Policy Viewpoints

Competitive Devaluation and Egypt’s Export Potential

Publication Number: ECES-PVP26-E/A

April, 2011

Author : Magda Kandil

Type : Policy Viewpoints

Recent global developments have brought to the fore concerns about increased competition to boost exports by resorting to competitive devaluation, also known as beggar-thy-neighbor policies or currency wars. Many emerging countries, including Egypt, have been struggling to cope with the resulting pressures that have escalated in the form of a surge in capital inflows that exercise pressures on the exchange rate and threaten competitiveness. Following an overview of the state of play in the global economy, this edition of Policy Viewpoint considers the implications for Egypt of a currency war. It demonstrates that the main challenge to Egypt’s competitiveness is high inflation. Failure to mobilize exports through depreciation could pose a challenge to competitiveness. Moreover, depreciation could fuel inflation and prove to be a threat to competitiveness in light of Egypt’s high dependency on imported intermediate goods. To conclude, the exchange rate policy should be managed to strike a balance between promoting growth and containing inflation, in line with the underlying fundamentals and priorities for domestic policies. This balance is, however, continuously challenged in the face of persistent capital flows that move around the globe in search of high returns. To stem the risk of hot flows, temporary measures may include capital controls and/or taxes and incentive schemes that vary with the type of inflows. However, persistent flows would demand policy adjustments, namely fiscal consolidation, to achieve sustainability and ensure external stability over time.