Why do the countries devalue their own currencies?
Nazeer Mohmand
Since decades, US and China are in a trade war. China has been relentlessly devaluing their currency, as claimed by Donald Trump during his regime. China always manipulates (devalue) their currency. Devaluation of currency make countries best in case of exports. Suppose a country exports wheat to USA, the exporter would receive $1 is equal to RS. 100 for a one kg. Now the government has decided to devalue their currency by 100 pc, then for the same quantity of wheat the exporter would receive $1 is equal to 200 rupees. Devaluation nudges the worker and firms for further production to produce more. Devaluation of currency in the country increases the exports and can enhance the productivity.
Devaluation critically encounters the imports of the particular country. People in underdeveloped countries are dependent on imports at majority. The elite and the upper middle class always rely on imports. When the prices of imports get higher, their demands for imports fall short. By lowering demands, they substitute the imported goods and services with domestic goods. Devaluation in the countries restrain the imports while making the domestic goods more vigorous, and it becomes more sophisticated. One important logic behind the devaluation of the currency in the country is that, whenever the government facing the current account deficit, it opts for the devaluation of their own currency against dollar to gain some relief in balance of payment. Devaluation is blessing incase of exports and to reduce imports. Weaker currency escorting higher employment, faster GDP growth. Competitive devaluation is a specific scenario in which one nation is matched by currency devaluation of another. This could happen when both currencies have managed exchange rates rather than market determined floating exchange rates. If the currency war does not breakout, then currency devaluation may lower productivity, because the imports of capital equipment’s and machinery may become too expensive. Devaluation in short, boost exports because it becomes competitive in international market, with shrinking trade deficit. Weak currency makes the interest payment on outstanding debt less expensive.
Worsening factors of devaluation of currency are inflation and illegal against standard role of law. Devaluation escorts inflation and in some cases hyperinflation. Generally, a devaluation is likely to contribute to inflationary pressure, because of higher import prices and rising demands for exports. Second, the important factor is that the FDI (foreign direct investment) always investigates the credibility of the currency. If the country’s currency is not credible, they switch their investment back. Devaluation is an illegal phenomenon against world standard role and drags country into a currency war. The perennial trade war between China and USA has its roots in this phenomenon. The international market monopolists, like IMF (international monetary fund) imposes different types of sanctions in-kind of higher taxes, higher interest rate on outstanding debt, and trade restrictions. IMF also advises the countries to keep their currency at nation matched currency rates. So far, the devaluation is blessing for developed countries, like China, USA, Russia etc. and a big trauma for underdeveloped countries. China could depreciate their “YAUN” against others and easily channelize the monetary affairs within the country because of strong institutions and progressive check and balances. Any rising of the prices of such inputs through devaluation, would rise industrial costs and reduce the intensity of capacity utilization. It examines that currency devaluation has positioned Pakistan lose heavily both as seller and as a buyer and has made no good substitute for remedial changes for economic policies and development planning. So, by examining devaluation in Pakistan it is concluded that, it has always led us to the cost push inflation and never-ending saga of cruel economic circle. There are many solutions to the current crises in Pakistan’s economy. Over population in Pakistan has adversely affected the economic growth. Heavy debt, unsatisfactory exports, insufficient revenue from taxes, higher unemployment are the crises which many times have led Pakistan into a default situation. The way forward to all these challenges is, increase in investment to get higher growth, assurance to the investors, and security to FDI, political stability, exports promotion through higher commission, business delegation, international advertisement, strict policies for tax collections, and ban on luxurious imports are mandatory for economic stability in Pakistan. Time certainly is right to adopt these policies and embark upon a plan that can yield fruitful results.
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