EGYPT

Financial development and financial liberalization in Egypt

Financial development and financial liberalization in Egypt

Introduction

Economic transition in Egypt had started with current account liberalisation without the introduction of adequate reforms for the real or the financial sectors of the economy. Over fifteen years of initial transition, the Egyptian economy was characterised by wide economic fluctuations, best represented by movements in GDP growth. The upward trend in growth collapsed in the mid-1980s due to the fall in foreign receipts (foreign assistance and transfers). This was a consequence of adverse external shocks (an upsurge in world interest rates after the Mexican debt crisis, and the fall in oil prices) and the associated domestic recession. In the late 1980s, Egypt had one of the highest debt ratios in the world, with a debt to GNP ratio in the 100 to 150 percent range. In 1988, this ratio reached a peak of 175 percent. According to this measure, Egypt wasmore heavily in debt than most other countries, including the leading debtors in Latin America.

Financial Development and Liberalization

In addition, During the 1980s, Egypt had one of the highest “financial repression” tax revenues ratios in the world, second only to that of Mexico. To give some idea of the extent of financial repression, the relevant ratio for Colombia was 0.3 percent, 3.3 percent in Pakistan, 0.4 percent in Thailand, and 2.5 percent in Zimbabwe, as compared with 5.7 percent for Egypt.

Early in the 1990s, Egypt started a comprehensive financial liberalisation programme, which included both domestic financial sector deregulation and capital account liberalisation. With the implementation of the financial liberalisation programme, many adjustment measures had to be undertaken. The fiscal deficit was reduced from 17 percent of GDP in 1991 to 0.9 percent in 1998. The government was no longer highly dependent on inflation tax revenue as the inflation rate fell from 20.2 percent in 1989 to 3.9 percent in 1998. Moreover, the foreign exchange market was reformed by the elimination of exchange quotas to public sector enterprises, by the establishment of private exchange houses, and by the adoption of a unified foreign exchange market. In October 1991, the exchange rate was unified at LE 3.24 per US$ 1. By 1994, the exchange rate had reached LE 3.39 per US$ 1, and continued at that rate until June 2001.

Egypt's economy is now growing at a rapid pace after several years of stagnation. Economic activity recently witnessed a turnaround accelerating from 4.1 percent in real terms in 2003/2004 to 7.1 percent in 2006/07. The Suez Canal, construction, telecommunication and tourism sectors were among the prime engines of growth during this period.

The removal of price distortions and a programme of privatisation have improved Resource allocation. About US$ 10 billion of annual subsidisation was cancelled during the six years to 1998.

FDI into Egypt has increased considerably in the past few years due to the recent economic liberalization measures taken, rising from $3.9 billion in 2004/2005 to $11.1 billion in 2006/2007.

Banking Sector Of Egypt

In order to enhance the efficiency of the financial ...