The document summarizes the findings of an economic model that simulates the impacts of various external shocks and a currency devaluation on Egypt's economy. The model finds that a terms-of-trade shock has a positive impact while lower exports, reduced capital inflows, and a combined shock require a stronger devaluation. A devaluation improves trade and current accounts but increases domestic prices. GDP effects vary by sector, with gains in agriculture, mining, and manufacturing, and losses in utilities and construction.

1. Devaluation and Implications on Egypt’s
Economy
Mariam Raouf
Senior Research Associate, IFPRI; CGIAR; Head of Modelling Unit,
INP
Egypt NPS Seminar Series:
Food Prices, Poverty, and Household Diets
Institute of National Planning (INP), May 22, 2023

2. Worsening of foreign trade and c/a balance
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2016 2017 2018 2019 2020 2021
Foreign trade and current account balance since last
devaluation (% of GDP)
Exports (% of GDP) Imports (% of GDP)
Trade balance (% of GDP) Current account balance (% of GDP)

3. … caused by (among others) 3 types of
external shocks
Simulation design
Terms -of-trade shock
Increase in world market prices of
30% for wheat
20% for maize and oilseeds
60% for crude oil, natural gas, petroleum, and fertilizer
Export shock
25% reduction of export domestic supply ratio
for wheat, maize, oilseeds, crude oil, natural gas, petroleum, and fertilizer
Foreign savings shock
50% net reduction of foreign capital inflows
Combined shock
Combination of all 3 shocks
Combined shock + devaluation
Combination of all 3 shocks + 40% nominal devaluation

4. Trade focused IFPRI RIAPA CGE model with product
differentiation on supply and demand side
• Captures direct and indirect effects of external shocks and
exchange rate revaluation
• World prices for food, fuels, fertilizer
• Export supply of food, fuels, fertilizer
• Capital in/outflows (FDI)
• Nominal devaluation
• Direct effects depend on
• trade shares (export-output share, import-demand share)
• trade substitution possibilities
• changes in relative prices (prices of import and export vs
domestically produced good)
• price elasticities of demand and supply
• Indirect effects include
• effects on intermediate input costs, depending on backward
linkages
• exchange rate effect, depending on trade substitution
elasticities
• wage rate effect, depending on relative factor intensities
• income effects, depending on change in foreign tot
• Tracks multiple outcomes
• National & sectoral GDP gains and losses, jobs created,
incomes of the poor, etc.
Trading
Farming
Processing Non-AFS
Activities (producers)
Factor
markets
Product
markets
Government
Trade
Rest of world
Grants
Investments & subsidies
Social transfers
Taxes
Rural
nonpoor
Rural
poor
Urban
poor
Urban
nonpoor
Households (consumers)
Egypt CGE captures linkages
between all economic actors

5. Shocks | World Food, Fuel and Fertilizer Prices
World price
Trade share
Direct use
Indirect use
Incomes
How big is the increase in world price?
How important are food, fertilizer and petrol
imports in local market?
How important are fertilizer, natural gas and
petrol exports to the economy?
Which sectors use the affected products as
inputs?
Which other sectors are affected via supply
chains?
What kinds of workers and households earn
incomes within the affected sectors?
Final use Which households consume the affected
products?
Impact Channel Considerations Supply and Demand
Supply
(% by source)
Demand
(% by use)
Source: IFPRI Egypt RIAPA Model
Maize Wheat Oilseeds Crude oil Natural gas Petroleum Fertilizer
0.5 0.4 0.4 3.6 12 0.5 0.4
Trade substitution elasticity
0
50
100
Maize Wheat
and barley
Oilseeds Crude oil Natural
gas
Petroleum
products
Fertilizer
Imports Domestic
0
50
100
Maize Wheat and
barley
Oilseeds Crude oil Natural
gas
Petroleum
products
Fertilizer
Exports Domestic

6. Shocks | World Food, Fuel and Fertilizer Prices
World price
Trade share
Direct use
Indirect use
Incomes
How big is the increase in world price?
Which sectors use the affected products as
inputs?
Which other sectors are affected via supply
chains?
What kinds of workers and households earn
incomes within the affected sectors?
Final use Which households consume the affected
products?
Impact Channel Considerations Consumption Baskets
Source: IFPRI Egypt RIAPA Model
How important are food and fertilizer imports
in local market?
How important are fertilizer, natural gas and
petrol exports to the economy?
3.2 4.4 1.9 4.9 2.7
30.9 31.6
30.1
35.0
29.7
66.0 63.9 67.9
60.1
67.6
0.0
20.0
40.0
60.0
80.0
100.0
All hhds Rural Urban Poor Non-poor
Composition of household consumption spending
Cereals & edible oils Other food Non-food goods & services

