intermediation and the appropriability of returns are the most important constraints to growth. Private returns are reduced through the high cost of complex regulations and inefficient government services as well as the cost of innovation and exploration. He further suggests that the recent pick-up in growth was unrelated to efficiency improvements in the financial sector.

# **B. ANALYSIS OF SUB PERIODS**

The two decades since the early 1990s can be roughly divided into three sub-periods, according to the international capital flows: a first period of capital inflow in the early 1990s following the adoption of economic reform (1991-1998); a second period of capital outflow (1999-2004); and a third period of capital inflow (2005-2008).<sup>3</sup> Tables 1.a to 1.d describe policies and outcomes during the three sub-periods. This section shows the commonalities and differences across the sub-periods.

GDP growth is procyclical with the external capital inflow/outflow, though domestic reform also follows a pattern of the external cycle. Following the adoption of the Economic Reform and Structural Adjustment Program (ERSAP) in 1991, GDP grew at an average rate of almost 4 percent in the first period, peaking at 5.5 percent in FY97. The ERSAP aimed at resolving the macro imbalances through market-oriented reforms, namely, increasing the private sector participation, boosting international trade and privatizing many state-owned companies. A large fiscal adjustment brought the fiscal deficit down from 15 percent to 1.2 percent of GDP between FY91 and FY95 (Ikram, 2006). Yet, as a result of reform fatigue, a lack of fiscal discipline, and a shock to external capital flows due to the Russian default and Long Term Capital Management Crisis in the United States in 1998, Egyptian growth reached a trough of 2.4 percent in FY02. Macroeconomic reforms resumed in FY05, the external environment improved and growth picked-up to 6.4 percent between FY05 and FY08 from an average of 4.1 percent in the previous period.

The increase in net foreign assets (NFA) of the central bank was significant in both capital inflow periods. In the first one, NFA increased by US$ 1.2 billion per year on average, while in the second they increased by US$7.5 billion. The difference between both was that the second period flows were mostly foreign direct investment (FDI) which increased from less than 1 percent of GDP in the early 2000s to 8.1 percent in 2008. A topic that deserves further exploration is the relationship between the increase in capital flows and the stagnation or fall in the savings rate in the early 1990s. While Enders (2007) shows a stagnation or slight decline in the savings rate since the mid 1990s, Favaro, Garrido and Stucka (2009) show a significant fall in the savings rate from the early 1990s to the late nineties. This would imply a negative association between capital flows and domestic savings. This fall could also be associated with prevailing negative real interest rates since 2005. The

> 3 Ikram (2006) constructs a consistent BoP series for the period 1952-2000, that show capital flows rising sharply after the adoption of the ERSAP and the Parid Club Agreement in 1991.

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