Covid-19, Vulnerability and Policy Response: A CGE Model of Egypt

This paper examines the effect of the COVID-19 shock on the Egyptian economy using a computable general equilibrium (CGE) model. We contribute to the literature in several ways. First, using a CGE model, we try to distinguish between supply and demand effects of COVID19 on the Egyptian economy. Second, using a dynamic model, we examine the key differences between the effects of the pandemic on the economy in both the short and long terms. Third, we identify how the pandemic and the policy responses of the government had a heterogeneous impact on different economic agents and sectors. Fourth, we modify the model to include the informal labor that was highly affected by the pandemic. We calibrate the mode using the social accounting matrix of Egypt of 2014/2015. Our main findings show to what extent the Egyptian economy has been relatively vulnerable to the world economy with the decline in most of its foreign currency sources. Yet, while the economy is negatively affected in the short term by the pandemic, most of the effects are temporary and vanish in the long run. In terms of the policy response, increasing public current consumption without sectoral targeting has positive welfare effects but hurts economic growth and employment. In contrast, increasing public investment increases growth, welfare, and employment in the short run thanks to more externalities. In terms of social policies, financial transfers to households/domestic business agents and irregular workers increase private consumption but negatively affects economic growth and employment with a deteriorated fiscal stance of the government. Finally, the monetary stimulus package has significant growth, employment, and well-being effects compared to fiscal one since the latter raises the cost of production because of the crowding-out effect, while the former reduces it.