Egypt’s Successful Stabilisation without Structural Reform

In 1991 Egypt launched the Economic Reform and Structural Adjustment Programme (ERSAP) under the auspices of the IMF and World Bank. Within six years the country had achieved a remarkable stabilisation success, bringing down inflation, the fiscal deficit and the current account deficit and building up the country’s external reserves. External debt was also brought under control and there was a large surge in capital inflows reflecting renewed confidence in the economy. However, the government failed to build upon this success with a deep enough set of structural reforms. Although privatisation and reform of an inward-looking trade regime took place, these reforms did not go far enough to fundamentally change the structure of the Egyptian economy. We speculate that one of the reasons for this was a lack of World Bank leverage in Egypt due to the ready availability of alternative sources of external funding especially in the form of the large and lenient US aid programme. In addition the successful stabilisation programme brought problems of its own, especially in the form of capital inflows and associated real exchange rate appreciation leading to Dutch Disease type effects in the economy. Consequently, the growth that followed the stabilisation experience was largely geared towards the domestic market and concentrated in the non-tradables sector and inward looking manufacturing. This has meant that Egypt has failed to generate export-led growth of the type necessary to absorb a growing labour force.