Money, inflation, and deficit in Egypt

Egypt has been able to escape high inflation by depleting its stocks of creditworthiness, money illusion, and enforceable foreign-exchange controls. These nonrecoverable assets are quickly becoming extinct and the economy is on an unsustainable path. The authors present a short- and medium-term dynamic model of the Egyptian economy and use it to simulate the effects on output and inflation of a stabilization-cum-adjustment program. Their conclusion is to make the public sector live within its means, and to do so at once. This is a demanding prescription; political and social pressure can become intolerable under adjustment. The authors show that both a slowdown in output and the initial rise in inflation associated with a tough reform program will be short-lived. And a do-nothing strategy will soon push the country into a serious crisis, the correction of which will certainly be more painful.