Real exchange rate assessment in Egypt: Equilibrium and misalignments

The underlying study focuses on assessing the real exchange rate in Egypt during the period 1999-2012. In particular, the paper estimates the Real Exchange Rate (RER) misalignments in Egypt during the period under investigation. This is implemented through carrying out two main steps: first, the observed real exchange rate is calculated. Then, the Equilibrium Real Exchange Rate (ERER) is estimated using three different techniques from the methodology spectrum of the empirical literature. These methodologies are widely used to estimate the ERER in both developing and developed countries alike; namely, the Purchasing Power Parity (PPP) approach; the Fundamental Equilibrium Exchange Rate (FEER) approach and Edwards Model (1989). Fortunately, the three techniques yield consistent results concerning the undervaluation and overvaluation episodes. Evidently, the REER appears to be misaligned during the period 2001-2009: undervalued during 2003-2007, overvalued 2001-2002 and 2008-2012. The paper concludes that the Egyptian Pound is recently overvalued; although all the applied approaches indicate different misalignment magnitudes, they all show a growing trend in the relative prices in favor of our trading partners. It is recommended to narrow down these deviations; the REER has to be devaluated by a range of 9 to 13 percent in order for the Egyptian products not to lose their competitiveness in the international markets. Key words: Exchange rate, misalignments, Egypt.