Question

‏1. Use the demand-supply fundamental model to illustrate the changes in the value of the Egyptian pound (EGP) against the U.S. dollar (USD) in the past few years. In your answer, try as much as possible to distinguish between the demand-side factors and the supply-side factors as discussed in class. Finally, show how the intervention by the Central Bank of Egypt (CBE) at some point has led to the creation and deepening of the “Black Market”. Although drawing graphs is not necessarily required, yet it will definitely help you to illustrate your answer.

Answer 1

            One US Dollar costs about 15.5 Egyptian pounds today. The rate has seen an upsurge from 2016. In 2015, the value of a dollar was about 8 EGP and it was increased to almost 18 EGP by the end of 2016. The rate has been declining hence and now it has reached almost 15.5. The differences that has been brought in the exchange rate in the post-2016 era has been due to the floating of the Egyptian pound in 2016. Floating of the Egyptian Pound was first done in 2003, where it was depreciated by almost 50% in comparison to the US Dollar. At those times, the exchange rate was brought down from 3.5 EGP to almost 5.5 EGP. The economy of the Egyptian market is affected by the following factors which can be explained from the perspective of supply and demand.

· With increase in trade deficit, the inflation levels are rising and there is no demand for country’s currency reflected by its goods and leading to currency depreciation.

· Increased budget deficit, foreign debts and interest rates has effects on the strength of the Egyptian pound.

· The trade deficit is caused by lo demand on the national currency.

· The Egyptian central bank devalued the money by 13% in 2016 which caused the value of Egyptian pound to fall at a random pace from 8 EGP to almost 18EGP for a dollar in a year’s time.

· The political instability and the shortage of foreign money inflows were the major reasons behind this devaluation.

· The devaluation has helped in attracting more foreign inflows which has helped the currency to raise by almost 2-3 EGP in the past few years.

· With increased FDI, the production rate has been on an increase in the nation which has caused the supply to rise and meet the demand of the economy.

· The inflation rate has been lowered to an extend which has been instrumental in improving the value of the Egyptian Pound and improving the employment levels in the economy.

The black market in Egypt has seen a further widening even after the devaluation was done by the Central Bank. The following are the causes

· The sudden devaluation measure plunged the value by a huge factor, Thus, the black money market was able to give more value to exchange the dollar that was inherent in the hands of consumers and thereby attracted more towards it and thus it expanded its network

· With devaluation of currency, domestic prices skyrocketed and inflation saw a huge rise which forced the people to move towards the black market system, which were able to reduce the cot burden of the consumers since they worked outside the government regulationary mechanism.

· The weakening of the foreign exchange reserve after this measure by the central bank also lead to the development of black market in Egypt.

· People began to lose confidence in the domestic currency which aggravated the issue further.

Thus, from the above points, it can be seen that although the central bank tried to eliminate the black market along with stabilizing the economic system, the action resulted in better functioning of such markets in the system.