The Great Debate on Exchange Rate Regimes: Why Should the Mena Region Care?

Abstract

Subscribing to the view that the choice of the Exchange rate regime is crucial for growth and long term development, this paper reviews the experiences of seven MENA countries with exchange rate-based stabilization and explores the future prospects for their graduation to more flexible regimes. The evidence is mixed with some (Egypt, Iran, Sudan, and Turkey) experiencing high and extended episodes of real exchange rate overvaluations, associated with a combination of high inflation inertia, unstable or pegged exchange rate regimes. The unsustainable overvaluations eventually contributed to the collapse of the pegged regimes in Egypt and Turkey. The other three (Jordan, Morocco, and Tunisia) are able to maintain very competitive exchange rates while avoiding high inflationary pressures, despite that the first two have pursued relatively rigid pegged regimes. The analysis of this paper suggests that the MENA countries would need to consider: more flexible exchange rate regimes in a world of high private capital flows; implement much stronger policy fundamentals; emulate Chile and Malaysia and only use capital control as complimentary to, not a substitute for, sound policies; select the “appropriate” exchange rate regime that would minimize the likelihood of speculative attacks and crises without sacrificing the long term goal of real exchange rate competitiveness. Finally, there is no one-size-fits all regime, and depending on country-specific characteristics, such 'appropriate' regime might be 'managed floating plus' or 'free floating' with inflation targeting; a modified target zone regime, along the lines of the BBC proposal; or even a variant of the pegged regime, following the Malaysian model.

Keywords: Exchange Rate Regimes, Middle east, Misalignment, Overvaluation, Stabilization Programs.