The principal objective of monetary policy during the period in consideration is more or less unchanged, focusing on price stability and stabilization of the exchange rate.
Moreover, the monetary authorities had other goals which include fostering output, promoting exports, and raising foreign competitiveness.
During the period 1997/1998-2002/2003, the central bank of Egypt's principle target was to control the excess reserves; growth in total liquidity (M2) was the intermediate target. In the year 2003, the CBE changed focused on price stability as the main target of its monetary policy. Therefore we divide the period into two phases, the first one from 1997/1998 to 2002/2003 and the second phase from 2003/2004 to 2008/2009.
The following figures show the trends in some indicators that were the focus of the monetary policy in different intervals of time.
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Figure (1) shows the real GDP growth rate trends that started with the slow down resulting from the Asian financial crisis then showed ups and downs in its value in short terms cycles.
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Figure (2) shows the total liquidity (M2) annual percentage change during the mentioned period, which showed ups and downs trends except for the period (2000/2001-2003/2004) when (M2) showed a continuous increase.
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Figure (3) shows the exchange rate (L.E/$) during the mentioned period, which showed a continued increase in its value during the years 1997/1998-2002/2003, then hardly showed a trend of decline through the following years till the end of the period.
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Figure (4) shows the values of net international reserves ($bn) during the mentioned period, which started with a decline in the value till the year 2003/2004, then showed a continued increase till the end of the period.
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Figure (5) shows the Average inflation rate during the period which was unstable and showed ups and downs in sharp trends.
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Figure (6) shows the budget deficit as a percentage of the GDP during the mentioned period, which showed a sharp rise during the period 1999/2000-2002/2003, then gradually started to decline.
Analyzing the different figures that represented the main objectives of the monetary policy during the period in consideration, we conclude that the monetary policy had no clear influence on maintaining any of these objectives except for just short intervals of time.
In the following sections we will analyze each phase, steps and mechanisms taken to deal with the situation.
THE FIRST PHASE: RESPONSIVE POLICIES TO ECONOMIC SHOCKS (1997/1998-2002/2003)
In 1990's Egypt undergone massive reform of the banking sector within its adopted Economic reform program, the growth of the banking sector together with the liberalization process undertaken in the economy represented an extra burden on the Central Bank of Egypt as the main regulator of the banking industry.
During the period 1997/1998-2001/2002; in addition to the principle target of controlling the excess reserves, the short run burden of curbing inflation and macroeconomic adjustment fell on monetary policy.
This phase witnessed three major shocks: the Luxor terrorist attack in 1997, the Asian financial crisis of 1997/1998, and the September 11th attack (2001) which negatively affected the growth of credit to the private sector. Furthermore the capital outflows which followed the international financial markets crisis has contributed to the worsening of the overall balance of payments.
The monetary authorities responded to this situation by letting commercial banks absorb the increase in foreign exchange demand and increase domestic credit, this increased the pressure on the exchange rate and forced the central bank to tighten monetary conditions during the year 1999/2000. …