The Impact of Interest, Exchange, and Inflation Rates on the Efficiency of the Real Sector: Empirical Study of Egypt

This study examined the effect of interest, exchange, and inflation rates on the performance of the real economy in Egypt through the period 2003-2018. The performance of the real sector is represented here by the efficiency of allocating and using resources in the different production processes, and the state of unemployment; moreover, the performance of the production function was examined on the aggregate and sectoral levels. Data Envelopment Analysis (DEA) techniques were used to determine the efficiency of the productive sectors and the aggregate production function. Then, Auto-Regressive Distributed Lag (ARDL) models were applied to determine the long-term effect of the variables in question on the efficiency of the production and the rates of unemployment.|The study found that technological progress is the main catalyst for the efficiency of the productivity of the factors of production in the Egyptian economy. On the other side, the efficiency of determining the optimal mix of factors of production in the aggregate production function, scaling efficiency, is the main determinant of the technical efficiency of factors of production. On the sectoral level, the productive sectors were arranged according to the efficiency of factor productivity as follows: mining, agriculture, services, and manufacturing sector. The devaluation of the local currency negatively affects the level of technical progress while it positively supports the process of scaling the factors of production; however, the ultimate effect of local currency devaluation on total factor productivity is negative. This may be attributed to the increase in the cost of imported technology due to local currency devaluation. On the other hand, high-interest rates negatively affect the process of determining the optimal mix of different factors of production in the aggregate production function, which may be attributed to the deviation of the relative relationship between the factors of production and their prices. In general, strengthening the local currency exchange rate with low inflation and interest rates can support the efficiency of the real sector and allow the regulation of aggregate production function in a manner that efficiently minimizes the average cost of aggregate output.