Is the private sector the real victim of the currency devaluation?

While the Central Bank of Egypt’s decision to float the Egyptian pound in November 2016 impacted businesses and individuals alike, one thesis delves deeper into how the exchange rate affects activity in the private and public sectors, as well as their subsectors.

“The Impact of Exchange Rate Changes on Sectoral Activity: The Case of Egypt,” a master’s thesis submitted to the American University in Cairo’s Economics Department by Nada Shokry, finds that Egypt’s private sector is more likely to be affected by fluctuations in the exchange rate than the public sector.

Hence, it is the private sector that needs additional support in the case of a devaluation, either through tax cuts or subsidy increase. However, public sectors which contribute largely to the GDP are also highly responsive to currency devaluations.

In other words, the demand on products from private subsectors – as opposed to the public subsectors – are more prone to be affected by changes in prices; a concept known as high elasticity. However, the more the public subsectors contribute to the GDP, the higher their elasticity becomes. Those subsectors include petroleum, mining and industry.

The thesis, published in May 2017 under the supervision of Associate Professor of Economics Mohammed Bouaddi, also differentiates between using the Real Effective Exchange Rate (REER) or the Real Exchange Rate (RER) in methodologies examining the impact of currency devaluation, and concludes that using RER estimations to evaluate the economy’s performance after a devaluation is misleading.

In a nutshell, most sectors with low elasticity are public, non-tradable, low-GDP contributors, such as public housing, real estate, construction, hotels and restaurants. But in the end, all sectors and subsectors are somehow affected by changes in the exchange rate.

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