UNCTAD urges the world to learn from previous crises

Sherine El Madany
5 Min Read

CAIRO: Traditional assistance packages are counterproductive and multilateral cooperation is the only viable solution to weather a deepening global financial crisis, said the United Nations Conference on Trade and Development (UNCTAD) in a report released Thursday.

As the financial crisis becomes increasingly global, the world economy is caught in a loop of weaknesses and seems headed for a deep and synchronized downturn, reads the UNCTAD report entitled “Will We Never Learn?

“But the world seems not to have learned the lessons from previous financial crises: that traditional adjustment packages can be counterproductive, and that better global exchange rate arrangements will be critical if we are to achieve and maintain monetary and financial stability.

While it is still too early to gauge the real depth of the downturn, the report says, many industrial countries are on the verge of recession. Combating deflation takes precedence over inflationary concerns, as headline inflation is likely to dip below zero in the coming months. While many developing and emerging economies are still growing, their economic outlook has severely deteriorated in recent months.

Commotion from the world’s worst global economic crisis in 80 years is expected to hit most emerging economies in the form of declining exports, negative wealth effects, falling commodity prices, and an overall economic slowdown.

On the local front, Prime Minister Ahmed Nazif confirmed last Monday – in a televised speech explaining his government s economic policies to parliament – that the global financial crisis would lead to a fall in Egyptian exports, a decline in foreign investment in Egypt, a reduction in revenue from the Suez Canal, and lower income from tourism.

Nazif set the government’s target for economic growth at 5.5 percent for the two years starting July 2008 down from a record high of 7.2 percent growth in the 2007/8 financial year.

To combat such fallouts, the UNCTAD report stresses the need for an exchange rate regime that provides a stable international value of money and helps minimize cost of adjusting the nominal exchange rate to differences in cost levels of trading partners – an adjustment it says is indispensable and unavoidable.

“The critical point is this: Traditional assistance packages or swap agreements . are clearly counterproductive, the report argues. What is needed to combat the crisis is a real currency devaluation to restore international competitiveness.

The report points towards a rather unconventional type of assistance to avoid a downward overshooting of the exchange rate, which would both hamper countries’ ability to check inflation and unnecessarily distort international trade.

“To stop an overshooting devaluation – which is the rule and not the exception – is very costly if attempted unilaterally, but very inexpensive if countries under pressure to devalue join forces with countries facing revaluation, the report explains.

“Countries that are struggling to stem the tide of devaluation are in a weak position, as they have to intervene with foreign currency, which is available only in limited amounts.

That’s why the report suggests that countries with appreciating currencies engage in a symmetrical intervention to stop the “undershooting because the appreciating currency is available in unlimited amounts.

“Unless there is a fundamental rethinking of the exchange rate mechanism and the cost involved in the traditional ‘solution’ of assistance packages without symmetrical intervention, the negative spill-over of the financial crisis into the real economy will be much higher than needed, the report warns.

In Egypt, several economists forecast the Egyptian pound will depreciate against the US dollar in 2009.

“Inflation risks are subsiding and the government’s focus is shifting to growth, and we expect a policy preference for [the pound] weakness to manifest itself over the next 12 months, said Simon Kitchen, senior economist at investment bank EFG-Hermes. “The authorities priority will be keeping exports competitive even as external demand falters.

He expects the local currency to weaken to LE 6.20 against the greenback by the end of 2009. “This will mean an 11 percent depreciation of EGP-USD over the next 12 months.

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