A-LevelEconomicsGovernment macroeconomic intervention9708/22 · May/June 2019 · Q120 Marks
Egypt's economic difficulties Table 1.1: Egypt, selected economic indicators, 2014–2019 | | Consumer Price Index (base year 2000) | Current account balance (US$ billion) | Unemployment rate (% of total labour force) | |---|-------------------------------------|------------------------------------|---------------------------------------------| | 2014 | 304 | –2.356 | 13.4 | | 2015 | 337 | –12.182 | 12.9 | | 2016 | 371 | –18.659 | 12.7 | | 2017 | 453* | not available | 12.6* | | 2018 | 530* | not available | 11.8* | | 2019 | 587* | not available | 10.7* | * International Monetary Fund (IMF) estimates Source: International Monetary Fund, World Economic Outlook Database, April 2017 Egypt's Central Agency for Public Mobilization and Statistics (CAPMAS) reported that Egypt's annual inflation rate surged to 32.9% in April 2017, compared to 10.9% in 2016. This is considerably higher than the expected rate that was estimated by the IMF shown in Table 1.1. Inflation had been rising in Egypt since the decision of the Central Bank of Egypt (CBE) in November 2016 to float Egypt's currency (the Egyptian pound) in a move that caused a 50% depreciation in its value against the US dollar. This came as part of the Egyptian government's reform programme, started in 2014, to reduce the budget deficit and acquire a US$12 billion loan from the IMF to ease the US dollar shortage that had restricted Egypt's business activity. A macroeconomic research group has said that ‘The sharp rise in inflation could largely be attributed to the effects of the weaker Egyptian pound. Inflation was also made worse by levying a new indirect tax called Value Added Tax (VAT), and cutting subsidies on energy in November 2016.' On the same day as the CBE floated the Egyptian pound it raised the interest rate by 3 percentage points to 14.75%. Egypt's VAT replaced the previous sales tax, which economists said created market distortions. It was expected to broaden the tax base in a country where the government struggles to collect income tax because of a large informal economy and widespread tax avoidance. The VAT does not apply to basic goods and services to protect the poor. Source: Islam Al Naggar, Egypt Today, 10 May 2017, and Reuters, 29 August 2016
- (a)(i)What happened to Egypt's current account balance between 2014 and 2016?[1]
- (a)(ii)With reference to Table 1.1 calculate the percentage rate of inflation in Egypt between 2016 and 2017 that was estimated by the IMF.[1]
- (b)Identify two Canons of Taxation satisfied by Egypt's new VAT.[2]
- (c)Explain how the decline in the value of the Egyptian pound could cause demand-pull inflation and cost-push inflation in Egypt.[4]
- (d)Explain how the estimated changes in unemployment in Table 1.1 might be expected to affect the current account balance of Egypt after 2016.[6]
- (e)Discuss whether the Egyptian government's fiscal and monetary policies in the article are likely to succeed in curing the inflation problem.[6]
Mark scheme
Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.
- [1] The deficit increased
- [1] 22.1%
- [2] The acceptable 'canons of taxation' are Smith's canons Certainty The timing and amount to be paid must be certain and open Convenience The means and timing of payment must be convenient Economy The cost of collection must be low relative to the yield Equity The tax must be 'fair'. Others acceptable responses developed by other economists include, simplicity, productivity and elasticity, diversity and that the tax should automatically adjust to changes in inflation All the above are acceptable. 'Equality' is not acceptable.
- [4] For an explanation of how the decline in the Egyptian pound could cause cost-push inflation. The decline in the value of the Egyptian pound makes imports more expensive (1 mark) This increases the price of imported raw materials and as a result business costs. This causes cost-push inflation (1 mark)
- [4] For an explanation of how the decline in the Egyptian pound could cause demand-pull inflation. The decline in the value of the Egyptian pound makes exports cheaper (1 mark) and this is expected to increase the net exports and as a result aggregate demand. This causes demand-pull inflation (1 mark)
- [6] Two approaches are acceptable: For linking a fall in unemployment and rising incomes (1 mark) For explaining that the rise in incomes is likely to lead to rising imports (1) and falling exports (1) and an increasing deficit (1) Up to 3 marks And/or For explaining that the fall in unemployment means that more people are in work and that national production will rise (1 mark) For explaining that this would lead to a rise in exports (1) and a fall in imports (1 mark) and a reducing deficit (1) Up to 3 marks For elaboration that considers any factors that the identified change i.e. the increasing and/or reducing deficit relies upon. Up to 2 marks If a candidate adopts both approaches without elaboration of either then 4 marks maximum
- [6] For recognition of any fiscal policy measures in the data (1 mark) and for an explanation of how this measure might (or might not) cure the problem of inflation (1 mark) For an evaluative comment that explains why this measure might not (or might) succeed in curing the inflation problem (1 mark) (Up to 3 marks) For recognition of any monetary policy measures in the data (1 mark) and for an explanation of how this measure might (or might not) cure the problem of inflation (1 mark) For an evaluative comment that explains why this measure might not (or might) succeed in curing the inflation problem (1 mark) (Up to 3 marks)
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