Public Financial Management

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Introduction

The world economic crisis resulted from the financial crisis in the US real-estate market and spread to the entire world. This economic crisis is considered a major economic crisis which will last for more years with heavy impacts on the world economy. The UN predicted that world economic growth will not exceed 1 % in 2009 (Kochhar 2008). This critical situation presents real challenges to all world economies including Egypt. Egypt should review its financial policies including exports, investment, credit, banking systems, budgets and other important sectors (World Bank, 2008, 1). The important questions can be how the economic crisis will impact the Egyptian economy and what policies should be taken and when? This paper tries to answer those questions and develop some recommendation for surviving the financial part in Egypt. The study is based on some important surveys of academic researches and international reports in order to have general view of the problem from inside and outside Egypt.

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Background of the crisis

The existing economic crisis has stronger impacts more than any other previous crisis. This is due to globalization, natural climate disasters, population, and extensive oil prices. The crisis started by financial market collapse as a result of severe problems in the real-estate markets in United States. This resulted in loss of trust in major financial systems and liquidity problems because the value of commercial was over estimated and resulted in many financial problems (Rude, 2008, 2).

Impacts & Results of the Crisis on Egypt

The first major impacted sector is tourism, which is considered an important industry that supplies the state with the biggest share of its foreign currencies, since the crisis has a global dimension, the US and EU economies are highly influenced. This reflected on the number of tourists who visit Egypt by 15%. The second impacted sector was the international trade. As the crisis strike both EU and US economies which are the major trade partners of Egypt, this will result in decline of the performance of the Egyptian economy as the national revenue is also decreased and associated with higher budget shortage and increase of inflation (Al-Sherbini 2008).

Suez Canal is the third major impacted sector. The Canal is the second major income source after tourist. Due to the decline of the international economic performance, the international trade will be decreased and also the volume of the international trade will decrease. In other words, this means that the export and import will reduce. So shipping and transportation of goods will be less and the revenue of the Suez Canal will be decreased resulting of less money to the country, the government and the population.

International trade is the fourth major impacted sector due to reduction of exports especially to major trade partners such as the European Union. Oil is the fifth impacted sector because oil is considered an important national revenue source for Egypt. Due to the crisis, it was expected that the oil prices will decline by 20% by 2010. The foreign investment in Egypt will also decline. This has reflected on the GDP growth which decreased to less than 4 %, (Snower, 2008, 110)

Food and fuel crisis are the most serious Egyptian problems under the current economic crisis. The world economic crisis has increased the food prices in Egypt. This has translated to increase of unemployment, poverty and increase of social problems due to the high inflation and scarcity of resources. Food and fuel crises resulted in an increase of the number of poor people by at least one hundred million (Lin, 2008). If the economic crisis period increased there will be decrease in exports and the payment rate will be influenced in an extremely harmful way which will affect the public eventually (Global Research, 2008, 5).

How to face the crisis?

To face the current problem, it should be understood that no real solution, the success will be in only how to decrease its impacts on the Egyptian economy (Felman 2008). The solutions should start evaluating the social costs of financial crisis. The poor and middle classes should be regarded as first priority (Rude, 2008, 2).

It is important to focus on saving stable public environment, development of suitable institutional and policy frameworks to support or help the economic growth and try to decrease the risk with the current global crisis and their impacts also development of information exchange and increase transparency and making more realistic and deeper analysis to improve risk management and taking better investment decision with private sector consultation (UNECE, 2008, 5).

Improving development of both public and private sectors, increase the stability of financial system and economy, and provide the right and on time required information to investors and policymakers for better risk management, investment decisions with a reasonable economic growth rates. (Doha Business Forum, 2008, 2)

Although the financial crisis has severe impacts, it has also some advantages that could be maximized if the government adopted its financial policies. Reduction in world oil and metal prices made imports cheaper which means removal of great amounts of financial loads from the government budget and release to some extent of pressures on the Egyptian economy. In other words, this means the saving of huge expenditures and increase of the government budget. It’s important to pay attention to the state owned enterprises because they contain more than 75 % of the employment. The products of these companies must be protected from global recession as much as possible. The government can use banks to support those enterprises and increase their role in the current and future times to maintain the economic growth at reasonable levels. (Global Research 2008).

Capital and Liquidity issues problem must be considered and well determined with respect to the current Egyptian economic performance. The government should try to decrease the financial loads on individuals and firms through using lower interest rates and much easier finance conditions in order to perform better movement of funds and investments. The government should also decrease the borrowing costs from banks in order to encourage investments and capital movements. Transparency is always an issue for debate. It would be very hard to achieve any success under the current economic conditions without clear transparency. For example, banks recognize and clarify their losses as fast as they can. The government should increase the business and motivate it with more tax relaxations to encourage investments. (Felman 2008).