7. Shocks | Lower export-domestic supply share
Export ratio
Trade
elasticities
Direct use
Indirect use
Incomes
How big is the reduction in exports?
How important are fertilizer, natural gas and
petrol exports to the economy?
Which sectors use the affected products as
inputs?
Which other sectors are affected via supply
chains?
What kinds of workers and households earn
incomes within the affected sectors?
Final use Which households consume the affected
products?
Impact Channel Considerations Export vs Domestic Supply
Demand
(% by use)
Source: IFPRI Egypt RIAPA Model
Maize Wheat Oilseeds Crude oil Natural gas Petroleum Fertilizer
0.5 0.4 0.4 3.6 12 0.5 0.4
Trade elasticity
0
20
40
60
80
100
Maize Wheat and
barley
Oilseeds Crude oil Natural gas Petroleum
products
Fertilizer
Exports Domestic

8. Shocks | Lower capital inflows
Investment
Demand
share
Direct use
Indirect use
Incomes
How large is the reduction of capital
inflows (FDI)?
How important are tradable and non-tradable
investment goods?
Which sectors use the affected products as
inputs?
Which other sectors are affected via supply
chains?
What kinds of workers and households earn
incomes within the affected sectors?
Final use Which households consume the affected
products?
Impact Channel Considerations Investment Goods Supply
Supply
(% by source)
Source: IFPRI Egypt RIAPA Model
Maize Wheat Oilseeds Crude oil Natural gas Petroleum Fertilizer
0.5 0.4 0.4 3.6 12 0.5 0.4
Trade elasticity
0
20
40
60
80
100
Imports Domestic

9. Policy | Devaluation
Exchange
rate
Trade
shares
Direct use
Indirect use
Incomes
How big is the devaluation?
How important is tradability, export and
import orientation, and import dependence?
Which sectors use the affected products as
inputs?
Which other sectors are affected via supply
chains?
What kinds of workers and households earn
incomes within the affected sectors?
Final use Which households consume the affected
products?
Impact Channel Considerations Trade Orientation and Import Dependence
Source: IFPRI Egypt RIAPA Model
Commodity
EXP-OUT
shr
IMP-DEM
shr
Vm/Vshr Commodity
EXP-OUT
shr
IMP-DEM
shr
Vm/Vshr
Maize 0.1 29.3 4.7 Fats and oils 5.7 22.2 43.3
Rice 0.0 0.1 4.9 Grain milling 9.3 16.9 26.3
Wheat and barley 0.0 39.5 6.7 Other foods 4.7 6.3 18.1
Other cereals 2.9 1.0 4.2 Textiles & clothing 22.0 22.1 20.0
Vegetables 5.5 0.0 3.9 Wood & paper products 14.7 36.6 24.2
Fruits and nuts 18.6 7.0 7.7 Petroleum products 12.8 13.7 11.2
Oilseeds 8.2 74.5 7.8 Fertilizer 33.6 5.5 4.2
Other crops 16.4 26.3 5.7 Chemicals 12.3 22.3 19.2
Cattle & raw milk 0.0 1.1 7.1 Machinery 1.6 42.7 17.5
Poultry 0.0 0.3 17.1 Equipment 44.6 66.1 22.3
Other livestock 1.9 0.6 1.4 Vehicles 10.8 73.2 27.2
Forestry & fishing 0.4 1.0 8.7 Other manufacturing 9.8 17.3 19.2
Crude oil 10.3 10.5 11.0 Utilities 0.3 0.0 9.3
Natural gas 13.2 0.0 9.4 Construction 1.7 1.2 17.5
Other mining 34.1 30.7 21.3 Trade & transport 12.8 12.8 13.9
Meat processing 1.7 42.8 2.2 Acc & food services 39.7 0.0 18.6
Fish & seafood proc 17.4 66.1 2.2 Private services 3.0 10.6 11.7
Dairy 6.1 7.9 7.7 Public services 2.0 1.9 14.5
Fruit & vegetable proc 30.5 5.6 5.5
EXP-OUTshr=exports as a percentage of output; IMP-DEMshr=imports as percentage of absorption; Vm/Vshr=share of
imported intermediate inputs in total intermediate inputs; FNshr= Final demand as share of absorption; εS=price elasticity of
output supply; σq/t=trade substitution elasticity; η=income elasticity of demand

