The Egyptian stabilization experience : an analytical retrospective

This paper analyzes the successful Egyptian stabilization experience during the 1990s, focusing on its distinctive features and contrasting them with the recent experiences of other developing countries that undertook adjustment. The successful stabilization provides a sound launching pad for Egypt's acceleration of structural reforms, which were designed to raise Egypt's economic growth rate. Following the Middle East conflict, Egypt launched a concerted stabilization effort that had as its main elements a large fiscal adjustment, virtually unparalleled in recent years; an exchange rate anchor; prudent monetary policies; and early moves to liberalize interest and exchange markets. This effort produced a remarkable turnaround in Egypt's macroeconomic fortunes in terms of reducing inflation, restoring confidence, and engendering external viability. The paper focuses on the distinctive features of the Egyptian experience and provides explanations for the following analytical questions: How was an output collapse avoided despite the large fiscal adjustment? How did the Egyptian financial system escape the trauma typically associated with stabilization? Why was chronic dollarization reversed? Why did the level of monetization decrease despite the successful stabilization? Was the choice of the exchange rate as anchor appropriate? Why did the resulting real appreciation not threaten external viability?