Currency devaluation and its impact on the economy

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Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy since a weaker currency will boost exports, which in turn will lift employment and all this will set in motion economic growth and keep the economy going By Parveen Zaiby Devaluation means decreasing the value of nations currency relative to gold or the currencies of other nations. Devaluation occurs in terms of all other currencies, but it is best illustrated in the case of only one other currency. Devaluation and Depreciation are sometimes used interchangeably, but they always refer to values in terms of other currencies and the value of currency is determined by the interplay of money supply and money demand. In common modern usage, it specifically implies an official lowering of the value of a countrys currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system.

Historically, early currencies were typically coins stamped from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.

Present day currencies are usually fiat currencies with insignificant inherent value. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. Some analyst are of the view that weakening the value of currency could actually be good for the economy-since a weaker currency will boost manufacturing production, which in turn will lift employment and all this will set in motion economic growth and keep the economy going. But the dangers of a falling rupee too quickly, would be that the foreigners will stop investing in the country, which would make it impossible to finance the current account (trade) deficit. It will then be forced to push interest rates up to defend the rupee (crashing rupee stock and bond markets is supposed to make the rupee more valuable), and that could create recession.

In an open market, the perception that a devaluation is imminent, may lead speculators to sell the currency in exchange for the countrys foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country foreign reserve are at lower level after the real exchange rate has fallen. In these circumstances, the currency value will fall rapidly. This is what occurred during the 1994 economic crisis in Mexico.

Devaluation of a currency was a matter of prestige in the past. However with the lapse of time it has been learnt that such an operation is sometime necessary to save the country from economic hardships. Devaluation is not an enduring way to improve the economy, unless the Government revises its method of economic planning and execution of plans, no amount of devaluation will stabilise the external value of our currency. We must give highest priority to the consolidation of our economy vis-a- vis expansion. A strong discipline should be exercised over all the unproductive expenditure whether it is in public or private sector.

Possible impact of the devaluation on the economy

Possible impacts of the devaluation on the economy could be the stimulation of merchandise exports, discouraging merchandise imports and thus improving terms of trade, increase revenue collection and savings in repatriation of profits and royalties by existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold smuggling. Inflow of foreign capital can be improved by devaluation only if prices do not rise. It is supposed to provide an escape from vexation import controls that prevent utilisation of full industrial capacity, stifle export drive, bestow monopoly profits on a few, inefficient market regulation and pressure on budget and domestic prices will sky rocket. The obvious consequence of devaluation in the short run would be to worsen the balance of payment position and raise the burden of Pakistans foreign debt and debt service liability and foreign loans repayment would break the back of the budget, which would in turn increases the trade gap. It will upset all the cost-price relationships in the economy, lead to galloping inflation, and will stall many ongoing projects due to rising costs.

Persistent adverse trade balance and disequilibrium in balance of payment are the main causes, which compels a country to devalue its currency. Major components of trade balance are exports and imports of a country. Adverse trade balance is generally the result of slackness in exports in comparison to imports. It might affect exports prices and thus wipe out all the edge that might be hoping to gain in the export markets through devaluation. The markets for Pakistans traditional export are inelastic, therefore devaluation may thus in fact give no big boost to their exports, because there is a small quantum of value added exports and major requirement is based on export of raw material. Further the quality of export not competitive in the foreign market. If an export -boom in agro-based industries does come about, the consequential diversion of land from food crops will raise food prices and cause a rise in wages unaccompanied by any gains in productivity. Moreover, most of the bigger enterprises will face increasing difficulties in loan repayments and the cost of new industrial investments will shoot up sharply.

In Pakistan, industries are heavily dependent on imported raw materials for industrial goods and capital goods and components, and their access too many advanced countries are blocked by quotas and tariffs. , any rising of the prices of such inputs through devaluation, would raise industrial costs and reduce the intensity of capacity utilisation. Therefore, it should be avoided as a resort to deficit financing. Devaluation with its implications will cause a contraction in economic activity and consequential slide down in income tax receipts will raise the burden of Pakistans defence equipment, and foreign debt overnight. It cannot stop smuggling as long as black- market

transactions in foreign exchange continue. Devaluing the Pak. Rupee means devaluing the price of Pak labour and talent in the international market who send foreign exchange through home remittance. Devaluation will make Pakistan lose heavily both as seller and as a buyer and will make no good substitute for remedial changes in economic policies and developmental planning. Devaluation of Pakistan Rupee will mean devaluation of Pakistan labour and talent in the international market evaluation will serve as a drug rather as a stimulant and cause an unprecedented inflation.

Bold steps must be taken to enliven capital market and more foreign aid procured. Strong disciplined should exercised over all unproductive expenditure, whether it be public sector or private sector. Lavish spending of aid was bad enough, but it would be even worse to raise the cost of debt repayment through devaluation, whose benefits in terms of larger foreign investment are quite illusory.

