Several major economies are intervening in their currency markets to enhance competitiveness, particularly on the trade side. By causing its currency to depreciate, a country would enhance demand for exports while curbing demand for imports, resulting in improved trade balance. However, if competitive depreciation is the result of persistent quantitative easing in major trading partners, emerging economies could be continuously losing grounds in trade competitiveness. Specifically, low interest rates in advanced economies could result in a surge in “hot capital inflows” to developing countries, increasing appreciation pressures.
The discussion in this roundtable addressed the implications of currency wars for the Egyptian economy, mainly a widening current account deficit and the resulting consequences of inflationary pressures, asset bubbles and high sterilization costs. Policy options to mitigate these threats, including the need to resort to protectionist trade measures and capital controls, were discussed.