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Al-Ahram Weekly On-line 12 - 18 October 2000 Issue No. 503 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly On-line 12 - 18 October 2000 Issue No. 503
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Elections Palestine International Economy Opinion Culture Books Interview Travel Living Sports Profile People Time Out Chronicles Cartoons Letters To each his own
A RECENTLY released publication by the Egyptian Centre for Economic Studies (ECES) entitled "Alternative exchange rate regimes," asserts that there is no universal formula for the management of exchange rates. It suggests, instead, that each economy should adopt a system that is most appropriate for its particular needs. The publication, based on a presentation made by Michael Mussa, economic counsellor and director of the research department of the International Monetary Fund, is the latest to be issued in conjunction with ECES's "Distinguished Lecturer" series.Mussa emphasises the importance of a consistent policy for the exchange rate because "the only way that business can do business is if it is certain of the policy regime in which it operates."
In analysing exchange rate regimes for developing and emerging market economies, Mussa demonstrates that there is considerable policy variation among the 150 countries in this category. While some of these countries have applied the dollarisation system, by which another country's currency is adopted as the national currency, others have applied the peg system with varying degrees of strictness. Mussa asserts that for countries open to international capital and trade, a pegged exchange rate is "virtually synonymous with surrendering any independence in the conduct of national monetary policy."
The extent to which the financial market and trade are open to foreign involvement is also of relevance to the exchange rate, according to Mussa.
By virtue of its contact with international markets, Mussa classifies Egypt as being in the middle range of developing and emerging market countries. Egypt's interaction with international capital markets "is significant, but nowhere near that of economies like Hong Kong or Singapore."
Countries which limit their contact with international capital markets find it easier to maintain a pegged exchange rate. "It seems that a degree of closure to international capital markets provides a degree of isolation which helps sustain an exchange rate peg," Mussa explains.
However, maintaining a peg while having a high rate of capital mobility may succeed if the government is highly committed to maintaining the exchange rate and if strong banking and financial systems are in place.
In spite of the variation in the nature of exchange rate regimes among developing countries, Mussa demonstrates that there has been a trend among developing countries towards increased exchange rate flexibility. He attributed this to the tendency towards greater openness on the part of developing countries to trade and capital movement, noting also the trend towards diversification in trade.
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