Central exercise as well as sales tax receipts and custom duties should go down due to lower volume and high prices of imported inputs resulting in cut-backs in industrial production.

Devaluation in Pakistan in different periods

Pakistan had experienced an increased in wholesale price, after its first devaluation in 1955, due to inelastic production structure, which had generated uncontrollable inflationary pressure. Again on 11th May 1972, Pakistani Rupee was devalued by 56.7% in terms of gold to a new, unified Official Rate of PRs11.00 per U.S. Dollar and 4.5% fluctuation range for the currency was also introduced. At the same time, the entire Export Bonus Voucher scheme with its complex accessory rates was abolished. On 8th January 1982, the Rupee was devalued when the currency was unhitched from its link to the U.S. Dollar and the fixed Official Rate abolished. A controlled, floating Effective Rate for the Rupee, initially at the Rupee dollar exchange rate was Rs9.9 per U.S. Dollar was established in relation to a trade-weighted basket of currencies, Pakistan has been on a system of managed float since January, 8, 1982, under this system the country has experienced massive downward slide in its exchange rate. In 1997, retail prices rose significantly to 20 to 24 rupees/kg (US 55.4 to 66.5 cents/kg), indicating short domestic supplies, the devaluation of the rupee against the dollar was highest in 1996, which contributed to the rise in price since sugar had been traded internationally in

US dollars. As imports had increased in the 2 years period, the rising price of imported sugar (in rupees) was also reflected in the rising domestic price. An import tariff of 10 percent was removed in mid-1997, so as not to contribute to increasing sugar prices. It rose to very high amounting to Rs64.1 in July 2001. The economic indicators showed some visible improvement since the year 2001-02 and it continued to be so, which helped the authorities to turn around the creeping devaluation and the rupee has stabilised in the range of (Rs) 59-60 per dollar till 2006 and May 2007 (Rs60), but after that the currency has started devaluing since 2007 to date i.e., April 2008 it stands to now Rs63.40 against a dollar. It is concluded that devaluation may temporarily boost exports only if the demand of exported goods in the foreign country is price elastic, but this is not necessary for those goods for which the demand is not price elastic. We therefore, should first try to analyse the price elasticity of demand of goods exported from Pakistan, because experienced has taught that devaluation did not lead to increase in exports. Further to this, it has been observed that successive devaluation in the past have failed to evoke a favourable long term response in terms of improved exports. Apart from encouraging speculation it also shatters the confidence of the foreign investor in the domestic economy. It takes the economy on the path of devaluation aided cost push inflation and is a never ending vicious circle. A long term plan is required to put the economy on the right track. This should provide a framework for exporting value added branded products, improving the quality and image of existing products, finding new export markets and better marketing strategy.

We should try to effectively utilise the human resources, which is abundant in Pakistan and is underutilised. Moreover, cut in government expenditure, improvement in budget and trade deficit, multiple and persistent exchange rate would also be of great help. But devaluation is not the solution of the current economic crisis and should not be resorted to in future
www.rundtsintelligence.comCurrency

devaluation

A deliberate downward adjustment in the official exchange rates established, or pegged, by a government against a specified standard, such as another currency or gold.

Devaluation
The active decision of a government to reduce the value of its own currency vis a vis other currencies. Devaluation occurs exclusively infixed currencies, when the currency in question is pegged to another currency. Governments devalue their own currencies to make theirexports less expensive in foreign markets. If a company exports its products for the same price in the local (devalued) currency, it is cheaper for consumers to buy those products in their own currency.

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Devaluation means officially lowering the value of currency in terms of foreign currencies. There is a difference between devaluation and exchangedepreciation. Devaluation is the result of official government action.Depreciation or decline in the rate of exchange of one currency in terms of another is due to market forces. Substantially devaluation and depreciationboth refer to the reduction of international currency in terms of foreign currencies. When the rupee was delinked from the dollar and floated against a basket of currencies on Jan 8, 1982, the rupee parity stood rupees 9.90 to a dollar. The State Bank of Pakistan since then has devalued the rupee anumber of times. The rupee spot buying rate to dollar as on 1.6.2000 stands at rupees 54. There could be many motives of the devaluation. It stimulates exports of commodities. It restricts import demand for goods and services. It helps in creating a favourable balance of payments. Almost all the countries of the world have devalued their currencies at one time or the other with a view to achieving certain economic objectives. During the great depression of 1930 devaluation was carried by most countries of the world for the objecting of correcting over-valuation of currencies.Ads
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We have discussed earlier that the main role of money is to facilitateexchange. Money is accepted as a media of exchange because it has value. It is held as a store of value because it has value. The value of money has significant importance in the study of economic problems. By value of money is meant its purchasing power, its capacity to command goods in exchange for itself. Money as we know is not needed for its own sake but for the goods and services it can purchase. If money buys more commodities than it did at same time, we say the value of money is high and if it buys less, the value of money is said to be low. Thus the real value of a unit of money at a given time and place is the quantity of goods and services of all kinds that can be purchased with a unit of money. The value of money varies inversely with the general level prices. When the generalprices increase, the value of money falls and when general prices decrease, the value of money rises. In mathematical terms the value of money and the general level of prices are reciprocals of each other.
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Answered by Anonymous 1 2 3 4 5

