multiplier is. Accordingly, the
automatic stabilizers’ effectiveness will be limited.
7
De Arcangelis and Lamartine (2003) have employed data for the USA, West
Germany, France, and Italy. The authors have supported Perotti’s (2002) evidence
about the weak impact of fiscal policy shocks on the economy. Additionally,
Fernández and De Cos (2006) have used data for Spain. They have found a
positive impact of an expenditure shock on output and the three-year interest rate
on government’s bonds, in the short-term. However, this shock leads to higher
inflation, lower output and negative interest rate, in the medium- and long-term. A
positive shock to tax revenues contracts the economy in the medium-term and has
a transient enhancing effect on the budget.
In order to establish an empirical evidence about the impact of fiscal policy
shocks on interest rates other features have been incorporated to the BlanchardPerotti’s Structural VAR (Perotti, 2007 (a)). For instance, Dai and Philippon
(2006) have included the dynamics of bond prices of different maturities. They
have shown that following a positive fiscal shock to fiscal deficit as a ratio to
GDP, the nominal short-term interest rate does not change considerably and then it
increases. Inflation jumps up and then comes down. The fiscal shock affects the
long-term interest rates through expectations about the future spot rates as well as
the risk premium. In a similar manner, Favero and Giavazzi (2007) have
incorporated the debt level and the dynamic government’s budget constraint to
Blanchard-Perotti’s Structural VAR. The responses of the parallel variables have
not been different from Blanchard and Perotti (2002); Perotti, (2007 (a)).
Furthermore, the fiscal shocks have no significant effect on inflation.
Concerning the response of interest rate, the results obtained by Favero and
Giavazzi (2007) have revealed an evidence of a time-specific response which
depends on the sample under investigation12. Giordano et al. (2007) have shown
that an expenditure shock in Italy has positive effects on the economic activity;
whereas a shock to net tax revenues has slight effects. The response of inflation is
positive, but small and short-lived. Franta’s (2012) results for the Czech Republic
have pointed out to increases in GDP, net revenues, and inflation as a consequence
of an expenditure shock. A revenue shock leads to subsequent increases in
government’s expenditures.
12
Favero and Giavazzi (2007) have demonstrated that omitting the debt dynamic from the
assessment of fiscal policy shocks will lead to incorrect estimates of the dynamic effects
of these shocks. In addition, this omission can explain the insignificant response of longterm interest rate to fiscal policy shocks in several papers.
8
The application of the Blanchard and Perotti’s approach in developing and
emerging market economies can be regarded as rare. For instance, Restrepo and
Rincón (2006) have obtained results for Chile and Colombia. Their analysis for
Chile has indicated that a positive revenues shock has a transitory negative effect
on GDP. A positive expenditure shock has a transitory positive effect on growth of
real GDP. For Colombia, a positive revenue shock has no impact on GDP and the
effect of an expenditure shock is significant, but trivial.
Another analysis for Colombia has been performed by Lozano and Rodríguez
(2011). According to them, an expenditure shock has positive and significant
effects on output, private consumption, employment, prices, and short-term
interest rates. A shock to direct taxation is less efficient because of its influence on
private investment. A shock to indirect taxation does not affect real activities,
significantly.
For Croatia, Ravnik and Žilić (2011) have suggested that a revenue shock has
a long-lived diminishing effect on the overnight interest rate while an expenditure
shock leads to an immediate decline in the short-term interest rate. The responses
of output and inflation rate are inferior compared to the response of interest rates to
this policy shock.
Ben Slimane and Ben Tahar (2013) have analyzed the effects of fiscal policy
in Tunisia and Egypt. For Egypt, a revenue shock has a persistent negative impact
on short-term interest rate following a short-lived immediate increase, while an
expenditure shock has an immediate increasing impact on interest rate, which is
switched to a persistent negative impact, in the medium- and long-term. In the case
of Tunisia, an expenditure shock has an immediate increasing effect on inflation.
The interest rate has an immediate decline, which is converted to a positive impact,
in the short- and medium-term.
9
III. The Interaction between Monetary and
Fiscal Policies (Theory and Practices)
This section of the study provides a theoretical background of the channels
through which the fiscal policy affects the economy and monetary variables. In
addition, it focuses on the existing legal and institutional frameworks for
coordinating monetary and fiscal policies in Egypt. Finally, it reviews the key
macroeconomic developments during the period under investigation (i.e. before
and after the 25th of January Revolution).
A. Theoretical Background
Fiscal policy impacts both directly and indirectly a number of transmission
channels and therefore has implications for the monetary policy implementation.
The transmission mechanisms of fiscal policy on monetary policy imply the
impact of the former policy on the monetary policy variables. Consequently, fiscal
policy is an important determinant of the effectiveness of the monetary policy
(Sims, 2004; Favero and Giavazzi, 2004; Ersel and Özatay, 2008; Yörükoğlu and
Kılınç, 2012) and a measure to assess the degree of the central bank’s
independence and the monetary policy dominance (Sargent and Wallace, 1981;
Ersel and Özatay, 2008).
In the same concern, a strong fiscal stance promotes the developments in
domestic financial markets, reinforces the economy’s risk structure, and reduces
the structural weaknesses in the economy. On the other hand, a weak fiscal
position bound the role of transmission mechanisms of monetary policy
(Yörükoğlu and Kılınç, 2012). According to the theoretical literature, the principal
channels by which fiscal policy affects monetary policy are13:
Seignorage
It implies fiscal policy dominance on the monetary policy authority where the
financing of the budget deficit depends on printing money. Under fiscal
dominance, the fiscal authority sets on its own, the budget, announces the current
and future deficits, and determines the amount of revenues that must be raised
from the sales of bonds and seignorage, regardless of the monetary authority’s
inflation targets (Sargent and Wallace, 1981).
13
For more details, one can refer to Hemming et al. (2002); Henry et al. (2004).
10
As a result, this situation imposes constraints on the monetary authority (Zoli,
2005) through distorting the credibility of the monetary policy and raising the issue
of time-inconsistent policies (Kydland and Prescott, 1977). This has led to
extensive literature on the monetary implications of fiscal policy and the analysis
of the so-called fiscal theory of the price level (FTPL) (Woodford, 1995)14. This
type of research has emphasized on the importance of fiscal discipline as a
precondition for monetary stability (Mishkin, 2002) and this point of view has
been supported by empirical studies (Šehović, 2013). Examples for relevant work
are Favero and Giavazzi (2004); Javid et al. (2008). In this respect, the theoretical
relation between inflation and the overall fiscal balances has received attention
(Sargent and Wallace, 1981; Woodford, 1995). On the other hand, the empirical
evidence concerning the impact of specific budget items on prices remains quite
limited (Henry et al., 2004).
Aggregate Demand
In addition to seignorage, fiscal policy can affect prices through its impact on
aggregate demand. In this case, the magnitude of the impact of as fiscal policy
action will depend on a number of factors such as the agents’ expectations about
the government’s policy in the future (Woodford, 1995), public confidence in
fiscal sustainability, and any convoying changes in the monetary variables
(Hemming et al., 2002; Zoli, 2005).
Aggregate Supply
Other factors that exaggerate the fiscal policy impacts include (Henry et al.,
2004; Fernández and De Cos, 2006): the existence of nominal rigidities in the
economy, the elasticity of supply, the interest-rate elasticity of investment, the
interest-rate as well as income elasticities of money demand, the degree of the
economy’s openness, the exchange rate in addition to monetary policy regimes, the
magnitude of the wealth effects, the presence of forward-looking and rational
agents.
14
This theory applies to a non-Ricardian policy regime (i.e. with no government
commitment to adjusting fiscal policy if debt explodes). According to the FTPL, an
increase in the deficit results in a net increase in the permanent income of the private
sector. Given the unchanged total available resources of the economy, the new equilibrium
requires an increase in the price level (Henry et al., 2004).
11
Furthermore, the presence of developed or undeveloped financial markets
and the sectors’ speed of reaction to unanticipated changes in the instruments of
fiscal policy are other key aspects. The supply-side effects of fiscal policy may
arise from changes in labor income taxes in the presence of labor market rigidities
(Alesina and Perotti, 1997). These rigors features of the labor market may slowdown the reaction of the economic agents as well as the responses of the monetary
variables to changes in fiscal policy instruments.
Other Remarks
 The tax policy can affect the economy through two main channels. Firstly,
the distortions which are a consequence of the tax/incentive structure on
individual decisions. Secondly, the effects of taxes on aggregate demand
(Blanchard, 1990).
 On the regional level, the spillovers of the changes in domestic fiscal
policy are transferred to other countries among the monetary union through (i)
changes in the terms of trade; (ii) changes in the after-tax and after-subsidy
returns on investment in the case of international capital mobility; and (iii)
changes in the demand for imports (Harvey et al., 2001).
Therefore, maintaining fiscal sustainability15 is a requirement for the
establishment of monetary union since unsustainable fiscal policy will ultimately
undermine the ability of the central bank to maintain monetary stability (Oshikoya
and Tarawalie, 2010).
15
Fiscal policy persistence or sustainability can be defined as a measure of the degree of
dependence of current fiscal behavior on its own past developments (Afonso et al., 2008).
Additionally, the fiscal policy stance can be regarded as unsustainable, if in the absence of
adjustments, the government is not able to service its debt (IMF, 2011).
12
B. Legal and Institutional Frameworks
The Constitution of the Arab Republic of Egypt and its succeeding
amendments determined the responsibility of the CBE (e.g. the Constitution for
Year 2014 in Chapter 11: Article 220). Accordingly, the CBE is solely entitled to
issue banknotes. It shall maintain the integrity of the monetary and banking
system, and the stability of prices within the framework of the State’s general
economic policy, as regulated by Law No. 88 for Year 2003 of the Central Bank,
The Banking Sector and Money. This Law has formally stipulated the role of the
CBE in (Chapter 2: Article 5).
Consequently, the CBE is in charge for formulating and implementing
monetary policy, with price stability being the primary and overriding objective.
The Government’s endorsement of the objective of price stability and its
commitment to fiscal consolidation are important factors in this regard.
The aforementioned Law in (Chapter 2: Articles 6 &7) has assured instrument
independence to the CBE since it may take whatever measures it considers,
especially in case of a financial disturbance or another unforeseen condition that
calls for meeting the necessary needs in the financial markets.
Generally, the CBE shall set – in agreement with the government – the
objectives of the monetary policy through a Coordinating Council (CC) which has
been formed by the Presidential Decree No. 17 for Year 2005 (issued on the 12th of
January, 2005) under the chairmanship of the Prime Minister. Its membership has
included the Ministers of Finance, Planning and Investment, the CBE’s Governor
and his two deputies, and six members who have international expertise in the
economic, banking, and financial affairs .
The CC determines the monetary policy targets in a way that realizes price
stability and banking system soundness, within the context of the general
economic policy of the State. The Prime Minister determines the issues for
discussion. Based on the Executive Regulations of Law No. 88 for Year 2003, the
CC shall convene upon an invitation of its chairman, at least once every three
months, or whenever necessary. The meeting of the Council shall not be valid
without the presence of at least two thirds of its members, including a
representative of the CBE and a representative of the government. The decisions of
the CC shall be issued by the absolute majority of its members.
13
The Coordinating Council shall have a technical secretariat, to be informed by
decisions of the Council’s chairman. This secretariat shall be responsible for
arranging the Council’s meetings and taking, and preparing their minutes. Only the
chairman of the Council, or another person he may delegate, shall disclose the
agreed-upon decisions to the public.
As for the targets of the monetary policy, the CC, in pursuing its functions,
shall have recourse to the studies, information, and data provided by the relevant
departments, units, and committees of the CBE as well as by any other interested
entities. In addition, the Council shall be informed about the decisions and
recommendations issued by the CBE’s Board of Directors.
The effectiveness of such institutional design between monetary and fiscal
policies in Egypt through the CC has been challenged by many factors such as the
global financial crisis in 2008 and the European sovereign debt crisis in the end of
2009. Additionally, the two successive Egyptian revolutions in 2011 and 2013
have affected main macroeconomic indicators.
The nomination of a new Governor to the CBE, in November 2015 can be
considered as a step toward the revival of the CC and the enhancement of the
MPC’s role. The new Governor supports the essentiality of an effective formal
mechanism for implementing consistent monetary and fiscal policies that are in
line with the overall objectives of the State.
The CBE’s finance to the government has been framed through Law No. 88
for Year 2003 in (Chapter 2: Article 27). This Article has demonstrated that the
CBE shall extend financing to the government, upon its request, to cover the
seasonal deficit on the general budget, provided that the amount of such finance
shall not exceed (10%) of the average revenues of the general budget in the three
previous years.
The term of said finance shall be three months renewable for other similar
periods. It shall be settled in full within twelve months at most from the date of its
extension. The conditions concerning this finance shall be determined, upon
agreement between the Ministry of Finance and the CBE, according to the
prevailing credit and monetary conditions.
14
On the side of debt management, the existing institutional design assigns the
responsibility for Public Debt Management (PDM) to the Debt Management Unit
(DMU) under the supervision of the Minister of Finance. The DMU is responsible
for planning issuance calendars, maintaining oversight of the debt portfolio,
promoting the needs of investors, and improving the primary as well as secondary
markets by introducing new instruments16.
The CBE is the fiscal advisor and agent for the Ministry of Finance as stated
in Law No. 88 of the Year 2003 in (Chapter 2: Articles 24 throughout 27). It
manages the auction process and the Primary Dealer System (established by the
Minister of Finance’s Decree No. 723 for Year 2002) 17 which is the organizational
structure for the distribution of debt among banks. The Minister of Finance
reserves the right to accept, reject or refuse to recognize any or all bids or tenders
submitted in a particular auction. The decision of the Minister is final.
The second level of the institutional design in Egypt after the CC is the CBE’s
Monetary Policy Committee (MPC). In 2004, the CBE’s board of directors agreed
to establish the MPC to adhere to the objectives of Law No. 88 of 2003. Monetary
policy decisions are taken by the MPC, which has nine members comprising of the
Governor of the CBE, the two Deputy Governors, and six members of the Board of
Directors (including the representative of the Ministry of Finance and the
Chairman of the Egyptian Financial Supervisory Authority (EFSA)).
The MPC’s decisions are implemented through a set of policy instruments and
procedures. The MPC has announced – for the first time – its monetary policy in a
statement released to the public on the 2nd of June, 2005. Table (A2 in Appendix
A) indicates the MPC’s decisions since its formation. Accordingly, the MPC
represents a coordinating vehicle between monetary and fiscal policies through the
repetitiveness of the government in its scheduled time framed meetings.
16
For more information, refer to the official website of the Ministry of Finance,
[http://www.mof.gov.eg/].
17
Primary Dealer activities include the outright purchase and sale of government’s
securities and enter into Repurchase Agreements (Repos) with other Primary Dealers, nonPrimary Dealer institutions and individuals. Primary Dealer banks are authorized by the
CBE and in addition to a license from the EFSA in order to apply to the Ministry of
Finance for registration. For more information, refer to the official website of the Ministry
of Finance, Decree No. 723 for Year 2002 [http://www.mof.gov.eg/].
15
The MPC builds-up its main decisions based on models and deep analysis of
the economy. It also utilizes more reliable inflation measures such as the core
inflation to exclude major sources of unrealistic increases in the prices.
The main concern of the concurrent legal and institutional frameworks for the
interaction between monetary and fiscal policies shall be curbing the financing
resources directed from the CBE to the government in order to cover the widening
budget deficit.
Based on the above-mentioned coordinating arrangements, additional
legislative work has to be done to convert the government’s overdraft facilities
from the CBE into tradable government’s securities in financial markets. This will
enhance the effectiveness of the process of PDM. Once the financial markets are
developed and the coordinating links between fiscal and monetary policy
authorities are being enhanced, the responsibility of debt management will have to
be directed to a DMU that reports directly to the CC. Therefore, clear-cut lines that
determine the roles of the CBE and the DMU in PDM have to be outlined through
new legislations.
C. Key Macroeconomic Developments
(Descriptive Analysis)
Egypt has faced tremendous challenges due to the spillovers of the 25th of
January revolution. This has resulted in a contraction in the main economic
sectors, a sharp decline in capital flows, and a continued rise in the fiscal deficit
which has been above 10.0% of the GDP since FY 2011/12 and has been mainly
financed by domestic sources (IMF, 2015). Generally, despite of the weak
performance of the economic sectors; the banking system has played a supportive
role to the Egyptian economy during this critical period. Table (A3 in Appendix A)
summarizes the main indicators of the Egyptian economy during FY 2010/11- FY
2013/14.
16
Accordingly, the study summarizes the evolutions in vital macroeconomic
variables as follows:

