Catalog

	Table of Contents
p. 41 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies A. Comparing Financial and Economic Prices B. Effective Protection Or Effective Assisstance C. The Real Exchange Rate XVI. Appendices XVII. Others

Guidelines for the Economic Analysis of Projects : XV. Projects and Policies

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C. The Real Exchange Rate

199. In assessing the economic viability of a project, an estimate must be made of the SERF or the standard conversion factor. The SERF expresses the difference between the economic cost of traded goods at the official exchange rate and at the domestic market prices actually paid for them. The SERF can be affected by changes in the structure of taxes and subsidies, and trade controls. It can also be affected by long-term changes in the real exchange rate.

200. Nominal exchange rate changes can quickly be overtaken by changes in relative prices. Where the exchange rate change itself sets off changes in domestic prices, the initial effect of the exchange rate change may be short-lived. However, where there is a sustained difference in the rates of inflation for domestic goods and for foreign goods, and where this is unlikely to be compensated by improvements in productivity or by inflows of capital or income, then a permanent effect on the exchange rate may occur. If there is a change in the real exchange rate, this will alter the incentive between producing traded goods and services and producing nontraded goods and services. If it is expected that the real exchange rate will changethat it will depreciate, encouraging exporters, or that it will appreciate, encouraging producers of nontraded goodsthen this expectation should be built into the project cost and benefit streams. However, this should be done for all investment projects in the country in question, so that economic viability is tested on a consistent basis.

201. A change in the real exchange rate will also affect the returns to investors and borrowers in a project. Loan payments especially will differ depending on the currency in which the loans are denominated and the rate of real appreciation or depreciation relative to the domestic currency. This effect should be taken into account in the financial analysis from the borrower's point of view, and in the distribution analysis of project effects (see Appendix 29).

Back B. Effective Protection Or Effective Assisstance	Next XVI. Appendices