Money is one of the wonderful invention of man.Money is defined as "anything that is generally accecptable as a mean of exchange and that at the same time acts as a measure and store of value".Value of money is meant its purchasingpower and its capacity to command goods in exchange for itself. The value of money varies inversely with the general level of prices.When the general prices increase,the value of money falls and when general prices decrease, the value of money rises.Money is accepted as a media of exchangebecause it has value.Money is not needed for its own sake but for the good and services it can purchase.
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Answered by tomD 1 2 3 4 5

Money has no value. It is only a medium of exchange. The real test in here is how society values your labours and thoughts, and what you value. Then you make the exchange with currency or money. Some people value a rare stamp worth thousands, others a trip to Florida. The money is the same. It has no value of its own.
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Answered by Uil7 1 2 3 4 5

We have discussed earlier that the main role of money is to facilitate exchange. Money is accepted as a media of exchange because it has value. It is held as a store of value because it has value. The value of money has significant importance in the study of economic problems. By value of money is meant its purchasing power, its capacity to command goods in exchange for itself. Money as we know is not needed for its own sake but for the goods and services it can purchase. If money buys more commodities than it did at same time, we say the value of money is high and if it buys less, the value of money is said to be low. Thus the real value of a unit of money at a given time and place is the quantity of goods and services of all kinds that can be purchased with a unit of money. The value of money varies inversely with the general level prices. When the general prices increase, the value of money falls and when general prices decrease, the value of money rises. In mathematical terms the value of money and the general level of prices are reciprocals of each other. Money is one of the wonderful invention of man.Money is defined as "anything that is generally accecptable as a mean of exchange and that at the same time acts as a measure and store of

value".Value of money is meant its purchasing power and its capacity to command goods in exchange for itself. The value of money varies inversely with the general level of prices.When the general prices increase,the value of money falls and when general prices decrease, the value of money rises.Money is accepted as a media of exchange because it has value.Money is not needed for its own sake but for the good and services it can purchase.
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Answered by Abdullah06 1 2 3 4 5

Talking about Money it is accepted as a media of exchange because it has value. It is held as a store of value because it has value. The value of money therefore has significant in the study of all economic problems. By the value of money is meant its purchasing power its capacity to command goods in exchange for itself. Money, as we know, is not needed for its own sake but for the goods and services it can purchase. If money buys more commodities than it did at sometime, we say, the value of money is high and if it buys less, the value of money is said to be low. Thus, the real value of a unit of money at a given time and place is the quantity of goods and services of all kinds that can be purchased with a unit of money. The value of money varies inversely with the general level of prices: When the general prices increases, the value of money falls and when general prices decrease, the value of money rises. In mathematical terms the value of money and the general level of prices are reciprocals of each other, i.e., if the value of money falls by 10%, there is rise of 10% in the general price level. Similarly, a rise in 10% in the value of purchasing power of money is the same as decline of 10% in general price level.

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What Are The Effects Of Devaluation?

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Devaluation reduces the export price in term of foreign currencies in the world market. As a result the exports are increased so as to increase the revenue of the country. When the exports are increased all efforts are made to increase the production of the country. Increased demand for manufactured goods in the international market enhances incentives to the expansion of industries. Due to devaluation the price of imported goods in term of foreign currency goes up. So the prices of the commodities are increased because of increase in the price of imported machinery and raw material. The imports are reduced. When the revenues are increased due to an increase in exports and paymentsare reduced due to decrease in imports. As a result, the balance of payment of the country is corrected. Foreigners find it cheaper to invest in devaluating country so it tends to increase the investment of foreign capital. Because of devaluation, we have to pay more rupees in exchange of dollars. So in this way debt is increased. Devaluation makes currency smuggling unprofitable. It also discourages smuggling of other goods.
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Answered by eisha 1 2 3 4 5

Objectives of Devaluation: Almost all the countries of the world have devalued their currencies time to time to achieve certain economic objects. During great depression of 1930 most of the countries devalued their countries. In 1972 Pakistan devalued its currency up to 132%. In 1993 Care-taker Govt. devalued the currency up to 9%. Following are the main objectives of devaluation. To Encourage Exports: Devaluation policy is adopted to increase the exports of the country. As the currency of any country is devalued, the commodities of that country become cheap for the other countries and they increase their demand. To Discourage the Imports:

As the currency of any country is devalued, the other countries goods become costly to import from that country. So the people reduce their demands forforeign goods. To Correct the Balance of Payment: When the balance of payment of any country is unfavourable the devaluation policy is adopted when the currency is devalued, the value of imports increase but the value of exports decreases. So when value of exports will be greater then the value of imports, we will say that balance of payment is favourable.
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Answered by luckyhaidy 1 2 3 4 5

1. Effect on exports: devaluation reduces the export price in term of foreign currencies. In the world of market, as a result, the exports are increased. So increase in the revenues of the country. 2. Effect on Foreign exchange: When there is greater devaluation, the speculators are sure that in future, the currency will not be devalued they will purchase the currency. In this way, there is flow of foreign exchange from foreign to home country. 3. Effect on resources: increase in exports will lead to the full utilization of human and natural resources of the country. 4. Effect on production level: when the exports are increased, all efforts are made to increase the production of the country. 5. Effect on industry: Increased demand for manufactured goods in the international Market enhances more incentives for the expansion of the industries. 6. Effect on imports: Due to devaluation, the prices of imported goods in term of Foreign currency goes up. So the prices of the commodities are increased because of increase in prices of imported machinery and raw material. The imports are reduced. 7. Correction of balance of payment: When the revenues are increased due to Increase in exports and payments are reduced due to decrease in imports. As A result, the balance of payment of the country is corrected.

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Answered by eisha 1 2 3 4 5

Correction of Deficit: Devaluation makes home goods cheaper to foreign countries and foreign goods expensive to home country. In this way deficit in the balance of payment is corrected. Adjustment of Currency Value: When the currency is over valued, devaluation brings equilibrium in the external and internal value of the currency, so various imbalances in the country removes. Increase in Foreign Aid: The international lending agencies like IMF, IBRD insists upon devaluation, as in the Butto reign IMF stressed the Govt. of Pakistan to devalue the currency. Foreign investor also feels pleasure to do the investment in those countries where currency is devalued. End of Uncertainty: Devaluation removes the uncertainty in the business circles. Rate of investment also increases. Inflow of Remittances: The workers who are working abroad, they would prefer to send capital in side the country. Because they will get more currency in terms of foreign currency.
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Devaluation means lowering the value of currency in terms of foreign currencies. There is difference between devaluation and exchangedepreciation. Devaluation is the result of official government action, whereasdepreciation or decline in the rate of exchange of one currency in terms of another is due to market forces. Substantially devaluation and depreciationboth refer to the reduction of international currency in terms of foreign currencies. When the rupee was declined from the dollar and floated against as undisclosed basket of currencies of Jan 8, 1992 the rupee parity stood Rs. 9.90 to a dollar.The main motives for practicing currency devaluation are as follow:It stimulates exports of commodities. It restricts important demand for goods and services.It helps in creating a favorable balance and services. Almost all the countries of the world have devalued their currencies at one time or the other with a view to achieve certain economic objectives. During the great depression of 1930, devaluation was carried by most countries of the world with the objectives of; Correcting the over-valuation of all the currencies;Embarking upon an anti-deflationary pro gramme by monetary and fiscal expansion; To encourage exports and shrink impost so that favorable balance of paymentis achieved.
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The lowering of the value of one currency against the value of the othercurrencies is known as the devaluation of money. For example, if the value of the pound lowers as compare to dollar to a great extent consistently then it would be known as devaluation of pound. There are various effects of the devaluation of a currency on an economy like it can directly impact the value ofexports and imports. For writing an essay on the devaluation of money, you can start by giving a brief overview of the importance of devaluation of money. Then you can discuss the reasons of devaluation of money. After that you can write the effects of money devaluation on the overall economy.

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There are many advantages and disadvantages as well. Devaluation discourage the inflow of goods and services. As the importer in the devaluing currency have to pay more to the foreigners for a given quantity of imports they therefore shrink order. Devaluation has a very harmful effect on the economy of a developing country, if its exports have elastic ad its imports in-elastic demand. A developing country has to import a large number of strategic factors of production which are not available in the country foraccelerating the rate of economic development. The devaluing country cannot pay for all its costly imports and so it has to rely on foreign debts which have its own evil effects. The country can benefit from devaluation if the demands for its products are fairly inelastic. It can increase supply in response to a higher demand without increasing the price of the exported goods. The country then will be in a position to pay for the costly imports. The economic progress will not be adversely affected. If due to devaluation exports of goods and services are increased and imports reduced the country will have a favourable balance of payment. If the devaluing country's exports of goods and services increase it will stimulate domestic employment.

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There are many reason behind the Pak.currency devaluation,but the major reasons are trade deficit,decreasing Export,increase import,dollar demand,and the political instability in Pakistan.