The Real Sector
Real growth has slowed down to 2.1% annually on average over the postrevolutions period (2010/2011-2013/2014), compared to 5.4% annually on
average during the pre-revolutions period (2002/2003-2009/2010). On the supply
side, this decline reflects the weak performance of the main driving sectors,
namely; tourism, extractions, manufacturing industries, Suez Canal, and
construction and building (table A4 in Appendix A).
Given the downturn in most economic activities, unemployment rate
peaked to 13.3% in the 4th quarter of the FY 2013/2014 compared to 9.0% during
the corresponding period in the FY 2009/2010 (figure: 1).
Figure (1): Real GDP Growth Rate & Unemployment
On the demand side, while growth was mainly driven by private consumption
over the two said periods; investment fell down by 0.5% annually on average
during the first period compared to an increase of 7.2% in the second one (table
A5 in Appendix A).
Figure (2): GDP by Expenditure
(Contribution to Annual Growth Rate)
17

The Fiscal Sector
Overall budget deficit has remarkably inched up from LE 98.0 billion
(representing 8.1% of GDP) in FY 2009/2010 to LE 253.7 billion (12.4% of GDP)
in FY 2013/2014, which indicates an increase rate of a 26.8%, on average, between
(2010/2011 - 2013/2014) compared to only 12.4%, on average, over (2002/20032009/2010). The sharp increase in the budget deficit has reflected growing
government’s expenditures by a rate of 15.1% annually on average, exceeding its
counterpart of government’s revenues which recorded 10.5% annually on average
(table A6 in Appendix A).
Figure (3): Fiscal Policy Indicators
Government’s expenditures have almost maintained the relatively high annual
average growth rate post and before the revolution (15.1% versus 15.5%,
respectively). About 95.8% of total increase in expenditures post the revolutions
period was concentrated in three categories;
 Compensations of employees (represented 32.7% of total increase in
expenditures). The large increase in this item has followed from adapting some
measures aiming at realizing social equality; such as appointing part of the
temporary employment at the public sector, increasing the minimum level of
wages at that sector; in addition to other measures to respond to protestors’
demands.
 Interest payments on domestic and external debt (represented 36.4% of total
increase in expenditures). The increase in this item has resulted from

increasing treasury bills issuance to partially finance the escalating budget
deficit, adding to the incline in domestic interest rate on these bills.
Subsidies, grants, and social benefits (represented 26.7% of total increase in
expenditures). The government has contributed to pension funds, besides
taking plenty of measures to increase the coverage of social safety nets (table
A7 in Appendix A).
18
On the revenues side, tax revenues contributed by about 67.9% of total
increase in revenues in the period following the revolution. Taxes on income and
profits rose by 12.1% annually on average compared to 18.6% over the period
before the revolution. This came as a consequence of the slowdown in the
economy. Foreign grants has contributed by 31.3% of total increase in revenues,
they remarkably rose by 80.1% annually on average compared to only 0.2%, as a
result of the exceptional grants from some Arab countries, especially post the 30th
of June, 2013 events to confront the deteriorating economic stance that Egypt has
witnessed (table A8 in Appendix A).
Financing the budget deficit has been mainly through domestic resources,
especially the banking sector. The share of the Central Bank of Egypt has
increased from 11.8% of total financing in FY 2009/2010 to 47.0% in FY
2013/2014; recording an average annual increase of 79.2% post the revolutions
period compared to only 8.9% during the period predated the revolutions. Also, the
share of commercial banks has increased to reach 49.3% of total finance in
2013/2014 compared to 28.4% in 2009/2010 (table A6 in Appendix A).
Total government debt (domestic and external). As a consequence of the
above developments, gross domestic debt increased from 73.6% of GDP in FY
2009/2010 to 90.9% in FY 2013/2014, i.e. growing at an annual average rate of
19.6% over the period post the revolution compared to 13.2% annually on average
over the period before it. Based on the Ministry of Finance’s data released in 2014,
total government’s debt (including domestic and external) has reached 93.9% of
GDP at the end of June 2014 as compared to 93.8% of GDP at the end of June
2013. These fiscal and debt indicators reflect unsustainable fiscal policy in Egypt.

The Monetary Sector
On the monetary policy formulation and implementation18, the CBE – over
the medium-term – is committed to achieve low inflation rates which are essential
for maintaining confidence and for sustaining high rates of investment and
economic growth. The CBE meets its inflation objectives via steering short-term
interest rates, in line with the developments in the credit and money supply
conditions.
18
For more information, refer to the official website of the Central Bank of Egypt (CBE),
[http://www.cbe.org.eg].
19
Over the short-term, the CBE uses two standing facilities (i.e. an overnight
lending facility and an overnight deposit facility) as policy instruments within the
Corridor system. These rates have been firstly announced on 2/6/2005 in the
MPC’s Press Release, and are effective as of 5/6/2005. The overnight deposit and
lending rates have been set at 9.5% and 12.5%, respectively. Accordingly,
directing the overnight interbank rate within this corridor is the operational target
of the CBE19. During its successive meetings, the MPC’s decisions have come in
light of the economic developments and the inflationary expectations. Table (A2 in
Appendix A) reflects the developments in the CBE’s monetary policy rates based
on the MPC’s decisions.
Figure (4): Monetary Policy’s Rates
Figure 4 indicates a significant decline in the volatility of the overnight
interbank rate since the introduction of the Corridor system in June 2005.
Nevertheless, the oscillations in the interbank rates have emerged since the 25th of
January, 2011 after a successful record of practice because of the Corridor. The
movements in the rate are still within the limits.
Additionally, the CBE manages market liquidity through its open market
operations (OMOs). According to the MPC’s Press Release on 10/3/2011, 7-day
Repo transactions have been launched as of Tuesday 22/3/2011. Based on the
MPC’s meeting on 21/3/2013, the CBE’s main operations are Repos or deposit
auctions depending on the prevailing market liquidity conditions.
19
The CBE has moved from a quantitative operational target (excess reserves) to a price
target (overnight interbank rate) since 2005.
20
The role of the monetary policy operations to absorb or inject liquidity in the
market has been enhanced through publicly announced and scheduled auctions.
These operations have succeeded in containing the negative consequences of the
two revolutions on the performance of financial markets and the economic activity.
Regarding the inflation and short-term interest rates, the CBE utilizes the
Core CPI which excludes regulated items and the most volatile food items, namely
fruits and vegetables, from the headline CPI.
During the whole period under exploration, the average annual interest rate on
3-month and less deposits is regarded as stable. This indicates the effectiveness of
the management of the overnight interbank rate in providing signals to the money
market about the prevailing short-term interest rates (figure: 5).
Figure (5): The Inflation and Short-term Interest Rates
In 2008, the increase in international food prices has contributed to the hike in
both Headline CPI and Core CPI. Headline CPI inflation has reached 11.8% and
8.2% in FY 2010/11 and FY 2013/14, respectively (figure: 5).
Additionally, the decline in the value of the Egyptian pound after the
revolutions has contributed in the exaggeration of the inflationary pressures in the
economy. Nevertheless, the inflation rates in the post revolutions period are lower
than the rates which have prevailed in 2008.
21
Concerning the monetary base (M0), its increase during the post-revolutions
period as compared to the pre-revolutions period is attributed to the rise in
currency in circulation outside the CBE by an average annual growth rate of
around 17.2% against 15.7%. The main contributor to the increase in counterpart
assets of (M0) after revolutions is net domestic assets (NDA) with a surge of an
average annual growth rate of 46.6% against a decline of 21.6% in the prerevolutions period. The main driving force behind the upturn in NDA is the rise in
net claims on government by 59.9% compared with only 1.9% (table A9 in
Appendix A).
As for domestic liquidity (M2), it has increased by an average annual growth
rate of 14.5% in the post-revolutions period against 13.2% before revolutions. The
main contributor to the increase in counterpart assets of (M2) is the NDA with a
surge of an average annual growth rate of 22.7% against 8.5% in the prerevolutions period. The main component behind the upturn in NDA is the rise in
domestic credit (DC) with a rise of an average annual growth rate of 22.1%
compared to 10.4% in the pre-revolutions period (table A10 in Appendix A).
The reason behind the increase in DC during the post revolutions period
relative to the pre-revolutions period is the rise in net claims on government by an
average annual growth rate of around 33.7% against 17.8%. These claims on the
government have taken mainly the forms of securities and lending facilities.
Securities have increased by 22.8% compared with 11.6%. The lending and
discounts have increased by 38.8% compared with 10.7%. As a consequence of the
crowding-out effect, claims on private business sector has increased by an average
annual growth rate of 6.4% in the post-revolutions period as opposed to 6.2% in
the pre-revolutions period (table A11 in Appendix A).
Generally, the government crowds-out the private sector and distorts any
investment and development prospects because of the limited financial resources.
Net claims on the government from banks has increased from 49.0% of total credit
in FY 2010/11 to 64.3% in FY 2013/14; whereas credit to private business sector
declined from 36.2% of total credit to 24.0% (table A3 in Appendix A).
22

