Abstract
Over the past six years the Egyptian pound has moved in a 3 percent range vis-à-vis the dollar, and any upward or downward pressure on the exchange rate has been accommodated through passive intervention. There is no doubt that Egypt has prospered under this hard currency policy, with the exchange rate providing a nominal anchor. The benefits of this strategy include low inflation, disciplined financial policy, and a stable external environment. Capital inflows have bolstered long-term growth prospects by increasing investment and confidence. At the same time, the real effective exchange rate has appreciated by about 30 percent during 1991–96 owing to substantial inflation differentials in the early part of the period with partner countries. Clearly, this real appreciation would not represent an overvaluation if it resulted from a recovery from an undervalued exchange rate, if productivity growth in the tradable sector was substantially larger than compared with trading partner countries, or if the appreciation reflected changes in other fundamentals, such as those inducing higher confidence in the Egyptian market.
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