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There is consensus both within and outside Egypt that a devaluation of the Egyptian pound is imminent.While the official exchange rate is close to Egyptian pound 7.8 to the U.S. dollar, the rate in the black market has crossed Egyptian pound 9 to the U.S. dollar, or is some 15 percent lower than the official rate. Financial markets both in Egypt and abroad are already pricing in a devaluation of the pound as reflected in interest rate levels. The Egyptian government is currently paying over 12 percent on its three-month Treasury bills, while the rate in comparable U.S. Treasury bills is only 0.3 percent. Finally, inflation in Egypt is running at over 10 percent a year, while it is averaging below 2 percent a year in its trading partners, meaning that Egypt is losing international competitiveness by an average of 8 percent a year.On balance, Egypt should move to an inflation targeting monetary policy framework.It is the right alternative to the current regime of exchange rate targeting, as many countries, including some that are less developed than Egypt, have discovered.
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