The External Sector
Egypt adopted a number of exchange rate regimes starting from conventional
peg in the 1960s of the last century, to the crawling peg in the 1970s and 1980s,
and then it moved to crawling peg with bands in the 1990s of the said century.
There were several exchange markets in addition to the parallel market during
these decades.
In 2003, Egypt adopted the managed float exchange rate regime that aimed at
enhancing the confidence of foreign investors and dealers in the foreign exchange
market, building up the international reserves to confront the needs for hard
currencies used to import strategic commodities, and abolishing the unofficial
market. (Table A12 in Appendix A) summarizes the IMF’s Classification of
Egypt’s exchange rate regime during the period (2003-2014).
The CBE manages the Egyptian exchange rate through the dollar interbank
market mechanism, which has been introduced as of the 23rd of December 2004.
This system has proved to be highly operative in eliminating the parallel market
and increasing foreign currency supply, and, in turn, has enabled banks to meet all
their customers’ needs. In addition, the dollar interbank market has played a
vibrant role in maintaining a relatively stable value of the Egyptian pound vis-à-vis
the US dollar, especially under the current political and economic circumstances. It
enabled the CBE in accumulating net international reserves (NIR) which registered
US$ 36.0 billion in December 2010.
In general, the CBE’s exchange rate policy actions have been directed to the
purpose of shielding the LE exchange rate from sharp fluctuations after the
political instability. The dollar interbank mechanism has been highly influential in
protecting the Egyptian currency from severe deterioration because of the global
financial crisis and the two successive revolutions. The weighted average of the
US dollar interbank rate posted LE 5.9690 at end of June 2011 (against LE 5.8496
at end of January 2011). Subsequently, the pound has depreciated by only 2%
during a 5-month period. Conversely, the international organizations have
expected a higher depreciation rate of the pound after the 25th of January
Revolution.
23
Considering the whole FY 2010/2011, the Egyptian pound has depreciated by
4.6% versus the US dollar. The pound has depreciated by 1.5% and by 13.6%
during FY 2011/2012 and FY 2012/2013, respectively.
In 2012, the NIR declined sharply in the aftermath of the 25th of January
Revolution, the foreign exchange market suffered from shortage in coping with the
dealers’ needs of foreign currencies on daily basis. In order to overcome these
problems and to provide the customers’ needs from authorized foreign market
rather than an unofficial one, the CBE has launched periodic FX Auctions since
December 2012, alongside the dollar interbank system. In FY 2013/2014, the
volume of trade through the FX Auctions has reached US$ 5.5 billion. The value
of the Egyptian pound has dropped by almost 1.9% in FY 2013/2014.
The CBE’s management of the foreign exchange has proved to protect the
Egyptian pound from speculative attacks. Furthermore, the CBE decided on the 4th
of February 2015 after a meeting held between the Governor and banks’ leaders to
put limits on dollars’ deposits, not more than US$ 10,000 per day and US$ 50,000
per month, for both individuals and Corporates. The decision came alongside the
CBE’s efforts to fight the dollar black market and to force importers to get dollars
from banks rather than the parallel market.
In FY 2014/2015, the volume of trade through the FX Auctions has reached
US$ 6.6 billion. The Egyptian pound has declined by nearly 5.5% during FY
2014/2015. By the end of FY 2014/2015, the total volume of periodic FX auctions
has reached US$ 15.4 billion since the inception of such mechanism. In addition,
the CBE has announced many exceptional auctions subject to the market’s
conditions (figure: 6).
Figure (6): The CBE’s FX Auctions and The Weighted
Average Exchange Rate
24
Accordingly, the FOREX market has proved its resilience and effectiveness
in confronting the post-revolutions economic instability, which is responsible for
the considerable drop in foreign investments.
As for the balance of payments (BOP), the current account deficit has
accounted for 2.6% in FY 2010/2011 and 0.8% in FY 2013/2014 because of the
financial support from the Gulf countries. These figures are accompanied by a
reversal in the overall BOP balance from a deficit of 4.1% of GDP in FY 2010/11
to a surplus of 0.5% in FY 2013/2014. The trade balance has registered 11.8% of
GDP in FY 2013/2014 compared with 11.5% in FY 2010/2011. The tourism sector
has declined sharply resulting in a drop in the services balance from 3.3% of GDP
in FY 2010/11 to 0.3% in FY 2013/14 (table A3 in Appendix A). As a result, net
international reserves (NIR) have declined sharply from US$ 26.6 billion
(covering 5.9 months of merchandise imports) at end of June 2011 to US$ 16.7
billion (3.3 months of merchandise imports) at end of June 2014.
Egypt’s indicators of external debt are within safety limits, in terms of
international comparison, as indicated in the CBE’s annual report for FY
2013/2014. Egypt’s debt as a percentage of GDP has registered 16.4%. This
percentage is among the best global practice that has ranged between 16.4% (for
developing Asian countries) and 65.8% (for East and Central European countries).
Moreover, by recording 7.3%, the external debt’s service as a percentage of
exports of goods and services is lower than global forecasts for 2014, that has
ranged between 13.6% (for Sub-Saharan Africa) and 56.3% (for East and Central
Europe). The external debt per capita has reached to US$ 506.4 in FY 2013/14
compared with 413.6 in FY 2010/11. Total external debt to GDP has increased
from 15.2% in FY 2010/11 to 16.4% in FY 2013/2014 (figure: 7).
On average, the percentage of external debt to GDP has recorded 15.5% since
FY 2010/11 and the external debt’s service as a percentage of exports of goods and
services is estimated by 6.4%.
Figure (7): External Debt
25
Generally, the Egyptian authorities have not saved efforts during 2011 and the
subsequent years to curb the inflationary pressures through tight monetary policy
and avoid any further slowdown in the output as an outcome of the political
situation. The macroeconomic policies have been directed to attain price stability
in addition to high, inclusive, sustainable, and well-diversified economic growth
without neglecting the main social priorities for the prosperity of the economy.
Through the enhancement of the cooperative links between both fiscal and
monetary authorities, the negative consequences of the two Revolutions on the
economy have been confined.
Despite of the unstable conditions that Egypt has passed through during the last
four years with deteriorations in its main macroeconomic indicators, the FY
2014/2015 has witnessed an emergence of improvements. This came after one year
from electing President Sisi alongside the authorities’ efforts to contain the
negative impact of such unstable period. Accordingly, this reflects the strength and
solidarity of the Egyptian economy’s fundamentals and represents a motive toward
growth and prosperity.
26
IV. Methodology, Data Description, and
Empirical Results
A. Methodology
This section presents the Structural Vector Autoregressive (Structural VAR)
methodology used in the empirical application. It briefly introduces the BlanchardPerotti’s methodology which will be used with slight modifications20.
The reduced-form VAR model can be expressed as follows;
X t  0  1t  AL X t 1  ut
(1);
where X is a k-dimensional vector of the endogenous variables,  0 is a constant,
t is a linear time trend, AL  is a lag polynomial of order L , u t is the stochastic
error with E[ut ]  0 , E[ut ut ]    , and E[ut us ]  0 for s  t . The main variables
included in vector X  z, y,  , p, ch 21 are described in the following table. It is
worth mentioning that the ordering of the variables is adopted from Perotti (2005).
Table (1): Main Variables in the Structural VAR Model
Variable
Definition
z
the natural logarithm of government’s expenditure deflated by GDP deflator
y
the natural logarithm of gross domestic product deflated by GDP deflator

the natural logarithm of Consumer Price Index (CPI)
p
the natural logarithm of taxes deflated by GDP deflator
m
the natural logarithm of money (M2)22 deflated by consumer prices
r
the natural logarithm of 3-month deposits’ interest rate
exc
the natural logarithm of nominal exchange rate defined as number of Egyptian
pounds versus one dollar
20
This methodology is used in different countries of which advanced economies like
USA, Canada, and Australia and many European countries like Germany, Spain, Italy
(These are countries with counter-cyclical), we also mention countries like Colombia,
Croatia (pro-cyclical fiscal policy), in addition to several other countries.
21
"ch" is a general variable that refers to one of the monetary policy variables.
22
In our preliminary analysis, domestic liquidity (M2) is chosen rather than the monetary
base (M0) due to several reasons; of which the relatively short monetary base series
available, besides its insignificance and unacceptable error diagnostics in our early work
stages.
27
An important notification here is that we are going to estimate three VAR
models separately; each one will contain one of the variables that represent a
monetary policy channel. The reason behind this separation is the fact that we have
data series that are too short to estimate a seven-variable VAR model. In addition,
we prefer to follow the empirical studies that estimated the same size VAR model
with very similar sets of variables.
As the reduced-form disturbances will in general be correlated, it is necessary
to transform the reduced form model into a structural model. Pre-multiplying
equation (1) by the ( K  K ) matrix A0 gives the structural form
A0 X t  A0  0  A0 1t  A0 ALX t 1  Bet
(2);
where A0 is the matrix that describes the contemporaneous relation among the
variables collected in the vector X t . The expression A0 u t  Be t describes the
relation between the reduced-form disturbances ut that are given in equation (1)
and the structural disturbances et which are given in equation (2). In the
following, it is assumed that the structural disturbances are uncorrelated with each
other, i.e., the variance-covariance matrix of the structural disturbances  e is
diagonal. This representation of the structural form is called the AB model.
Without restrictions on the parameters in A0 and B , it is impossible to obtain
the structural form in equation (2) and, hence, the impulse response functions.
Therefore, it is necessary to impose exogenous constraints. In our analysis, we use
the identification approach used by Perotti (2005) in which he used a five-variable
VAR model rather than Blanchard and Perotti (2002) where they used a threevariable VAR. The idea behind the identification approach by Blanchard and
Perotti is that if we take high frequency data (like quarterly data), the systematic
discretionary fiscal policy response will be slow due to data collection, and the
slow implementation of discretionary measures.
28
Adopting Perotti’s (2005) approach, the relationship between the reduced-form
disturbances ut and the structural disturbances et can be written as
utz   zyuty   z ut   z ch utch   zp etp   zz etz ,

