On the unfinished business of stabilization programs: a CGE model of Egypt

ABSTRACT

Several emerging economies have embarked on structural adjustment reform programs that focused more on short-run-oriented stabilization reforms. Yet, longer-term structural policies that can shift their potential GDP were not fully taken into consideration. Thus, this paper contributes to the literature in three ways. First, we contrast the effects of stabilization and allocation policies in order to examine to what extent they complement or substitute each other. Second, we analyze how the effects of such policies can differ in the short and long term and with different market structures (perfect vs. imperfect competition). Third, we develop a CGE model for Egypt that was subject to a recent reform program developed with the IMF. Our main findings show that stabilization reforms reduce economic growth by 2.5% in the short run. Yet, they positively affect it over time especially if they are accompanied by structural reforms. Indeed, the latter increase economic growth (of 8.6% in the long run). Furthermore, from a social perspective, stabilization reform deteriorates households’ welfare in the short run. Finally, we find that negative effects of stabilization and structural reforms are more pronounced under imperfect competition pointing out the importance of an effective competition policy.

KEYWORDS:

• CGE
• stabilization policies
• structural reforms
• imperfect competition
• oligopoly
• Egypt

JEL CLASSIFICATION:

• D58
• E63
• P41
• F10

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Law no. 67 for year 2016, pp. 41–50.

2 The tobacco and beverage market have strong retail penetration which allows consumers to search for information on different brands, prices and quality, which is translated into a better shopping experience.

https://www.mordorintelligence.com/industry-reports/egypt-tobacco-market

3 We assign it for all activity value of 20 as the case of Tunisia (Tchoffo et al., 2020).

4 See Table A3.1 in Appendix 3 for a more detailed presentation of the simulation exercises.

5 It is noteworthy that, the level of aggregation according to the social accounting matrix does not allow to simulate the value added tax at the commodity level as mentioned in the VAT law. For example, the law imposed a value-added tax on manufactured tobacco and alcoholic beverages of 200% and 150% respectively, while it imposes a value-added tax on cigarettes at 50% and on non-alcoholic drinks at 8%. In the SAM, all these products are classified under a single sector ‘tobacco and beverages’. For the sake of consistency and the lack of detailed data at the product level, we simulated the imposition of a unified VAT rate of 14%.

6 Appendix 2.2 summarizes the distribution of value added in benchmark year.

7 See Tables A2.2 and A2.3 in Appendix 2 for more descriptive statistics from the SAM.

8 See Figures A2.1–A2.4 in Appendix 2 for more descriptive statistics from the SAM.

9 While we assume current public spending is fixed, public savings is not.

10 Price of imported product (including all taxes and tariffs)

11 FOB price of exported commodity (in local currency).

12 Tariff rates appear in the equation of indirect taxes hence declining in tariff rates affect the government income from indirect tax.

13 We assume that transfers rates and government expenditure are fixed hence the only adjustment tool to the reduction in government income is reducing government savings or increasing government deficit.

14 Table A3.2 and Table A3.3 in Appendix 3 provide a summary of the sectoral impacts of stabilization and structural policies.