In a nutshell
- The real exchange rate (RER) is an economy-wide relative price, closely monitored by governments due to its perceived influence on export competitiveness and growth (a definition of RER and associated concepts are provided in the below annex).
- A recent study1 assessing both the direct and indirect poverty impact of the RER on Egypt finds the net effect of RER depreciation/(moderate) undervaluation to be strongly pro-poor (Elbadawi and Refaat, 2015).
- Overall, real currency depreciation/undervaluation leads to higher average wages and other non-wage incomes for both poor and non-poor households. Moreover, an RER-led growth strategy is in fact pro-poor because the marginal impact on the income of the poor was found to be higher than that of the non-poor.
- However, an RER depreciation/undervaluation exchange rate policy has differing effects on wages across economic sectors and on different types of non-wage income; those negatively affected include those employed in some (but not all) non-tradable sectors or those receiving transfers from social funds.
- Therefore, accounting for both the indirect growth as well the direct distributional poverty effects of the RER is highly relevant for policymaking in view of two critical public policy aspects:
- It allows evaluating the extent to which such an undervaluation/depreciation strategy is more effective in terms of the poverty reduction goal relative to alternative growth strategies, such as those that favor non-traded activities.
- Moreover, by allowing a better understanding of the channels through which RER undervaluation might influence poverty at the household level, the evidence from such research should also inform actionable, sector-specific public policy interventions.
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