u   u   p ut  
p
t
y
py t
u  e  e ,
ch
p ch t
z
pz t
p
pp t
(3)
(4)
uty   yz utz   zputp   yy ety ,
(5)
ut  z utz  y uty  p utp   et ,
(6)
utch   ch z utz   ch y uty   ch  ut   ch p utp   chch etch ,
(7)
The first step is to use the institutional information to estimate cyclically
adjusted government’s expenditures and taxes. Reduced forms of innovations in
government spending and tax revenue can be displayed in the form of cyclically
adjusted reduced innovation23:
utz.CA  utz  ( zyuty   z ut   z ch utch )   zp etp   zz etz
(3')
utp.CA  utp  ( pyuty   p ut   p ch utch )   pz etz   pp etp (4')
Perotti (2005) sets the parameter  zp equal to zero, which is equivalent to
saying that government decisions on spending are taken before decisions on
revenue. Under that assumption, the cyclically adjusted reduced shocks are:
utz .CA   zz etz
(3'')
utp.CA   pz etz   pp etp
(4')
In addition, Perotti (2005) sets the inflation elasticity of government spending
(  z ) equal to -0.5, arguing that nominal wages of government employees, which
account for a large part of government consumption, do not react
contemporaneously to changes in inflation implying that the government wage bill
declines in real terms if there is an unanticipated increase in inflation (Caldara and
Kamps, 2008)24.
23
The cyclically adjusted (or structural) reduced form residuals for the fiscal variables
imply discretionary policy that are implemented for reasons other than the existing
macroeconomic conditions and do not react to the state of the economy (Fatás and Mihov,
2003; Lozano and Rodríguez, 2011).
24
For the Egyptian case, high shares of wage and salaries, subsidies, and interest
payments in the budget will imply rigid government’s expenditures (Ben Slimane and Ben
Tahar, 2013).
29
The price elasticity of government’s expenditures is set to -0.5, where
according to (Perotti, 2002), this value must be set between 0 and -1; opts for -0.5
without any of the calculation used in the case of other elasticities. The author
justifies this choice by the fact that one part (the non-wage component) of
government’s expenditure is inelastic to prices, and the elasticity of the other part
is equal to -1 (this part of expenditures is indexed in relation to CPI such as wages
in the public sector). The rest of the restrictions imposed by Perotti (2005) can be
deduced from the given matrix A provided that he calculated the two elasticities
 py
and
 p (elasticities of taxes in output and inflation, respectively) outside
the model first and then incorporated them into the model. For the case of Egypt
both elasticities were calculated, as will be indicated hereafter.
Now, it is possible to construct A and B matrices in the form Au  Be as
follows:
 1
 
yz

   z

 0
  ch z

0
.5
0
1
0
  yp
  y
  py
1
  p
  p
1
  ch y
  ch 
  ch p
0  utz    zz
0  uty   0
0  ut    0

 
0  utp    pz
1 utch   0
0
0
0
 yy
0
0
0
0
 
0
0
 pp
0
0
0
0   etz 
0   ety 
0   et 
 
0   etp 
 ch ch  etch 
To make the system just-identified, 2k 2  k (k  1) / 2 constraints should be
imposed in total in both matrices where k denotes the number of endogenous
variables. In other words, we need 35 constraints in each VAR model to obtain a
just-identified model. Matrix B has 19 coefficients that are equal to zero, and the
main diagonal of matrix A provides another 5 restrictions.
From the “identified” structural VAR, the impulse responses will be depicting
the responses of the different variables in the system to the structural shocks.
Exogenous Elasticities
We have used the method developed in Perotti (2002); Caldara and Kamps (2006
& 2008) in addition to others, to calculate the required exogenous elasticities. The
elasticity of taxes to GDP is composed of the elasticity of each tax category to
their tax base, and the elasticity of each tax base to GDP. It is calculated as
 py    p B   B y 
i
i
i
Ti
T
where  pi Bi is the elasticity of each tax category to its tax base,  Bi y is the
elasticity of each tax base to GDP, while Ti / T is the weight of tax i in total taxes.
30
In our case we used: tax on income and profits, tax on goods and services,
tax on international trade. The base of income and profits taxes is total domestic
expenditure, the base of goods and services tax is final private consumption, while
the base of international trade tax is imports. Single elasticities (  pi Bi or  Bi y ) are
simply calculated as the slope of the equation ln(y)= 01 ln(x) such that 1is
the elasticity of y with respect to x.
Using data from 2002/2003 through 2014/2015, 2nd quarter, the required
elasticities are calculated where it is found that the output elasticity of taxes equals
0.95. This almost matches the elasticity obtained by Perotti (2002) which
amounted to 0.92 for Germany. For Spain, an elasticity of 0.62 is calculated
(Fernández and De Cos, 2006), for the USA 1.85, UK 0.76, Australia 0.81 and
1.86 for Canada (Perotti, 2002).
The inflation elasticity of taxes is calculated using the simple equation
method as in Lozano and Rodríguez (2011), the result is 1.42 compared to 1.29 for
Colombia by Lozano and Rodríguez (2011), 0.89 for Croatia by Ravnik and Žilić
(2011). This implies that the results for Egypt, regarding the calculation of
exogenous elasticities, do not significantly differ from those in other countries.
B. Data Description
We use quarterly data on budget sector for the period 2002/2003 through
2014/2015, 2nd quarter. Data sources include the CBE, the Egyptian Ministry of
Finance, and the International Financial Statistics (IFS) published by the IMF.
Variables used throughout this study were defined earlier in (table 1). The
development in each of the previous variables during the period of study is
indicated graphically in (Appendix B). It is worth mentioning that variables with
seasonality components were de-seasonalized using TRAMO/SEATS method.
As it can be seen from table (2) below, almost all the variables of the model
are integrated of order one except for output which is not stationary at both level
and the first difference; yet, we can consider it integrated of order one as indicated
by most of economists in this area, and since we are interested in the dynamics
rather than parameter estimation, variable in their level are going to be used
throughout the following parts of the analysis following thus previous studies that
acted similarly in this case such as Perotti (2002); Fernández and De Cos (2006);
Tenhofen et al. (2010); Ravnik and Žilić (2011).
31
Table (2): Results of Unit Root Tests
Level
Variables
z
p
y
m
exc
r

None
1.76
1.31
1.35
1.83
1.08
-0.63
1.12
Const.
-1.76
-2.15
-1.32
-2.12
-1.70
-2.58
-2.01
First difference
None
Const.
-8.64*
-9.00*
-10.79*
-10.96*
-0.56
-1.50
-3.77*
-4.28*
-4.60*
-4.79*
-3.89*
-3.88*
-4.79*
-4.97*
Note: * and ** represent rejection of the null hypothesis at significance
levels of 1% and 5%, respectively. The Schwarz-information criterion is
used for choosing the optimal number of lags.
C. Empirical Results
It is worth mentioning that the SVAR technique used in this paper was
initially proposed by Blanchard and Perotti (2002) to assess the real effects of
fiscal shocks. This technique relies heavily on the existence of consistent quarterly
data over a sufficiently long period of time. It is usually recommended that fiscal
data on an accrual basis for general government be used for this type of study.
Unfortunately, in Egypt fiscal data for general government are officially
available on quarterly basis only for a short time (i.e. since 2006/2007). This
means that the time series comprises about 40 observations only, which is
considered quite shorter than those used in other empirical studies.
We estimated the structural model that we have specified using Perotti’s
(2005) identification approach described in subsection (A) in section (IV). The lag
length for the VAR model was chosen using Akaike information criteria available
in E-Views software. It is worth mentioning that we tested the model stability, the
test indicated that all roots of the characteristic polynomial are inside the unit
circle, so the specified VAR model is Stable.
32
The following table summarizes the estimation results of the SVAR model
concerning the prices and monetary variable equations for each of the three
scenarios.
Table (3): Main SVAR Findings
First Scenario: A Structural VAR Containing r

r
z
-0.01
-0.16*
y
1.64*
2.67*

-0.35
P
-0.01
0.07
Second Scenario: A Structural VAR Containing m

m
-0.04
0.03
0.99*
0.03
-0.80*
-0.02
0.00
Third Scenario: A Structural VAR Containing exc

