2016 Egyptian Currency Devaluation: A Difference-In-Difference & Synthetic Control Analysis

Abstract

For multiple decades, the Egyptian economy operated with a fixed exchange rate policy influenced by foreign currency reserves. Being a net importer, the main goal for this was fixing an overvalued rate for the Egyptian pound to keep import costs low. However, after the Egyptian revolution caused economic instability and reduced both tourism receipts and exports, the foreign currency reserves were drastically reduced which prompted the government to apply for loans from neighboring countries as well as international organizations to finance the importing of necessary goods such as wheat and crude oil. In late 2016, in order to obtain a $12 billion loan over a three-year period from 2016-2019, the IMF required that the Egyptian economy adopt a floating exchange rate policy to replace the fixed policy that had been in use for multiple years. This change led to a value depreciation of the Egyptian pound where it decreased from around L.E 8 per US dollar to around L.E 20 per dollar. This was the lowest the Egyptian exchange rate had ever reached. This paper uses both difference-in-difference regression models as well as synthetic control groups to provide an overall economic analysis regarding the effects that this policy had on the Egyptian economy such as changes in GDP growth rates, inflation rates and international trade and current account deficits. The overall conclusions showed generally favorable economic changes that followed the policy. These include an increase in both GDP and GDP per capita and a decline in the international trade deficit. The main consequence was an inflation spike resulting from the increased price of imported raw materials.