How the Global Finacial Crisis impacted Egypt - Term Paper Example

One effect of the challenges was a disruption of the reforms that were later resumed in 2004. This paper will discuss how Egypt’s economy was impacted by the crisis, what the government’s response was in terms of policies, and the nation’s current economic status. An understanding of Egypt’s economy before the 2008 crisis helps in understanding and analyzing how the economy was impacted. The economic reform policies that had run from 1991 to 2007 met most of the terms set by international institutions, donors and lenders and included broader incentives to the private sector’s role in all monetary activities.

The greatest negative impact was felt, rather than by the banking sector, on the real economy (Altintzis 1). This was occasioned by the fact that among the reforms that preceded the financial crisis, the government had put limits to the level of integrating the banking subdivision into the global financial system. Instead, banks had been consolidated into larger corporations with restructured management as the government did away with toxic debts, reducing the impact of the crisis on the sector, while the economy’s growth rate and the stock market suffered the most.

According to a report by the Cairo Chamber of Commerce, the losses by commercial and production sectors alone due to the crisis were estimated at US$4 billion for the year 2008/2009 (Altintzis 1). The greatest negative impacts on the real economy can be listed as the decline of GDP between 2007/8 and 2008/9 from 7.2% to 4%; a drop in domestic investment; a decline in the flow of foreign direct investment (FDI); an increase in the rate of return migration accompanied by reduced remittances; collapse of the capital market; a pronounced strain on payments balances; volatile oil prices; and reduced tolls from the Suez Canal that previously generated 70% of the nation’s foreign exchange (Altintzis 1).

The implication is that the economy was impacted in a complex manner, with the nation being exposed to true economic shocks and the government remaining relatively protected in terms of financial shocks. The worst hit portion of the population was the lower and middle income earners, who spend 45% of the earnings on food. The government was soon faced with the need for an urgent response to the financial crises as from mid 2008 to 2011, food prices became unaffordable to 40% of Egypt’s population that was below the poverty line (Radwan 40).

The slight improvement in annual growth rate did not reach the poor as only the wealthy benefited from it, increasing the poverty percentage to 50. The result was a socioeconomic instability that was politicized leading to the 2011 revolution. Among the policy changes to alleviate the effects of the crises, a bill was endorsed into law by parliament with the intention of protecting the 40% citizens below the poverty level as well as the lower and middle income groups. The bill reflected a fiscally and socially neutral package characterized by a decrease in energy subsidies as well as increased fees on the registration and licensing of automobiles and using cement raw materials.

There was also an increase on cigarette sales tax with various income tax exemptions abolished. In particular, the