exc
.03
0.06*
0.64**
-1.13*
0.62*
-0.06**
-0.08*
Note:* and ** represent significance at 1% and 5% respectively.
From the previous table, we can deduce that:
- Concerning the first scenario; first equation (inflation equation), there is an
inverse relation between real government’s expenditure and inflation such that
an increase in real government’s expenditure is accompanied with a decrease in
inflation holding all other factors constant. This may be explained by the fact
that there exist three possible ways in which the real government’s expenditures
can increase: first, increasing nominal government’s expenditure and nonincreasing inflation, second, non-increasing nominal government’s expenditure
and decreasing inflation, third, increasing nominal government’s expenditure
but with a higher rate than the increase in inflation. In these three cases, there is
no notable increase in inflation which would require the MPC to increase the
interest rate. Although this result may agree with the economic theory, it is
statistically insignificant. Results also show that the effect of real taxes on
inflation is economically significant but statistically insignificant. Results show
also that the effect of real output on inflation is both economically and
statistically significant such that an increase of 1% in real output would lead to
an increase in consumer prices by 1.6%.
33
- Concerning the first scenario; second equation (interest rate equation), there is
an inverse relation between real government’s expenditure and interest rate such
that an increase in real government’s expenditure is accompanied with a
decrease in interest rate holding all other factors constant. As indicated
previously, the increase in real government’s expenditure does not necessarily
imply that the MPC have to increase the interest rate. This result is hence
significant from both the economic and statistical respect. Results also show
that the effects of real taxes and inflation on interest rate are insignificant both
economically and statistically. The effect of real output on interest rate is shown
to be both economically and statistically significant such that an increase of 1%
in real output would lead to an increase in interest rate by 2.7%.
- Concerning the second scenario; second equation (money equation), results
show that the effect of real government’s expenditure and real output on real
money is economically significant since it implies that the increase in real
government’s expenditure
cases an increase in real money, however, the
relation is statistically insignificant. This applies also for the effect of real
output. Also, we see that inflation affects money such that an increase of 1% in
prices pushes money to decrease by 0.8% (second scenario) which is
economically and statistically significant result.
- Concerning the third scenario; second equation (exchange rate equation),
results show that the effects of each of the model variables on exchange rate is
economically and statistically significant. Holding all other factors constant, an
increase of 1% in real government spending pushes exchange rate to increase by
about 0.1% which is the same effect of real taxes but in the opposite direction.
An increase in output by 1% decreases exchange rate by 1.1% while an increase
in prices by 1% increases exchange rate by 0.6%.
(Table A13 in Appendix A) shows the estimated coefficients of A and B
matrices for the three scenarios of the Structural VAR where the first model uses
interest rate, the second uses M2, and the third uses exchange rate.
34
Figure (8): First Scenario: A Structural VAR
Model Containing r
The effect of Gov. Expenditure shock on:
35
The effect of Taxes shock on:
Figure (9): Second Scenario: A Structural VAR Model
Containing m
The effect of Gov. Expenditure shock on:
36
The effect of Taxes shock on:
Figure (10): Third Scenario: A Structural VAR Model
Containing exc
The effect of Gov. Expenditure shock on:
37
The effect of Taxes shock on:
Since we are interested in the effects of the fiscal policy on the conduct and
transmission mechanism of monetary policy, hereunder, we report the impulse
responses of government’s expenditure (the column on the left) and taxes (the column
on the right) shocks to each of the SVAR variables. According to the impulse
responses shown in figures (8) through (10), we observe that:
(1) There are some differences in the effects of fiscal policy among each of the three
models due to the change in one of the monetary policy variables. However, we will
adopt the first scenario (i.e. the model with the short-term nominal interest rate)
because it is the model mostly used in literature.
(2) A shock to real government’s expenditure has a long-run effect on output as it
persistently increases with a shock to expenditure. The reverse response is obtained
when the shock is to taxes, but with the output tending to return back to its initial
level in about two years. The last statement is similar to the results obtained by
Lozano and Rodríguez (2011) who found that, for the case of Colombia, a shock to
taxes (either direct or indirect) would be much less efficient and less significant
compared to expenditure shock.
(3) A shock to real expenditure will lead to an increase in prices starting from the
second quarter which could be explained by the mentioned increase in output. The
response of prices to taxes shock is the opposite as expected, and the effect seems
permanent for both shocks.
(4) A shock to real government’s expenditure does not cause the expected increase in
interest rate (r). Despite of the effects of shocks to real government’s expenditure
are both statistically and economically significant, it does not necessarily lead to an
increase in interest rate. The reasons behind may include (i) the MPC makes its
decision based not on the CPI itself but on the core CPI, which excludes supply
shocks provided that the Egyptian economy has already witnessed many supply
shocks since the beginning of the global financial crisis, and (ii) as previously
indicated there are three cases in which real government’s expenditures may
increase without meaning that there is a notable increase in inflation (i.e. increasing
nominal government’s expenditure and non-increasing inflation, non-increasing
nominal government’s expenditure and decreasing inflation, and increasing nominal
government’s expenditure but with a higher rate than the increasing inflation).
38
It is worth mentioning that the aforementioned result is consistent with
Fernández and De Cos (2006) who showed in the case of Spain that a positive
expenditure shock leads to higher inflation and negative interest rate, in the
medium- and long-term. It also coincides with the results by Ravnik and Žilić
(2011), in the case of Croatia, who found that an expenditure shock would lead to
an immediate decline in the short-term interest rate. Favero and Giavazzi (2007)
demonstrated that omitting the debt dynamic from Blanchard-Perotti’s Structural
VAR would lead to inaccurate estimates of the dynamic effects of these shocks. The
effect of taxes shock could be justified similarly.
(5) The effect of real government’s expenditure shock on money is an instantaneous
increase that lasts for two quarters but afterwards the response is distorted between
ups and downs. Unexpectedly, a shock to taxes gives a similar scenario. It is worth
mentioning that the SVAR model in the second scenario did not give an acceptable
level of significance with the parameter estimates and, hence, we cannot rely much
on its results.
(6) From figure (10) we note that a shock to real expenditure leads to a short term
depreciation of the Egyptian pound (which could be explained by the increase in
prices) followed by a period of fluctuations that comes to a long period of
appreciation. This may be justified by the monetary policy interventions in the
FOREX market to keep the value of the Egyptian pound at an acceptable level so
that it would prevent any adverse effects on the foreign trade and more generally on
the Egyptian economy. The same applies to explaining the effect of taxes shock;
however, we can see in this case a tendency to the appreciation of the Egyptian
pound.
It is worth mentioning that when the period of response is increased
convergence to zero axis was seen for money (as a response to taxes revenue only)
within about 30 periods, while exchange rate did not converge. Prices level has a
long-run response that did not converge either.
The general conclusion is that the relationship between fiscal policy and
monetary policy is strong and it goes from the former to the latter.
39
V. Fiscal and Monetary Policies Challenges
Confronting Egypt and the Country’s Outlook
The Egyptian policymakers have to encounter the following key challenges:

The Fiscal Policy
On the tax revenue side; (i) the difficulty to generate direct tax revenues (Ben
Slimane and Ben Tahar, 2013); (ii) the inefficient collecting schemes of taxes; (iii)
low rates of taxes on property; (iv) a decline in taxes on international trade since
FY 2002/03 due to tariff reductions, trade agreements, and discretionary
exemptions; and finally (v) the decline in the tax base because of the tax evasion
problem (table 4).
In order to overcome the fiscal problems on the tax revenues side, a tax on
income from dividends and capital gains has taken place since July 2014 (IMF,
2015). However, the Egyptian authorities have suspended the application of the
decision concerning colleting tax on capital gains to the coming two years starting
from 17th of May 2015, but the tax on income from dividends is still valid. This
decision came to protect the Egyptian stock exchange (EGX) from sharp capital
outflows.
Additionally, the Egyptian fiscal authority is grabbing efforts to create and
generate other tax sources given the expected revenue loss from the subsequent
stages of trade integration within the COMESA and the tripartite COMESASADC-EAC trade agreement25.
Table (4): The Budget Sector’s Tax Revenues in Egypt
(1989-2014)
Source: The International Monetary Fund (IMF) Country Report for Egypt. (2015).
Report No. 15/33, p. 38.
25
The Tripartite FTA arrangement is signed on 10th of June, 2015 in Sharm El-Sheikh,
Egypt. This trade agreement covers 26 countries and will build on the FTAs that are
already in place in the COMESA, SADC, and EAC regions.
40
On the expenditures side challenges include; (i) an expenditure structure
that is characterized by being rigid with a serious misallocation of resources
because subsidies, wages, and interest payments make up considerable percents of
total expenditures; (ii) an expenditure structure which neglects investment in
human capital, youth, fields of Research and Development (R&D), several
megaprojects, and the technological infrastructure; (iii) the problem of
reprioritizing the expenditure program to finance a number of essential social
protection programs; (iv) the considerable increase in the wage bill post the 25th of
January Revolution because of permanent hiring of temporary workers and hikes
in the minimum wage; (v) the government is committed to ensuring that the
constitutionally authorized increase in social spending on healthcare, education,
and scientific research will translate into productivity growth with tangible
development outcomes for the Egyptian economy; (vi) the problem of handling the
energy and electricity pricing; and finally (vii) the changes in the international
prices of primary commodities which alters the projections of the government’s
expenditure.
Another important challenge on the fiscal side is the broadening gap between
Egypt and emerging market economies (EME) regarding fiscal policy indicators.
In general, the main fiscal policy variables in Egypt are diverging from that of the
EME for the whole period from 2006 to 201526.
A deterioration in the general government’s overall balance as a % of GDP in
2014 is depicted for Egypt. The percents are -13.6 in Egypt and -2.4 in EME. A
high debt burden is presented in Egypt since the general government’s gross debt
as a % of GDP has reached 90.5% relative to 41.7% in EME.
These fiscal figures will cast doubts on Egypt’s fiscal performance in the future
given the income growth rate prospects of the Egyptian government.
In general, the slowing output growth, widening fiscal deficit reflected by growing
government’s expenditures and the slowing revenues, growing domestic debt
represent main challenges to the fiscal policy.
26
The International Monetary Fund (IMF). (2015) "Fiscal Monitor: Now is the Time
Fiscal Policies for Sustainable Growth", April (Washington D.C.).
41

