PoundDevaluation of the Egyptian Pound

Scenario Analysis Series

Published: January 2013

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 Summary

This scenario analysis note attempts to clarify to our clients and readers the triggers behind the current domestic currency slide and the likely economic impacts of a sustained depreciation of the pound to EGP 7 per USD by the end of June 2013 compared to Dcode EFC’s standard/baseline assumption of an orderly depreciation that brings the pound to only EGP 6.5 per USD by June 2013. This note also highlights government policy response options which can be adopted instantly as well as over the medium term. The analyzed depreciation scenario assumes that the value of the pound will further decline in subsequent years by a rate equal to the inflation gap recorded between Egypt and its major trading partners so as to preserve Egypt’s economic competitiveness and provide a boost to domestic economic activities and employment. As explained in detail below, this scenario assumes the government’s response will be passive and piecemeal and will rely primarily on the net, short-lived positive impacts of the sustained depreciation, which cannot possibly address Egypt’s core economic problems and challenges in full. In other words, the projected scenario and its macroeconomic implications assume that the government will not adopt key fundamental or structural reforms such as addressing youth unemployment, streamlining energy subsidies and increasing taxes, or boosting the productivity of the Egyptian labor force.


Table of Contents

I-Introduction

II-Triggers of the current depreciation of the Egyptian pound

III-Macroeconomic implications

a)Economic growth

b)Inflation

c)Exchange and interest rates

d)The banking sector

e)Government finances and the budget deficit

f)The external sector (balance of payments)

IV- Impact Assessment Summary Diagram

V-Projected government response and policy options


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