Question

“Egypt has faced and is still facing financial challenges that are currently exacerbated by the COVID-19.” Choose one of the following policy options to help Egypt address its current challenges:

• Policy Option A: resort to the IMF & World Bank for financial assistance (more loans)
• Policy Option B: utilize domestic resources as per its own natural endowments adopting an economic strategy largely dependent on import-substitution.

Throughout our study of the economic history of the modern Middle East, we have passed through economic & financial policies that, to a large extent, resemble either of the two options.

Give a detailed description and analysis of the option you choose focusing on:

• Similar policies adopted in the Middle East, (including, for example, institutions playing similar roles to the IMF in case you choose option A).
• Lessons drawn from our study of Econ 2051.

( 800 words answer)

Answer 1

Introduction

The Corona Virus Pandemic is causing great concern, among the economists that it may lead to long term problems in the society and the economy as a whole if not corrected in time. On one hand, we are facing difficulty in opening up establishments as we fear that the disease may spread. This is leading to decline in the overall demand for goods and services, and on the other hand, the taxes are slowing down which is leading to crisis in the markets.

Egypt is facing a dual problem. On one hand, recently the currency was devalued by as much as 32% as the IMF had granted loan to the country to keep its economy stable, and on the other hand it is now facing more issues due to the pandemic as expenditure on health care extends and tax revenues decline in the country.

The country is faced with two options either to devalue further and take more loans to be able to expand its operations, or to allow for locally dependent strategy.

In my opinion, the country can allow to take more loans in this situation from the IMF and negotiate on interest payments so that the devaluation does not hit them hard. The reasons for this are as explained.

Case Specific Reasons: -

The reason for adopting a policy of loan increase primarily revolves around the fact, that the country cannot support import substitution at this juncture. Industries cannot be revived unless the pandemic goes away as people would not come to work or demand more for goods and services.

These are tough times; wherein opening markets could lead to a catastrophe for the government at 100% scale. Even if lock down measures are lifted, these cannot lead to normal economic conditions let alone import substitution.

Substituting imports requires serious measures to be taken in terms of the economy being self-reliant. The country at present does not have the required capital or economic conditions to be able to achieve this.

They need to try and control the pandemic and for that inflow of currency as well as foreign goods is necessary. For this we need to reach out to the IMF and take loans which it has been granting at low interest rates which would not impact the currency so much.

Given that other countries also face similar situations the devaluation of currency would not be as much, as other countries also see a decline in their relative currency values. The time is to spend more on health care and revival than to opt for protectionism as the industry cannot return to its normal levels any time soon.

Please feel free to ask your doubts in the comments section.