The Monetary Policy
Vital challenges on the monetary policy side include; (i) controlling the
continued inflationary stresses; (ii) monitoring current and expected exchange
rates; (iii) dealing with the parallel foreign exchange market; (iv) mitigation of the
inflationary effects of increasing domestic liquidity; (v) enhancing the mutual
coordination between monetary and fiscal policy because the required fiscal
consolidation will entail price adjustments of various administered goods and
services, which has a direct impact on inflation; and finally (vi) improving the
effectiveness of the CC and MPC as coordinating arrangements.
In order to cope with these challenges from the monetary policy perspective,
Kandil (2011) emphasizes on utilizing non-traditional monetary policy tools to
eliminate structural distortions in the economy and increase the effectiveness of
conventional monetary policy instruments. In the same context, Al-Mashat (2011)
considers the consolidation of Egypt’s fiscal position through a transparent
medium-term fiscal consolidation strategy as a step towards qualifying the
Egyptian economy to adopt an inflation targeting regime.
Al-Mashat demonstrates the benefits gained from inflation targeting regime
with an explicit inflation target which outperforms the outcomes from the current
regime with only an implicit anchor via the activation of the available expectations
channel.
The Main Features of the Macroeconomic Medium- and Longterms Strategies27
The political instability that Egypt has witnessed since the 25th of January
Revolution has given a proper opportunity to the Egyptian authorities to address its
economic challenges. A medium-term strategy covering the period FY 2014/2015
to FY 2018/2019 has been released in addition to a long-term strategy plan which
is underway to cover a longer period up to the year 2030.
27
Official Publication of the Egyptian Government. (2015)."Egypt’s Five Years
Macroeconomic Framework and Strategy: FY 2014/15–FY 2018/19", the Egyptian
Ministry of Finance’s official website, [http://mof.gov.eg/].
42
The medium-term strategy plan which has been presented by the economic
ministerial committee recently in 2015, describes the framework for Egypt’s
medium term economic vision and outlines the concrete policies, programs and
projects that will guide and operationalize the growth strategy. The targets of the
plan are summarized in Box (1).
Box (1): Egypt’s Macroeconomic Targets
FY 2014/15 – FY 2018/19
• Sustainable real GDP growth reaching at least 6% by the end of the period;
:
• A faster pace of job creation in order to bring the unemployment rate below 10% and in
particular to address the high rate of youth unemployment;
• Greater efficiency in government spending in parallel with a planned reduction of the
fiscal deficit to 8 - 8.5% of GDP, and the government debt to within a range of 80 85% of GDP;
• Headline Inflation within a 6 - 8% range;
• Higher rates of domestic investment;
• Improved export performance;
• The development of the country’s human resources supported by increased spending on
health, education and Research and Development (up to at least 10% of GDP) as
mandated by the Constitution;
• Enhanced productivity on the national level and continued investment in and upgrading
of infrastructure.
Source: Official Publication of the Egyptian Government. (2015)."Egypt’s Five Years
Macroeconomic Framework and Strategy: FY 2014/15–FY 2018/19".
On the fiscal policy side, the government targets to reduce the budget deficit
over the next five years to 8 - 8.5% of GDP and government debt to 80 - 85% of
GDP, while at the same time increasing spending on health, education, and
Research and Development (R&D). The strategy is to reduce large inefficient
spending items – such as energy subsidies – and shift it to better serve public needs
and to foster productive investment; and widen the tax base, including by raising
taxes on high earners, to create fiscal space for increased social spending and
investment, while reducing the deficit to make room for the private sector.
43
A comprehensive fiscal Agenda is provided in the following box where it can
be noted that much of the government's fiscal program has already been
implemented or is in process:
Box (2): The Fiscal Agenda
Achieved reforms
. . . In the pipeline
 10% tax on all forms of net realized capital gains,
including mergers, acquisitions and trade in the
capital market
 10% tax on dividends
 A temporary 5% tax on profits made by individuals
and companies on revenues exceeding LE 1 million
for three consecutive years
 Criminalizing non-issuance of tax invoices to
professionals
 Annually increasing the fixed tax rate on cigarette
packs (proportionally to price of cigarette pack)
 Increase excises tax on alcoholic beverages from
100% to 200%
 Amendment of property tax law to exempt one
residence up to LE 2 million and implementing the
tax for the first time since its issuance in 2008
 First phase of energy and electricity pricing reforms
 Phasing in the smart card system for distribution of
subsidized gasoline
 Approval of five-year-electricity pricing reform
 Issuance of new mining law which will maximize
beneficial receipts
 Moving to a fully-fledged Value Added Tax
regime.
 Issuance of Telecom license bill
 Subsequent phases of fuel and electricity price
adjustment
 A new Customs Law to help facilitate trade and
combat unlawful trade practices
 Amending Sukuk law to attract new sources of
funding
 Changing the government procurement law to
align with world best practices
 Changing the government procurement
specifications to more green and energy saving
materials
 Advancing tax audit systems to alleviate tax
avoidance practices
Source: Official Publication of the Egyptian Government. (2015)."Egypt’s Five
Years Macroeconomic Framework and Strategy: FY 2014/15–FY 2018/19".
On the government’s expenditure. The government’s agenda has determined
its reform measures through reducing the burden of energy subsidies and wages on
the budget while focusing spending on pro-growth and social justice areas.
Reforms in the energy sector over the medium-term will encompass:
(i)
continuing price reform; (ii) raising the efficiency of energy use and diversifying
the energy mix; (iii) adopting smart cards; (iv) conducting structural and financial
reforms in the petroleum sector; and (v) combating smuggling of petroleum
products.
44
On the PDM and its financing strategy. The government will be focusing
on further lengthening the average maturity of the domestic debt, smoothing the
maturity structure and reducing the average cost.
Fiscal consolidation to reduce the deficit to 8-8.5% of GDP by FY18/19 will be
the main tool to sustain confidence and support the debt management policy, in
addition to enhancements to the government’s treasury function. Moreover, the
government will seek to expand its sources of financing both domestically and
internationally as well as to develop new instruments.
On the monetary policy side. The medium-term plan will seek to control and
gradually reduce inflation towards the CBE’s target of 6-8% in the medium-term
to improve real incomes and enhance external competitiveness, while maintaining
an active and orderly foreign exchange market that reflects supply and demand,
thereby facilitating the resumption of capital inflows and easing pressure on
international reserves.
Egypt’s strategy for the year 2030. The Egyptian government has also
declared its long-term vision for the year 2030. The strategy targets three main
goals (i.e. economic development, competitiveness of markets, and human capital).
Accordingly, the government will be responsible for achieving a growth rate of
7%, increasing investment rates, raising the contribution of services to GDP,
increasing exports, and reducing unemployment rates to about 5%.
There is no doubt that an enhanced organizational framework for
coordinating monetary and fiscal policies by the government will be essential to
achieve these targets.
45
V.I. Concluding Remarks and Policy
Recommendations
Conclusions
While there is an agreement between most economists regarding the effects
of monetary policy shocks, the empirical literature has struggled so far to provide
facts on the effects of fiscal policy shocks. There is even no agreement upon the
qualitative effects of fiscal shocks on macroeconomic variables.
This paper analyzed the effects of fiscal policy shocks and the interaction
between fiscal and monetary policy in Egypt for the period FY 2002/2003-FY
2014/2015, 2nd quarter. To achieve our goals, we used a Structural Vector
Autoregression (SVAR) model, which has been widely recommended by several
previous empirical papers, especially Blanchard and Perotti (1999 & 2002). The
SVAR model is identified by Perotti (2002 & 2005), where he extended the model
to enclose monetary policy variables.
Since the VAR approach heavily relies on the existence of consistent quarterly
data over a sufficiently long period of time, and unfortunately these data are not
officially available for a long time in Egypt, a database of selected fiscal variables
for budget sector (the administrative system, local administration, and service
authorities) was assembled.
It has been shown from the descriptive analysis that the fiscal deficit has been
above 10.0% of the GDP since FY 2011/12 and has been mainly financed by the
banking sector. The share of the CBE in such finance has increased from 11.8% of
total financing in FY 2009/2010 to 47.0% in FY 2013/2014; recording an average
annual increase of 79.2% post the revolutions period compared to 8.9% during the
period predated the revolutions. Because of the limited financial resources, the
government crowds-out the private sector. Banking credit to private business
sector declined from 36.2% of total credit to 24.0%; whereas net claims on the
government from banks has increased from 49.0% of total credit in FY 2010/11 to
64.3% in FY 2013/14.Therefore, trends of money creation has continued during
the post-revolutions period. The monetary base (M0) has increased in the postrevolutions period as compared to the pre-revolutions period by an average annual
growth rate of around 13.2% against 13.6%.
46
As for domestic liquidity (M2), it has increased by an average annual growth
rate of 14.5% after revolutions against 13.2% before revolutions. This has
triggered the inflationary pressures.
In our empirical work, macroeconomic effects of the fiscal shock were
assessed through three main scenarios by a 5-variable SVAR model. The first
scenario includes real government spending, real output, consumer prices, taxes,
and interest rate on 3-month deposits. The second scenario includes the same
variables replacing the deposits’ interest rate with money (M2), while the third
scenario replaces the deposits’ rate with nominal exchange rate. In our analysis, we
split fiscal revenue from expenditures to find out the distinct effects of each fiscal
component.
The impulse responses showed the following effects of both a positive
government spending shock (of one standard deviation) and a positive tax revenue
shock. First, a shock to government’s expenditure has a long-run effect on output
as it persistently increases. The reverse response is obtained when the shock is to
taxes, but with the output tending to return back to its initial level in about two
years. Second, a shock to expenditure will lead to an increase in prices starting
from the second quarter which could be explained by the mentioned increase in
output while the response of prices to taxes shock is the opposite as expected, and
the effect seems permanent for both shocks.
Third, a shock to government’s expenditure causes a decrease in interest rate
(which is already justified earlier); on the other hand, taxes shock causes interest
rate to decrease for about 2 years. Fourth, the effect of a shock to government’s
expenditure on money is an instantaneous increase that lasts for two quarters but
afterwards the response is distorted between ups and downs. A shock to taxes
gives a similar scenario. Fifth, a shock to expenditure leads to a short term
depreciation of the Egyptian pound followed by a period of fluctuations that comes
to a long period of appreciation. The same applies to the effect of taxes shock with
more tendency to the appreciation of the Egyptian pound.
47
Policy Recommendations
 Concerning the empirical section of this study, the Structural VAR model
is estimated based on a relatively short period of just 50 observations,
which is short considering that the model includes 5 variables in each
monetary policy scenario. Other relevant studies use more than one
hundred observations (e.g. Tenhofen et al., 2010). This may explain the
inability of the variables in the model to have convergent responses in the
long-run as has been grasped from the impulse-responses’ graphs. Thus,
we recommend that these results have to be taken cautiously. We also
strongly acclaim performing further study using data with a higher
frequency such as monthly data, but this will imply using proxy variables
in some cases. This will insure enough degrees of freedom and more
robustness of the model estimates.
 Macroeconomic variables react in a different way to investment versus
consumption expenditure by the government (Tenhofen et al., 2010).
Therefore, a disaggregation of the government’s expenditure may result
in different conclusion. This is a scope of further research.
 In light of the empirical exploration for Egypt, this study suggests
monitoring the government’s expenditure, determining numerical targets,
and reallocating it to build up productive capacities and investments. This
is consistent with (Cordes et al., 2015) who advocate the application of
expenditure rules as tools for spending control, enhanced fiscal
sustainability, and improved fiscal discipline.
48
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Appendix (A): Tables
&
Appendix (B): Figures
56
Appendix (A): Tables
Table (A1): Summary of the Main Outcomes of Literature that
Adapts (Blanchard and Perotti)’s Work
Period
Country(ies)
Blanchard
Quarterly data covers the
The USA
and
period
Perotti
(1960:1 to 1997:4)
Main Results
Author(s)
A positive spending shock increases output. An
unanticipated tax increases have a strong negative
output effects. The multipliers for both spending
(1999 &
and tax shocks are small.
2002)
Quarterly data for the USA
(1961:1 to 2000:4);
The USA,
The results are consistent with (Blanchard and
West Germany, Perotti)’s concerning the direction of the influence
Perotti
West Germany (1961:1
the United
of fiscal policy shocks. Nevertheless, the results
(2002)
to1989:4); United Kingdom
Kingdom,
regarding the magnitude of the effects have shown
(1964:1 to 2001:2); Canada
Canada and
(1962:1 to 2001:4) and
Australia
very low fiscal policy multipliers.
Australia(1964:1 to 2000:4)
Höppner
Quarterly frequency from
(2001)
(1970:1 to 2000:4)
The analysis shows a negative response of output
to tax shocks and a positive response to
expenditure shocks. Private consumption reacts
negatively to taxation, but increases in response to
spending shock.
Tenhofen
Quarterly data ranging from
et al. (2010)
(1974:1 - 2008:4)
Germany
An expenditure shock triggers an output increase.
A revenue shock does not affect output
significantly. Private consumption has a weak
positive response to a spending shock; whereas
private investment increases more significantly.
The authors have shown very low expenditure
multiplier which decreases over time.
De
Quarterly data for the period
Arcangelis
(1960-1997). West Germany
and
is the only exception with the
France and
Lamartine
period (1961-1989)
Italy
(2003)
The USA,
The finding of low fiscal policy multipliers is in
West Germany, line with (Perotti, 2002)’s analysis. The responses
of output to fiscal policy shocks are countrydependent.
Table (A1) : Contd.
Author(s)
Period
Country(ies)
Main Results
Restrepo
Quarterly data for Chile
Chile and
For Chile, a positive shock to tax revenues has a
and Rincón
(1989:1 through 2005:4); for
Colombia
transitory negative effect on GDP. A positive
(2006)
Colombia (between 1990:1
shock to spending has a transitory positive effect
and 2005:2)
on real GDP growth. For Colombia, a positive tax
revenue shock has no impact on GDP and the
effect of a spending shock is significant, but very
small.
Fernández
Quarterly frequency for the
and De Cos
period 1980:1-2004:4
Spain
A positive spending shock has positive effects on
output in the short-term at the cost of higher
(2006)
inflation and public deficits and lower output in
the medium- and long-term. A positive revenues
shock contracts the economy.
Quarterly data for the USA
The USA,
The results from both the quarterly and annual
Perotti
(1947:1 to 2003:4);
Australia,
data are qualitatively consistent with the evidence
(2007 (a))
Australia (1959:3 to 2006:2),
Canada, and
Canada (1961:1 to 2006:3)
the United
although in general the effects of fiscal policy
and the United Kingdom
Kingdom
shocks are smaller.
for the USA in (Blanchard and Perotti)’s,
(1963:1 to 2006:2).
An expenditure shock in Italy has positive effects
Giordano et
Quarterly data for
the period 1982:1 to 2004:4
on the economic activity; whereas a shock to
Italy
al. (2007)
inflation is positive, but small and short-lived.
Caldara and
Quarterly data over the
Kamps
period 1955:1 2006:4
(2008)
revenues has slight effects. The response of
USA
The results regarding the consumption,
employment, and wage responses to government
spending shocks confirm (Perotti, 2007(a))’s. The
response of output to tax depends on the
identification approach of fiscal policy shock.
Table (A1) : Contd.
Author(s)
Period
Country(ies)
Ravnik and
Monthly data from 2001:1
Croatia
Žilić (2011)
until 2009:12
Main Results
They have suggested that revenues shock has a
long-lived diminishing effect on the overnight
interest rate while the spending shock leads to an
immediate decline in the short-term interest rate.
The responses of output and inflation rate are
inferior as compared to the response of interest
rates to this policy shock.
A spending shock has positive and significant
Lozano and
Quarterly data ranging from
Rodríguez
1980:1- 2007:4
Colombia
effects on output, private consumption,
