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Globalization Challenges to Egypt’s Production Sectors(Period ended December 1996)Macro IndicatorsInflation > 5%Fiscal deficit > 2% of GDPPublic debt > 50% of GDPCurrent account deficit > 5% of GDPShort-term flows (net portfolio & other investment) >50% current account deficitCapital inflows > 5% of GDPRatio of short-term debt to international reserves > 1Table (3.17)Selected Indicators of Vulnerabilities.Indonesia***Korea Malaysia Philippiens Thailand**************Financial Sector IndicatorRecent financial sector liberalization****Recent capital account liberalization*Credit to private sector > 100% of GDP****Credit to private sector, real growth > 20%*Emphasis on collateral when making loans***Estimated share of bank lending to the real estate****sector > 20%Stock of nonperforming loans > 10% of total loansStock market capitalization (% of GDP)40303109856Nonetheless, it is within the realm ofeconomic management and governance thatcontrolling for the degree of exposurematters most. After all, it is theresponsibility of this management to dealwith these shocks in order to minimize theirnegative consequences, while at the sametime maximizing the benefits. This calls for:External position strengthening. Defendinga fixed exchange rate is not the only optionavailable for policy makers. Marketpressure should not be absorbed by usingNIR without allowing for reflection on theexchange rate. Fixing the exchange rate ofthe Egyptian pound should not be a goal initself since most of the countries thatdefended the fixed rate using theirinternational foreign exchange reserveswere faced with currency attacks andspeculative demand. Moving towards amore liberal exchange rate policy will help:reduce the local demand for dollarization ofdeposits, the dedollarization of loans; andwill reduce expectations for furtherdevaluation. It will also create confidencethat the economic policies adopted by theauthorities are more market oriented.Timely actions are always recommended.To increase the earnings of the economy,the authorities should work on attractingFDI through the privatization of publiclyowned enterprises and allowing foreignfinancing for public investment projects.Some foreign concessional borrowing mightbe helpful in the present stage to continuethe development efforts, without addingmore pressure on local financing.To avoid the tendency to increaseshort-term borrowing by banks andcorporations, the CBE should work onrestricting the ability of banks to increaseEgypt Human Development Report 2000/2001 - 61