By Matiop Aguek Anyang,
Aug 26, 2021 — Currency devaluation in macroeconomics and modern monetary policies, is an official lowering of the value of a country`s currency against any other external currencies or currency basket, within a fixed or pegged exchange system.
Fixed or pegged exchange system is an exchange regime where the value of a country`s currency is officially fixed / pegged by a Monetary Authority at a certain value against other currencies or basket of currencies, or another measure of value such as the gold.
Monetary Authority may consider devaluing a country`s domestic currency because of a well-studied and analyzed problems on the economy. Amongst many, the main objective of currency devaluation is to combat “imbalances on the balance of trade”. This means that any country that finds it difficult to compete in the foreign markets for its goods and services, because of expensive currency may possibly be considered for a currency devaluation.
Other objectives of currency devaluation can be explained as below.
- Currency devaluation boost Exports
For an economy that has economic productions, for instance Agriculture produce but finds it difficult to compete with other foreign markets, it is highly recommendable to undergo its currency devaluation. As a result, its produce will then be less expensive hence increasing demands leading to competitive advantage with other economies.
- Currency devaluation shrinks the trade deficits
Trade deficits are the imbalances on the balance of trade. This simply means an economy suffers from trade imbalances when its imports exceed the Exports. In this situation, Monetary Authority of a country undergoes an option of currency devaluation. If that is done, imports will be more expensive than Exports therefore, an incentive to insulate country`s balance of payment problem.
- Currency devaluation reduces foreign debts burden
Foreign debts are the borrowings by the governments. For example, had a government of South Sudan borrowed a debt of SSP 500,000,000 in 2012, but found it expensive and difficult repaying this debt. Repaying the same debt after 15th December 2015 when SSP was devalued would have made it three times or more, cheaper.
However, depending on the diagnosed status of an economy, currency devaluations is not free from lists of disadvantages. Some disadvantages of currency devaluations on economies are as follows.
- Inflation.
Devaluing a currency is likely to result into inflation. This is because any quantity of an imported good or raw material will increase in price. Sadly enough, if a devaluing economy has no productions to exports, it will, with no option continue to import the already made expensive imports by devaluation. This harm lives of people living in such an economy adversely.
- Reduces real wages and salaries
Devaluation makes currency cheaper and as such, the value of wages and salaries become valueless to support a living
- Reduces the purchasing power
Purchasing power is a financial ability to afford buying goods and services that are needed for living. While goods and services become expensive.
- Deterioration of living standards
Since real wages and salaries become valueless, less purchasing power, it leads to consequent deterioration of quality of lives for the people living in such a situation.
- It may lead to civil disorders
Just as many civil disorders had happened and are happening around the world, over 80% result from economic deterioration of lives. If the economic problems of an economy are not studied and analyzed well, copy, and paste currency devaluation may present a regrettable challenge to the country.
- Scares off investors
Investments are scared off from such economies where currency devaluations are wrongly administered. It makes investors less willing to risk because devaluation highly reduces real values of their holdings
- Difficult to repay back debts in foreign currencies
Assuming someone or a South Sudan for example, has an outstanding debt in foreign currencies such as the United States Dollars. repaying back such a debt would mean series of difficulties. This is because of the depreciated value of SSP because of its devaluation becomes an obstacle.
- It may lead to poor political relations of nations
Assuming South Sudan devalues its SSP to gain competitive advantage of its goods and services in East African regional markets, Uganda may consider doing the same, Kenya and so forth. This may lead to misunderstanding and perhaps political and economic standoff in the region.
Lessons on currency devaluations
Devaluation is mostly used in situation where a currency has a defined value relative to the baseline.
When Labor, led by Harold Wilson, took office in October 1964, it was immediately faced with a deficit of £800 million, which contributed to a series of sterling crises. A possible solution was to devalue the pound against other currencies to make imports more expensive (which meant more inflation), but exports cheaper, causing an increase.
By the summer of 1966, the pressure on sterling was acute but Wilson was determined to resist devaluation. To him the pound was a symbol of national status, of Britain’s role in the world as a key player. On 12 July 1966 the Cabinet rejected the devaluation option and agreed to a tough package of deflation and austerity instead.
However, due to several factors including international crises and dock strikes, by November 1967 the financial pressures had become overwhelming. On 16 November the Chancellor of the Exchequer, James Callaghan, with Wilson’s backing, recommended to the Cabinet that sterling should be devalued by just under 15 per cent. This was agreed and then implemented, at 14 per cent on 18 November. A package of measures including defense cuts, restrictions on hire purchase (credit), and higher interest rates was also agreed.
There was a forlorn tone to Callaghan’s proposal to the Cabinet, and at the end of November he moved to the Home Office, to be replaced as Chancellor by Roy Jenkins. In a famous broadcast, Wilson informed the nation that ‘the pound in your pocket’ had not been devalued, a controversial claim which appeared to ignore the fact that imports would become more expensive.
YES QUESTIONS that may warrant currency devaluation;
- Does an economy have a surplus production for export, but suffers from unfair competition because of expensive currency?
- Does an economy suffer from balance of payment deficits for that matter?
- Does the government find it difficult repaying off its Sovereign Debits?
If these questions, particularly 1 and 2 are of YES ANSWERS, the country is recommendable for a currency devaluation.
NB: though an economy may suffer from “Balance of Payment Deficits”, devaluing its currency cannot help if it does not have goods and services to export. It can actually worsen the economic indicators of a country.
Recommendation
I strongly recommend the Monetary Authority of South Sudan (Bank of South Sudan) to carry out a well detailed “Cost-benefit Analyses” of 15th December 2015 Currency devaluation on South Sudan`s Economy and development “a Situation backed up Monetary Policy Master Plan’ for South Sudan Economy.
Conclusion
Currency devaluation by its objectives, Effects, Pros and Cons, is not recommendable for unproductive economies that lack goods and services to export. “The 15th December, 2015 South Sudanese Pounds devaluation was an economic tragedy”.
The Author is a graduate student of Economic Development and Policy Analysis, University of Juba. He is reachable at Matiop.aguek@gmail.com
The statements, comments, or opinions published by Nyamilepedia are solely those of their respective authors, which do not necessarily represent the views held by the moderators of Nyamilepedia. The veracity of any claims made are the responsibility of the writer(s), and not the staff and the management of Nyamilepedia.
Nyamilepdeia reserves the right to moderate, publish or delete a post without warning or consultation with the author(s). To publish your article, contact our editorial team at nyamilepedia@gmail.com or info@nyamile.com.