employment, prices, and short-term interest rates.
(2011)
A shock to direct taxation is less efficient because
of its influence on private investment. A shock to
indirect taxation does not affect real activities,
significantly.
Franta
Quarterly frequency for the
The Czech
GDP, net revenues, and inflation increase as a
(2012)
period 1999: 1 to 2011: 3
Republic
consequence of an expenditure shock. Revenues
shock leads to subsequent increases in
government’s spending.
For Egypt, a revenue shock has a persistent
Ben Slimane
and Ben
Tahar
(2013)
Quarterly data
Tunisia and
Egypt
negative impact on short-term interest rate
following a short-lived immediate increase. This
shock increases inflation and interest rate in
Tunisia, in the short-term. An expenditure shock in
Egypt has an immediate increasing impact on
interest rate, which is switched to a persistent
negative impact, in the medium- and long-term. In
the case of Tunisia, an expenditure shock has an
immediate increasing effect on inflation. The
interest rate has an immediate decline, which is
converted to a positive impact, in the short- and
medium-term.
Source: Prepared by the authors based on the literature review.
Table (A2): Developments in the CBE’s Monetary Policy Rates
According to the MPC’s Press Release
Date of the MPC’s Press Release
Overnight
Deposit
Interest Rate*
Overnight
Lending
Interest Rate*
Main
Operation
Rate **
Discount
Rate ***
2005
•MPC Press Statement June, 2
•MPC Press Statement July, 7
•MPC Press Statement August, 4
•MPC Press Statement September, 1
•MPC Press Statement October, 5
•MPC Press Statement November, 10
•MPC Press Statement December, 1
9.50%
12.50%
Unchanged
9.00%
Unchanged
11.50%
11.00%
Unchanged
10.75%
8.75%
2006
•MPC Press Statement January, 19
•MPC Press Statement February, 16
•MPC Press Statement April, 6
•MPC Press Statement May, 18
•MPC Press Statement June, 29
•MPC Press Statement August, 10 Amendment of August, 16
•MPC Press Statement October, 5
•MPC Press Statement November, 2
•MPC Press Statement December, 14
8.25%
10.25%
Unchanged
10.00%
8.00%
Unchanged
8.50%
8.75%
10.50%
10.75%
2007
•MPC Press Statement February, 1
•MPC Press Statement March, 22
•MPC Press Statement May, 10
•MPC Press Statement July, 5
•MPC Press Statement August, 16
•MPC Press Statement September, 20
•MPC Press Statement November, 1
•MPC Press Statement December, 13
Unchanged
2008
•MPC Press Statement February, 7
•MPC Press Statement March, 23
•MPC Press Statement May, 8
•MPC Press Statement June, 26
•MPC Press Statement August, 7
•MPC Press Statement September, 18
•MPC Press Statement November, 6
•MPC Press Statement February, 12
•MPC Press Statement March, 26
•MPC Press Statement May, 14
•MPC Press Statement June, 18
•MPC Press Statement July, 30
•MPC Press Statement September, 17
•MPC Press Statement November, 5
•MPC Press Statement December, 16
9.00%
9.50%
10.00%
10.50%
11.00%
11.50%
10.00%
9.50%
9.00%
8.50%
8.25%
11.00%
11.50%
12.00%
12.50%
13.00%
13.50%
Unchanged
2009
Unchanged
12.00%
11.00%
10.50%
10.00%
9.75%
Unchanged
10.00%
11.00%
11.50%
10.00%
9.50%
9.00%
8.50%
Unchanged
Table (A2): Contd.
Date of the MPC’s Press Release
Overnight
Deposit
Interest Rate*
Overnight
Lending
Interest Rate*
Main
Operation
Rate**
Discount
Rate***
2010
•MPC Press Statement February, 4
•MPC Press Statement March, 18
•MPC Press Statement May, 6
•MPC Press Statement June, 17
•MPC Press Statement July, 29
•MPC Press Statement September, 16
•MPC Press Statement November, 4
•MPC Press Statement December, 16
Unchanged
8.25%
9.75%
8.50%
Unchanged
2011
•MPC Press Statement January, 27
•MPC Press Statement March, 10
•MPC Press Statement April, 28
•MPC Press Statement June, 9
•MPC Press Statement July, 21
•MPC Press Statement August, 25
•MPC Press Statement October, 13
•MPC Press Statement November, 24
9.25%
Unchanged
Unchanged
Unchanged
Unchanged
9.25%
10.25%
9.75%
9.50%
Unchanged
10.75%
10.25%
10.25%
2012
•MPC Press Statement February, 2
•MPC Press Statement March, 22
•MPC Press Statement May, 3
•MPC Press Statement June, 14
•MPC Press Statement July, 26
•MPC Press Statement September, 6
•MPC Press Statement October, 18
•MPC Press Statement December, 6
Unchanged
2013
•MPC Press Statement January, 31
•MPC Press Statement March, 21
•MPC Press Statement May, 9
•MPC Press Statement June, 20
•MPC Press Statement August, 1
•MPC Press Statement September, 19
•MPC Press Statement October, 31
•MPC Press Release December, 5
9.75%
Unchanged
9.25%
8.75%
10.25%
9.75%
9.75%
9.25%
Unchanged
9.25%
8.75%
8.25%
9.75%
9.25%
8.75%
2014
•MPC Press Release January, 16
•MPC Press Release February, 27
•MPC Press Release April, 28
•MPC Press Release May, 29
•MPC Press Release July, 17
•MPC Press Release September, 1
•MPC Press Release October, 16
•MPC Press Release November, 27
Unchanged
9.25%
10.25%
Unchanged
9.75%
9.75%
Table (A2): Contd.
Date of the MPC’s Press Release
•MPC Press Release January, 15
•MPC Press Release February, 26
•MPC Press Release April, 23
•MPC Press Release June, 11
•MPC Press Release July, 30
•MPC Press Release September, 17
•MPC Press Release October,29 2015
Overnight
Deposit
Interest Rate*
8.75%
Overnight
Lending
Interest Rate*
2015
9.75%
Main
Operation
Rate**
Discount
Rate***
9.25%
9.25%
Unchanged
Source: The official website of the CBE, [http://www.cbe.org.eg].
* These rates were announced on 2/6/2005 in the first MPC’s Press Release, and were
applied as of 5/6/2005.
** This rate was firstly announced on 10/3/2011 in the MPC’s Press Release as Repos
were launched starting from Tuesday 22/3/2011 based on this release. It worth
mentioning that according to the MPC’s Press Release on 21/3/2013, the CBE’s main
operations would be Repos or deposit auctions depending on the prevailing market
liquidity conditions.
*** The MPC’s Press Release has reported the discount rate – for the first time- on June
26, 2008. Before this date, the main focus of the release was on the overnight deposit and
lending rates as well as overviewing the prevailing economic and monetary conditions
that led to the MPC’s decision.
Table (A3): Main Indicators of the Egyptian Economy
(FY 2010/11-2013/14)
FY *
Indicators
2010/11
2011/12
2012/13
2013/14
Real GDP growth rate at factor cost (%)
1.9
2.2
2.1
2.1
Real GDP growth rate at constant market prices (%)
1.8
2.2
2.1
2.2
Real Sector
Financial & Monetary Sector
CPI inflation (urban) July/June (%)
11.8
7.3
9.8
8.2
PPI inflation July/June (%)
19.4
-3.7
8.4
4.3
Domestic liquidity growth rate M2 (%)
10.0
8.4
18.4
17.0
Growth rate of time & saving deposits in local currency
7.0
8.6
14.8
19.5
(%)
Foreign currency deposits/ Total deposits (dollarization
21.0
20.7
21.3
19.0
rate) (%)
Net claims on the government / Total credit (%)
49.0
53.9
59.8
64.3
Credit to private business sector / Total credit (%)
36.2
31.8
27.5
24.0
Credit to household sector / Total credit (%)
11.1
10.5
9.5
8.9
Credit to public business sector / Total credit (%)
3.7
3.8
3.2
2.8
Net international reserves (US$ mn) at end of the period
26564
15534
14936
16687
NIR in months of merchandise imports
5.9
3.1
3.1
3.3
External Sector
Trade Balance/GDP (%)
-11.5
-13.0
-11.3
-11.8
Current Account / GDP (%)
-2.6
-3.9
-2.4
-0.8
Overall Balance / GDP (%)
-4.1
-4.3
0.1
0.5
Service Balance/ GDP (%)
3.3
2.1
1.9
0.3
FDI in Egypt (net)/GDP (%)
0.9
1.5
1.4
1.4
Net transfers/ GDP (%)
5.6
7.0
7.1
10.6
External debt/ GDP (%)
15.2
13.2
17.3
16.4
External debt service/Exports of goods and services (%)
5.7
6.3
6.3
7.3
Budget Sector
Expenditure/GDP (%)
29.3
30.5
33.5
35.1
Revenues/GDP (%)
19.3
19.7
20.0
22.9
Total wages/Total public revenues (%)
36.3
40.5
40.8
39.1
Primary deficit ** /GDP (%)
3.6
4.0
5.3
4.1
Overall deficit/GDP (%)
9.8
10.8
13.7
12.8
Gross domestic public debt/GDP (%)
76.2
78.6
87.1
90.9
Other Indicators ***
Unemployment rate (period average, %)
10.4
12.4
13.0
13.4
Poverty rate (%)
25.2
NA****
26.3
NA****
Population (in millions)
80.4
82.4
84.7
86.7
Source: The Central Bank of Egypt, Annual Report, different issues, the official website of the CBE,
[http://www.cbe.org.eg].
*Fiscal Year ends on 30th of June.
**Overall balance minus interest payments.
*** International Monetary Fund, (2015). Arab Republic of Egypt: IMF’s Country Report
No. 15/33, Washington, D.C.
**** Not available.
Table (A4): Developments in GDP at Factor Cost *
(Value in LE mn)
FY
Change during the period
Pre-revolutions
2002/03-2009/10
2001/02
Sectors
Total GDP
Agriculture, Irrigation & Fishery
Mining
Manufacturing Industries
Electricity
Water
Construction & Building
Transportation & Storage
Communications
Suez Canal
Wholesale & Retail Trade
Brokerage & Subsidiary
Activities
Insurance & Social Insurance
Social Solidarity
Restaurants & Hotels
Real Estate Activities
General Government
2009/10
Post-revolutions
2010/11-2013/14
Value
Average
Annual
Growth
Rate
(%)
Value
Average
Annual
Growth
Rate
(%)
2013/14
354563.8
58369.0
29359.5
70084.2
5933.0
1522.2
16560.0
17333.8
6419.0
8199.1
42958.8
538023.5
75713.1
43378.5
101793.9
10044.6
2428.1
33007.9
28326.8
16049.6
17416.3
63936.0
584395.8
84953.8
40151.8
112530.6
11939.0
2875.8
39534.0
31628.2
19942.0
19916.3
70413.5
183459.7
17344.1
14019.0
31709.7
4111.6
905.9
16447.9
10993.0
9630.6
9217.2
20977.2
5.4
3.3
5.0
4.8
6.8
6.0
9.0
6.3
12.1
9.9
5.1
46372.3
9240.8
-3226.7
10736.7
1894.4
447.7
6526.1
3301.4
3892.4
2500.0
6477.5
2.1
2.9
-1.9
2.5
4.4
4.3
4.6
2.8
5.6
3.4
2.4
21122.0
30971.8
34037.5
9849.8
4.9
3065.6
2.4
9146.1
0.0
6457.0
13923.0
35269.3
1017.6
12426.5
22629.9
18236.2
44820.6
1127.9
14253.2
16998.8
21792.3
51288.9
-8128.5
12426.5
16172.9
4313.2
9551.3
-24.0
..
17.0
3.4
3.0
110.3
1826.7
-5631.2
3556.1
6468.3
2.6
3.5
-6.9
4.6
3.4
Source: Ministry of Planning, Follow-up and Administrative Reform and the authors’ calculations.
* At 2001/2002 prices.
Table (A5): Developments in GDP by Expenditure *
(Value in LE bn)
FY
Change during the period
Pre-revolutions
2002/03-2009/10
2001/02
GDP at market price
Domestic Demand
Total Consumption
Household Consumption
Government Consumption
Capital Formation
Net Foreign Demand
Exports
Imports
354.5
395.4
327.2
279.5
47.7
68.2
-16.5
69.4
85.9
2009/10
537.9
584.3
465.1
405.3
59.8
119.2
-9.0
190.0
198.9
2013/14
584.4
673.2
556.6
486.4
70.2
116.7
-65.7
174.0
239.8
Post-revolutions
2010/11-2013/14
Value
Average
Annual
Growth
(%)
Value
Average
Annual
Growth
(%)
183.4
188.9
137.9
125.8
12.1
51.0
7.5
120.6
113.0
5.4
5.0
4.5
4.8
2.9
7.2
-7.3
13.4
11.1
46.4
88.9
91.5
81.1
10.3
-2.5
-56.8
-15.9
40.8
2.1
3.6
4.6
4.7
4.1
-0.5
64.6
-2.2
4.8
Source: Ministry of Planning, Follow-up and Administrative Reform and the authors’ calculations.
* At 2001/2002 prices.
Table (A6): Developments in Main Public Finance Indicators
(Value in LE bn)
FY
Total Revenues
Total Expenditures
Cash Deficit
Overall Fiscal Balance
Financing Sources; of which:
Banking Financing
Central Bank
Other Banks
Non-Banking Financing
Foreign Financing
Overall Fiscal Balance as a
percentage of GDP
Revenues as a percentage of GDP
Expenditure as a percentage of GDP
Change during the period
2001/02
2009/10
2013/14
78318
115542
37224
38486
38486
14391
5864
8527
16308
6527
268114
365987
97873
98038
98038
39380
11561
27819
61229
2458
400130
643094
242964
253730
253730
244363
119349
125014
32956
4022
10.2%
8.1%
12.4%
20.8%
30.5%
22.2%
30.3%
19.5%
31.4%
Pre-revolutions
2002/03-2009/10
Average
Annual
Value Growth
Rate
(%)
189796
16.6
250445
15.5
60649
12.8
59552
12.4
59552
12.4
24989
13.4
5697
8.9
19292
15.9
44921
18.0
-4069
-11.5
Post-revolutions
2010/11-2013/14
Average
Annual
Value
Growth
Rate
(%)
132016
10.5
277107
15.1
145091
25.5
155692
26.8
155692
26.8
204983
57.8
107788
79.2
97195
45.6
-28273
-14.3
1564
13.1
Source: Ministry of Finance, and the authors’ calculations.
Table (A7): Developments in Main Public Expenditures Indicators
(Value in LE bn)
FY
Total Expenditures
Compensations of Employees
Purchases of Goods & Services
Interest
Subsidies, Grants, and Social
Benefits
Subsidies, Grants, and Social Benefits
Grants
Social Benefits
Other
Other Expenditures
Investments
Change during the period
Post-revolutions
2010/11-2013/14
Average
Annual
Value
Growth
Rate
(%)
277107
15.1
90681
19.8
-2619
-2.4
100810
24.4
2001/02
2009/10
2013/14
115542
30516
8651
21752
365987
85369
28059
72333
643094
176050
25440
173143
Pre-revolutions
2002/03-2009/10
Average
Annual
Value
Growth
Rate
(%)
250445
15.5
54853
13.7
19408
15.8
50581
16.2
18051
102975
177048
84924
24.3
74073
14.5
5949
2024
10078
0
16797
19775
93570
4380
4483
542
28901
48350
136209
5181
35128
530
40313
51100
87621
2356
-5595
542
12104
28575
41.1
10.1
-9.6
42639
801
30645
-12
11412
2750
9.8
4.3
67.3
-0.6
8.7
1.4
7.0
11.8
Source: Ministry of Finance, and the authors’ calculations.
Table (A8): Developments in Main Public Revenues Indicators
(Value in LE bn)
FY
Total Revenues
Tax Revenues
Taxes on Income & Profits
Taxes on Property
Taxes on Goods & Services
Taxes on International Trade
(Customs)
Other Taxes
Grants
Property Income
Sales of Goods & Services
Financing Investment
Other
Change during the period
Pre-revolutions
2002/03-2009/10
Average
Annual
Value
Growth
Rate
(%)
189796
16.6
119693
16.3
56994
18.6
8007
35.7
46125
15.6
Post-revolutions
2010/11-2013/14
Average
Annual
Value
Growth
Rate
(%)
132016
10.5
89622
11.1
44269
12.1
10291
21.4
24704
8.2
2001/02
2009/10
2013/14
78318
50801
19624
763
20970
268114
170494
76618
8770
67095
400130
260116
120887
19061
91799
7296
14702
17654
7406
9.2
2952
4.7
2148
4265
12789
5619
1737
3107
3309
4332
54570
17212
8873
12633
10715
45606
57523
25044
4785
7056
1161
67
41781
11593
7136
9526
5.5
0.2
19.9
15.0
22.6
19.2
7406
41274
2953
7832
-4088
-5577
34.1
80.1
1.3
9.8
-14.3
-13.6
Source: Ministry of Finance, and the authors’ calculations.
Table (A9): Developments in Reserve Money (M0)
(Value in LE mn)
FY
Change during the period
Pre-revolutions
2002/03-2009/10
2001/02
Reserve Money (M0)
Currency in circulation
Outside CBE
Banks deposits in local
currency
Counterpart assets
Net foreign assets (NFA)
Net Domestic assets (NDA)
Net claims on government
Claims; of which
Government
securities
Deposits
Net claims on banks
Other items (net)
2009/10
Post-revolutions
2010/11-2013/14
Value
Average
Annual
Growth
Rate
(%)
Value
Average
Annual
Growth
Rate
(%)
2013/14
73772
203071
364473
120116
13.6
113481
13.2
45376
144253
288651
92293
15.7
109555
17.2
28396
58818
75822
27822
9.6
3926
1.8
73772
9816
63956
71325
117532
98512
203071
190234
12837
80611
150288
121533
364473
37395
327078
419218
463724
240331
120116
177892
-57775
9843
13566
5006
13.6
47.8
-21.6
1.9
1.4
113481
-109802
223283
316656
274104
109734
13.2
-36.7
46.6
59.9
34.7
46207
-17687
10318
69677
29010
-96784
44506
-9045
-83095
3724
63515
-131133
0.6
0.8
-197.6
-216.0
-42552
-9192
-84181
Source: the authors’ calculations based on data collected from the CBE.
22.5
-20.0
-494.8
-524.5
Table (A10): Developments in Domestic Liquidity (M2)
(Value in LE mn)
FY
Change during the period
Pre-revolutions
2002/03-2009/10
2001/02
Domestic Liquidity (M2)
Money Supply (M1)
Currency in circulation
outside the banking system
Demand deposits in local currency
Quasi-Money
Time &saving deposits in local
currency
Demand, time & saving
deposits in foreign currencies
Counterpart Assets
Net foreign assets (NFA)
Domestic credit
Other items (net)
2009/10
Post-revolutions
2010/11-2013/14
Value
Average
Annual
Growth
Rate
(%)
Value
Average
Annual
Growth Rate
(%)
2013/14
328728
59805
917459
214040
1516601
410554
533197
146828
13.2
18.0
507190
161847
14.5
18.2
42299
135209
270856
86951
15.9
102969
17.3
17506
78831
139698
59877
22.6
58878
20.0
268923
703419
1106047
386369
12.1
345343
13.3
192718
545303
869976
333293
14.4
286244
14.2
76205
328728
17285
360090
-48647
158116
917459
282408
775268
-140217
236071
1516601
119162
1625141
-227702
53076
533197
256979
387822
-111604
6.0
13.2
41.0
10.4
25.5
59099
507190
-134338
732375
-90847
10.1
14.5
-22.2
22.1
18.5
Source: the authors’ calculations based on data collected from the CBE.
Table (A11): Developments in Domestic Credit (DC)
(Value in LE mn)
FY
Change during the period
Pre-revolutions
2002/03-2009/10
2001/02
Domestic Credit
Net claims on government (A+B-C)
A-Securities
B- Lending and discount
C-Deposits
Claims on public business sector *
A- Securities
B- Lending and discount
Claims on private business sector
A-Securities
B-Lending and discount
Claims on household sector
Other Items (Net)
360090
95423
162675
33580
100832
31143
252
30891
200230
15114
185116
33294
-48647
2009/10
775268
326141
440410
68139
182408
29985
173
29812
326350
39202
287148
92792
-140217
Value
Average
Annual
Growth
Rate
(%)
Value
Average
Annual
Growth Rate
(%)
387822
222623
236565
34646
48588
-5002
72
-5074
112043
24841
87202
58158
-111604
10.4
17.8
11.6
10.7
4.5
-2.2
8.0
-2.2
6.2
15.4
5.3
15.1
25.5
732375
607849
461550
165370
19071
12436
24
12412
66034
1818
64216
46056
-90847
22.1
33.7
22.8
38.8
3.0
11.3
2.6
11.3
6.4
1.6
7.0
13.6
18.5
2013/14
1625141
1045186
1004342
264196
223352
45417
317
45100
389275
40304
348971
145263
-227702
Post-revolutions
2010/11-2013/14
Source: the authors’ calculations based on data collected from the CBE.
* Including all public sector companies subject or not to law No. 203 for 1991.
Table (A12): Developments in The IMF’s Classification of
Egypt’s Exchange Rate Regime
Year
The IMF’s classification of Egypt’s exchange rate regime
2003
Managed Floating With no predetermined path for exchange rate
2004
2005
Managed floating
2006
Other conventional fixed peg arrangements
2007
Managed floating
2008
Managed floating with no pre-determined path for the exchange rate
2009
Other Managed Arrangement
2010
Other Managed Arrangement
2011
Crawl-like arrangement
2012
Stabilized arrangement
2013
Crawl-like arrangement
2014*
Stabilized arrangement
Source: (Massoud and Willett, 2014, p. 7).
* The International Monetary Fund (2014). Annual Report on Exchange
Arrangements and Exchange Restrictions, October, p. 9.
Since July 2013, the Egyptian pound has stabilized within a 2% band against
the U.S. dollar. This trend continued through April 2014, which led to
reclassification of the de facto exchange rate arrangement
from crawl like to a stabilized arrangement, effective July 3, 2013.
Table (A13): The Estimated Coefficients of Matrices A and B for
Three Scenarios of the Structural VAR Model
First Scenario: Matrices in a Structural VAR Containing r
0
.500
0
 1
 .040
1
0
.038

