Mubarak`s era
Reasons for ERSAP:
ERSAP (economic reform and structural adjustment program)
- The fear for an extension of economic crisis that became obvious
beginning with 80’s.
1- The continuous slowing of the growth GDP rate : the annual growth GDP
rate reduced year by year reaching 1.1% in 1991 the GDP per capita dropped
absolutely from 1824 thousands LE in 1989/1990 to 1801 thousands in
1990/1991 a reduction of 1.3%.
2-external debt rise and that of the budget deficit and of the foreign balance of
payment deficit.
3-the country’s currency reserves are reduced thus in 1990 the coverage of
imports for a month, two months less than the international standards.
4-inflation growth, balance of payments deficit, practice of unreal exchange
rate, high taxes that stopped the international and economic relations with
other countries a weak financial market, high fluctuations of prices and
monopoly of public sector in the economy.
The objectives of ERSAP
1-switching the economy into a market based economy via the liberalization
of prices interest rate and trade.
2-stablizing the economy and rectifying macroeconomic policies.
Dimensions of ERSAP
Dimensions -----> (trade balance – price stability – private investment).
1-trade balance:
decrease or eliminate the deficit in the trade balance via
devaluation of domestic currency, floating exchange rates, cutting tariffs of
trade and eliminating quantitative restrictions imposed on imports .
2-price stability:
achieve price stability using both monetary & fiscal policy
tools.
3-private investment:
encourage private investment by liberalizing prices
selling public enterprises to private sector (privatization) except for
infrastructure enterprises.
The ERSAP components
1-public sector reform:
the public sector reform has two objectives:
A-To change the institutional, legal and financial environment of public
enterprises and raise their efficiency.
B-privatization of public enterprises in commodities and financial sectors with
the exception of strategic enterprises.
2-pricing policies
:
Price decontrol is essential to move to a market based
economy. Domestic energy prices are lower than international prices and have
been highly subsidies. According to ERSAP oil prices were to raised annually
in order to match their international equivalent.
3-
investment policies: ERSAP attaches high priority to the decontrol of
investment and calls for a competitive investment environment for public and
private enterprises.
4-external policies: these comprise exchange reform , trade liberalization and
debt relief.
Exchange reform: unified exchanged rates.
Trade reform: ERSAP commits the government to trade liberalization
Debt Relief: the Egyptian government approaches the pairs club creditor for
comprehensive.
5-monetary policies: the main feature is imposing a credit ceiling in the
banking system.
6- Fiscal policies:
Revenue side: ERSAP
provides measures to increase revenues, these include
introducing a global income tax and general sales tax increasing exercise taxes
and rising prices of energy and public enterprises production .
Expenditure side: on the expenditure side the mean measures consist of
restraining the increase in the wage bill reducing public investment and
reducing subsidies
.
7-social policies:
this aim to minimize the negative impact of ERSAP on the
poor by creating social fund for development (SFD).
The economic impact of ERSAP
1-impact on the balance of payments
1- Tight monetary &fiscal policies to cut spending should affect balance of
payments accounts positively through reducing demand for imports.
2- Devaluation is supposed to increase foreign demand for exports and to shift
productions from non tradable to tradable.
3- Debt relief has a positive impact on the balance of payments through
reducing interest payments on debt and capital outflows as debt repayment.
- Devaluation and tight monetary &fiscal policies had a favorable impact on
Egypt balance of payment accounts.
2-impact on budget deficit:
Expenditures side :The main IMF policy recommendations for reducing
government expenditures owe to decrease nominal growth rates of wages,
subsidies and government investments
.
- One item of government has been growing rapidly since implementation of ERSAP :
the interest payments on domestic public debt.
Revenue side :ERSAP recommending measures to raise revenue: like a global
income tax, widening the corporate tax base , extending the sales tax to whole
sale activity.
3-impact on employment:
- ERSAP affects the labor market through 2 main channels:-
1-Through its impact total production: ERSAP’s monetary and fiscal
reforms have a contractionary impact on total investment and GDP growth.
2-Through implementation of public enterprises reform: the impact of
privatization on employment is negative at least in the short term. The
overstaffed enterprises cannot be sold to private owners unless the new
owners are permitted to lay off workers.
The social impact of ERSAP
The impact of ERSAP on the poor is through 3 channels:
1-the cost of living: increases in prices of energy, transportation public
enterprises commodities, the elimination of subsidies and raising the indirect
taxes are the main ERSAP policies that raise the cost of living.
2-income earned:
-ERSAP’s impact of raising prices will reduce the real income
-ERSAP’s tight monetary and fiscal policies and reduction in government
investment will depress overall growth and job creation in the short term at
least.
3-social services: the investment in education and health care on 1991/92 is
still below the level achieved in the late eighties.
Thus implementation of ERSAP will have negative effects on the poor, which
is acknowledge by the fund and the bank. The social fund for development
(SFD) was created to alleviate hardship on the poor.