Exchange Rate Regime and Competitiveness of Manufactured Exports: The case of MENA Countries

In this paper, we show that MENA countries have been characterized by a significant overvaluation of their currency during the 70s and 80s. For this purpose, we have developed an indicator of misalignment based on the estimation of an equilibrium exchange rate ─ following Edwards (1989) ─ on a panel of 53 countries, among which 10 are MENA economies. Overvaluation has however decreased in the 90s, probably due to the flexibilisation of the exchange rate regime in some MENA countries and to a better macroeconomic management in others. Misalignment remains nevertheless higher than in other regions, which may be explained by the delay of the MENA region in adopting more flexible exchange rates, as well as in reforming their economy. Our study illustrates that overvaluation had a cost for the region in term of competitiveness. This has been done through the estimation of an export equation, which shows that manufactured exports have been affected by the overvaluation of the exchange rate. This finding partly explains the lower diversification of some economies at some period of time and highlights the need for improved management of the exchange rate regime. In fact, countries that had already a more diversified economy, have benefited, specially in the 90s, from the reduction of the overvaluation of their currency.