A   .008  1.639
1
.012

 .948  1.417
1
 0
 .160  2.671 3.353  .070
0
0
0

0
1
;
0
0
0
0 
.109
 0 .004
0
0
0 

B 0
0 .015
0
0 


0
0 .089
0 
.082
 0
0
0
0 .027
Second Scenario: Matrices in a Structural VAR Containing m
0
0.500
0 0
 1
 .034
1
0
.020 0

A   .039  .987
1
.021 0


 .948  1.417 1 0
 0
 .028  .031 .797 .002 1
;
0
0
0 
.097 0
 0 .005 0
0
0 

B 0
0 .010 0
0 


0 .091 0 
.075 0
 0
0
0
0 .011
Third Scenario: Matrices in a Structural VAR Containing exc
0
0.500
0
 1
 .027
1
0
.016

A   .030  .638
1
.062

 0.948  1.417 1
 0
  .058 1.135
 .625 .075
0
0
0 ;

0
1
0
0
0 
.116 0
 0 .006 0
0
0 

B 0
0 .012 0
0 


0 .092 0 
.081 0
 0
0
0
0 .013
Appendix (B): Figures
Figure (B1): Developments in the Main Variables
Figure (B1) contd.: Developments in the Main Variables
Figure (B1) contd.: Developments in the Main Variables