Macroeconomic Jargon

In a world which is increasingly becoming focused around economics, a basic understanding of the subject has become essential in order to stay up-to-date with current events.

How many times have you heard a phrase like “Egypt’s deficit as a percentage of GDP is good but cash deficits are still increasing” and wondered if you had been missing out too much on the economic segment on the news? The chances are that it has happened a lot, but if you aren’t an economics major, worked in the field, or like reading those figure-sprawled pages in the newspaper, then your knowledge of economics is probably mostly based on that course you took back in high school. In this article we are going to focus on the most popular economic jargon that will enable you to keep up with an economically dominated conversation, and perhaps throw in a few words of your own.

 

GDP

Gross Domestic Product (GDP) is the total market value of all final goods and services produced in a country in a given year. This includes total consumer, investment and government spending, the value of exports, minus the value of imports. Real GDP is calculated taking into account price changes, which removes the effects of inflation.

Real GDP growth is indicative of overall growth in the economy. Egypt has witnessed a strong 6.8% increase in real GDP in FY06 and looks like it will be maintaining the trend with a 7.1% increase in the first half of FY07.

 

Fiscal Policy

Fiscal policy refers to the decisions taken by the government regarding taxation and government spending. Modifying taxes has a direct impact on how income is distributed and therefore spent. For example, If the government increases taxes on personal incomes, this leaves less disposable income to be spent by consumers on goods and services, while it would give the government more money to spend on national projects or investments for example. The government could also choose to subsidize certain products (meaning increased government spending), which would eventually lead to increased consumer spending due to a decrease in prices. However, since the economy is much more complex in reality, fiscal policies take a lot of time for their actual effects to appear.

In Egypt, a number of fiscal policy decisions were taken in 2005 which brought corporate tax down to 20% from 40% and income tax from 20% to 10%.

 

Monetary Policy

This refers to the Central Bank’s policy which regulates the money supply and interest rates in order to control inflation and stabilize the local currency. By impacting the effective cost of money, the central bank can affect the amount of money that is spent by consumers and businesses.

In an attempt to curb inflation rates in Egypt, the Central Bank increased both the overnight deposit and lending interest rates to 8.75% and 10.75%, respectively, towards the end of 2006. Increasing bank deposit rates means that the government is trying to encourage individuals to make bank deposits, thereby decreasing the money supply in the economy and accordingly limiting inflation.  However, inflation levels are still high, reaching 12.9% in February 2007.

 

CPI

The consumer price index measures inflation by monitoring the change of prices in a fixed basket of products and services which includes housing, electricity, food, and transportation.

In the first few months of 2006, the CPI in Egypt dropped to 4.7% compared to the same period in 2005 which witnessed a CPI of 7.3%. However, recent developments such as the onsets of the avian flu, as well as increased fuel prices have pushed the CPI up to 12.6% in February 2006.

 

Foreign Exchange Rate

Since the year 2000, foreign currency reserves in Egypt steadily fell and in late

2002 the Egyptian pound was devalued. To face this devaluation, the Egyptian Central Bank started implementing a managed float policy. This meant that the value of the pound would be determined through the forces of supply and demand up to a certain limit. Since the adoption of this policy, the pound has been steadily gaining in value versus the dollar.

Foreign currency reserves have also been increasing since 2003 (mainly earned through trade surpluses from oil and gas, tourism and foreign direct investments [FDIs]) due to balance of payment surpluses. The growth in these reserves has allowed Egypt to maintain its managed float policy, as the Central Bank is able to pump dollars into the economy in the event of the appreciation of the US dollar against the Egyptian pound.

 

Balance of Payments

The balance of payments (BoP) is a measure of the payments in financial capital that flow in and out of a country. If more money flows in than out, the country has a positive balance of payments and vice versa. The BoP comprises:

• Current Account – made up of goods and services
• Capital Account – Non-financial assets.
• Financial Account – Financial assets such as stocks, bonds and FDIs

Egypt’s BoP is one of the positive facets of the Egyptian Economy, having reached USD3.3 billion in FY06. Egypt’s current account enjoys a healthy surplus mainly attributed to oil and gas exports. As for the financial and capital accounts, FDIs have been the main catalyst behind their surplus. However, net portfolio investments in Egypt dropped to USD57 million in the first half of FY07, from USD2.8 billion in the same period of FY06, as Egypt’s stock market began declining in February 2006.

 

Budget Surplus/Deficit

A budget surplus or deficit is the amount by which government income either exceeds or doesn’t cover its spending over a certain period of time. Achieving a budget surplus is not always necessary, however maintaining a budget deficit could be tricky if not managed properly. Maintaining a budget deficit means that the government has to be using appropriate debt instruments to finance its deficit–debt instruments that don’t carry very high interest rates and take up a large proportion of the GDP (debts with high interest rates would direct government spending away from productive purposes and increasingly towards financing the that debt).

Egypt has recently been successful in lowering its budget deficit. Due to strong growth in the GDP and large privatization proceeds, namely EGP5.9 billion out of the EGP16.7 billion earned through the sale of Egypt’s third mobile license, the deficit of the budget sector declined to 7.9% of GDP in FY06, down from 9.6% of GDP in FY05.

Minister of Finance, Youssef Boutros Ghali, has forecasted that the deficit would decrease to 5.7% of the GDP during FY07, but would eventually increase again to 7% the next year. Meanwhile, Egypt’s 2007-2012 economic plan, as mentioned by a report published by the Ministry of Social Development, includes the reduction of the budget deficit to 5.4% of the GDP.