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Can Egypt coordinate its monetary policies?

ECES examines what would be the consequences of coordinating monetary and fiscal policies and its effect on inflation and debt.
 

Scenario 1:

In this scenario, the Central Bank of Egypt (CBE) and the Ministry of Finance (MoF) coordinate policies to contain inflation

- CBE increases interest rate, leading to higher household saving, lower consumption, lower investment and slower economic growth.
-Dedollarization occurs.
- Higher cost of servicing public domestic debt.
- Public foreign borrowing may be less costly than public domestic borrowing.
- Higher savings provide an opportunity to reduce medium term financing gap for future growth.
- Egyptian Pound appreciates ad interim, leading to a decrease in exports’ competitiveness and an increase in imports.
- Lower net international reserves.
- MoF pursues fiscal consolidation by cutting government expenditures or increasing tax rates, which reduces budget deficit, increasing investors’ confidence.

In this scenario, the government succeeds in taming inflation and tightening the budget deficit but possibly slowing down short-term economic growth.


Scenario 2:

In this scenario, the the Central Bank of Egypt (CBE) and the Ministry of Finance (MoF) coordinate policies to promote economic growth

- CBE decreases interest rate, encouraging private sector credit and investment but discouraging household savings and increasing inflationary pressures.
- Dollarization increases.
- Lower cost of servicing public domestic debt.
- Issuing more Treasury bills (TBs) to finance public domestic debt, further deepening the financial market.
- The need for foreign financial sources to close the financing gap increases, and is likely to materialize in the form of FDI and international borrowing.
- Egyptian Pound is depreciated, which might promote exports, if they are of good quality, and raise the cost of imports.
- Higher net international reserves.
- Government increases its expenditures, which may widen the budget deficit, unless tax revenues generated from higher growth offset the effect.

In this scenario, the government succeeds in boosting economic growth. However, expansionary measures leave inflation uncontained.

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