The government should use better management and supervision policies on banking sector and public finance to reduce the potential risks of the crisis. These policies may include appropriate procedures and action that guarantee that banks operation and their control are established on least possible credit risk. These policies and controls can be focused on areas of risks such as loans, eligibility and condition for borrowing certain types of loads. They can also focus on foreign exchange and maturity conditions, eliminating existing distortions and controlling incentives for excessive lending and borrowing (Ariccia et al 2008). Another thing that can be do is the use of required risk management models to face the crisis. For example the central bank may buy assets that face problems to avoid possible collapses (Bordo, 2007, 10).

Conclusion

This paper studied the reasons of the global economic crisis, its impacts on Egypt and what should be done to face this crisis. The focus of the financial sector impacts possible reforms.

In summary, the government should develop and adopt new policies to promote economic growth, and reduce the associated risks, enhancement information exchange, increase transparency and establish more realistic plans based on the available resources and minimum possible risks. More flexible and effective economic policies should be undertaken; banks should be used in an effective way to support the government financial policies.

At the strategic level, the government should search and increase strategic support in major sectors such as in tourism, energy and telecommunications. This include new field of assistance including infrastructure and technical exchanges (Hongjiang 2008)

Finally, it can be concluded that: facing crisis requires using strict and suitable financial sector policies and public financial management to face the crisis (Kochhar 2008).

References

  • Al-Sherbini, R (November 25, 2008) Egyptians fear repercussions of global financial crisis, , Retrieved from: https://gulfnews.com/business/tourism/egyptians-fear-repercussions-of-global-financial-crisis-1.144968.
  • Ariccia, G., Igan, D. and Laeven, L. (2008). The Relationship between the recent boom and the current delinquencies in subprime mortgages. Retrieved from: https://www.voxeu.org/index.php?q=node/914.
  • Bordo, M. (2007). The First Global Financial Crisis of the 21st Century, Retrieved from: https://www.scribd.com/doc/6921457/Felton-and-Reinhart-First-Global-Financial-Crisis-of-the-21st-Century.
  • Doha Business Forum (2008), The Impact of the Financial Crisis & Proposed Roadmaps: Leveraging Official and Private Sector Resources for Development, Retrieved from: https://www.un.org/esa/ffd/doha/businessector/Agenda_DohaBusinessForum.pdf.
  • Global Research (2008), Egypt Economic Review Economy Surviving the World Financial Turmoil. Retrieved from: https://www.scribd.com/doc/3308013/World-economy-IMF.
  • Hongjiang, W. (2008), China, Egypt vow to jointly overcome global financial crisis, Xinhua Retrieved from: https://www.gov.cn/misc/2008-12/26/content_1188111.htm
  • Felman , J. (2008), Where is the world Economy Heading?, International Monetary Fund India Presentation at World economy IMF, Retrieved from: https://www.scribd.com/doc/3308013/World-economy-IMF,
  • Kochhar, K. (2008). Countering Global Economic Crisis, The Economic Times March, 2008. Retrieved From: Http://www.Imf.Org/External/Np/Vc/2008/030308.Htm#Top,
  • Lin, J.( 2008) Impact of the financial crisis on developing countries, Financial Times. Retrieved from: https://www.sundaytimes.lk/081116/FinancialTimes/ft325.html , Sunday November 16, 2008
  • Rude, C. The Global Financial Crisis: What Needs To Be Done?, FES Briefing Paper 12 , Retrieved from: November 2008. library.fes.de/pdf-files/bueros/usa/05869-20081126.pdf
  • Snower, D. (2008). The First Global Financial Crisis of the 21st Century. University of Kiel, Kiel Institute for the World Economy, Retrieved from: https://www.voxeu.org/reports/subprime/section2.pdf,
  • UNECE, "The real estate and financial crisis: Causes, effects and impacts on development", Press Release ECE/ENV/08/P19Geneva, December 2008. (Michael D. Bordo, "The crisis of 2007: some lessons from history, December 2007", https://www.voxeu.org/index.php?q=node/816.
  • World Bank (2008), Global Financial Crisis and Implications For Developing Countries ,G- 20 Finance Ministers’ Meeting São Paulo, Brazil November 8, 2008, Retrieved from: http: // www. worldbank.org/html/extdr/financialcrisis/pdf/G20FinBackgroundpaper.pdf
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