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 payments are 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.
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 for foreign 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.
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.
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.
Describe the tools of devaluation?