10. Results | Selected Macroeconomic Indicators
Positive terms of trade shock (TOTshock)
Positive effect of higher export prices outweighs negative effect of higher
import prices
Lower export orientation (EXPshock)
poses adjustment cost on import side, requiring stronger nominal
devaluation
Lower foreign capital inflows
(FSAVshock) lead to
• strong real devaluation and
• improvement of trade and current
account balance
Devaluation (DEVAL)
• improves external position
• exceeding the increase necessary
to adjust current account
imbalances will increase domestic
consumer prices
BASE
TOT
shock
EXP
shock
FSAV
shock DEVAL
Absorption 5439.4 0.8 0.4 -1.7 -1.4
Consumption 4048.0 0.6 0.6 0.1 -0.2
Investment 957.9 2.1 -0.4 -10.3 -7.0
Exports 843.3 -12.1 -12.1 -8.6 -8.8
Imports 1300.8 -5.9 -7.9 -14.2 -12.7
Real exchange rate 91.3 9.4 8.5 15.4 16.8
Nominal exchange rate 100.0 1.8 7.6 12.8 40.0
World export price 100.0 10.9 10.9
World import price 100.0 6.7 6.7
World price 100.0 8.4 8.4
Domestic price 109.6 0.9 -0.8 -2.2 29.9
Consumer price 100.0 30.7
Terms-of-trade 100.0 3.9 3.9
C/A deficit/GDP 4.5 0.1 0.3 -1.9 -2.1
Trade deficit/GDP 9.9 0.1 0.7 -1.3 -1.7
Source: IFPRI Egypt RIAPA model

11. Results | Sectoral GDP
• National GDP and employment are not affected by
any of the shocks and devaluation
• Assuming full employment of factors
• Gains in agriculture, mining and manufacturing are
generally offset by losses in utilities and construction,
and vice versa for terms-of-trade shock
• GDP gains and losses are largest in the case of
lower capital inflows and devaluation
• Lower demand for investment goods affects particularly
construction, which produces almost exclusively non-
tradable investment goods
• Other capital goods producing sectors, such as
machinery, vehicles, and equipment benefit from their
export orientation and lower input costs
• GDP and employment inside agri-food system are
less affected
• Modest gains in GDP (except for TOTshock) in primary
agriculture, while food processing slightly declines
• Devaluation benefits export-oriented mining and
capital goods industry, import oriented agriculture
and trade-oriented food and consumer goods
-10.00 -5.00 0.00 5.00 10.00
Cereals
Other crops
Livestock
Other agri
Mining
Food
Cons goods
Intermediates
Capital goods
Utilities
Construction
Prv services
Pub services
Total
Change in sectoral GDP due to external
shocks and devaluation
TOTshock EXPshock FSAVshock COMBshock DEVAL

12. Results | Sectoral Employment
-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0
Cereals
Other crops
Livestock
Other agri
Mining
Food
Cons goods
Intermediates
Capital goods
Utilities
Construction
Prv services
Pub services
Change in sectoral employment due
to external shocks and devaluation
(%)
TOTshock EXPshock FSAVshock COMBshock DEVAL
• National employment is not affected by any of the
shocks and devaluation
• Assuming full employment of labor
• Other production factors (capital in agriculture,
livestock, mining, and other sectors, and land in crops
production) assumed to be immobile across sectors.
• Individual sectors expand/contract by hiring/releasing
labor from/to other sectors
• Changes in employment exceed GDP gains and
losses
• particularly in-capital intensive mining and
intermediates production
• and food processing in the case of TOTshock
• Devaluation creates employment in tradables
producing sectors while non-tradable construction
and utilities (water and electricity) release labor
• Food processing, being both more import than export-
oriented and strongly import-dependent and relatively
labor-intensive, also releases large amounts of labor
• Mining benefits from devaluation and strongly increases
employment but from a low initial level
• Labor-intensive non-tradable construction has to bear
the brunt of adjustment with regard to job losses

13. Results | Household Consumption
-1.0 -0.5 0.0 0.5 1.0 1.5
National
Rural
Urban
Poor
Nonpoor
Household Real Consumption
(% change)
TOTshock EXPshock FSAVshock Devaluation
• Household Income changes are inter- regionally
progressive , and within each region is regressive.
• Household consumption
• rises in all external shock scenarios at the expense of
worsening external conditions
• but declines in devaluation scenario with improving external
conditions
• Most households benefit from all external shocks, by falling
prices and/or rising incomes
• Urban households’ consumption is falling with lower net
capital inflows
• Importance of shocks differs across population groups:
• Rural and poor households are affected much more than
urban households from export demand and foreign savings
shocks
• Terms-of-trade shock has larger impact on urban and non
poor households than on urban households
• Devaluation affects urban and poor households negatively
while rural and nonpoor households benefit
• The negative impact of devaluation on urban and nonpoor
households outweighs the positive impact on rural and poor
households Fertilizer shocks

14. Results | Changes in Inequality
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Q1 Q2 Q3 Q4 Q5
Household Quintile Consumption
(% change)
TOTshock EXPshock
FSAVshock Devaluation
• Differential effects on poor/nonpoor
households are driving changes in
inequality :
• All three external shocks benefit household
consumption
• Lower foreign capital inflows and devaluation
have the strongest impact on inequality
• Lower foreign capital inflows and devaluation
affect households in 2nd and 3rd quintile
similarly
• Terms-of-trade shock and export demand
shock have positive impact for all households
in top quintiles with less impact on the first
three lower quintiles
• Overall, inequality is rising
• both as a result of external shocks and a
devaluation of the Egyptian Pound