Egypt’s Government Spending Multiplier: Its Size and Determinants

Fiscal policy has a potentially significant role in generating real income and stimulating aggregate demand. But under what circumstances does it actually succeed in boosting economic activity? This research paper seeks to explore two questions: (1) To what extent has government spending been ‘effective’ in stimulating aggregate demand in Egypt? And (2) how did the economic policy mix contribute to the effectiveness (or lack thereof) of fiscal policy in Egypt? These questions come at an important juncture, as Egypt is embarking on a program supported by an International Monetary Fund (IMF) Extended-Fund Facility; the cornerstones of which are: Expenditure restructuring and fiscal consolidation, exchange rate liberalization, and structural reforms to boost growth and reduce unemployment. In this paper, we focus on the period (FY2005—FY2016), for which quarterly data on fiscal indicators are available. We analytically and empirically assess the relationship between government spending and real GDP growth, in light of the following factors: The state of the business cycle, the degree of accommodation of monetary policy to changes in fiscal policy, the real exchange rate, and the degree of capital and trade openness. These factors have been identified in the literature as key determinants of the size of the fiscal multiplier.