This paper estimates Egypt's equilibrium real exchange rate and exchange rate misalignment based on economic fundamentals over the period 2001Q3–2017Q3. Focusing on the more recent period, we find that the Egyptian pound was undervalued by about 22.3% in 2017Q1 due to overshooting its equilibrium value after floating the currency in 2016Q4. The currency undervaluation then declined to 18.5% in 2017Q3 driven by an increase in the real effective exchange rate due to a surge in domestic inflation. With regard to the determinants of the equilibrium real exchange rate, we find the productivity differential (vis-à-vis Egypt's trade partners) and trade openness to be the most significant factors. We also provide projections for the equilibrium real exchange rate and exchange rate misalignment until 2020Q4, which reveal that the exchange rate undervaluation will be dissipating fast due to high inflation. If the nominal exchange rate stabilizes at its level in 2017Q3 (17.73 pounds per US dollar), the currency will be overvalued by 13.1% in 2020Q4. Given the uncertainty surrounding the projections, a forecast combination approach is also presented. Finally, the paper highlights the implications of the empirical findings for the conduct of monetary policy in Egypt.

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as well as internal seminar participants and reviewers at the IMF for their valuable comments. We are grateful to Francesco Vona for providing access to his taxonomy files. Any errors are those of authors.

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The paper proposes a chronology for the Egyptian economy by detecting phases of expansions and recessions during the period (2002–2019). It examines the cyclical behavior of variables that are considered potentially useful in measuring or predicting aggregate economic activity. To do so, we combine the National Bureau of Economic Research (NBER) approach together with time series analysis techniques to select the variables best suitable to play the role of coincident and leading indicators. This methodology is found to be the most appropriate when there is no well-established reference chronology as a benchmark for the cyclical analysis, which is the case of Egypt. As a result, two composite indexes are constructed: 1) the composite index of coincident economic indicators (CEI), which can be considered an adequate measure for the Egyptian business cycle; 2) the composite index of leading economic indicators (LEI) that shows good performance in anticipating aggregate economic activity in Egypt. Moreover, the empirical results indicate that total employment, consumption, and investment move coincidently with the reference cycle, while exchange rate and interest rate variables lead the reference cycle and have strong predictive power for economic activity in Egypt.