Currency Wars: Cross-Border Capital Flows and Currency Devaluations — Part Four

-       One of the hoped-for outcomes of a currency devaluation is attracting the movement of foreign capital and emigrating capital. But in most cases, foreign capital movement hesitates to enter the local market soon after a currency devaluation, until economic and security conditions there stabilize. Likewise, the movement of capital from inside to outside (the flight of capital), transferring most of its balances and fixed assets abroad prior to a devaluation of their country’s currency, takes time; investors are able to move assets abroad before the devaluation occurs. Capital flees abroad out of fear of confiscation and in search of safety and security abroad, away from disturbances whose outcomes cannot be predicted. These fleeing capitals, on the other hand, weaken their country’s tax base, since the tax base remains concentrated on wage and salary layers and the small-business layer — the middle class — and the country cannot collect large amounts as would be the case if the fleeing capitals and the large business layer remained. Thus the country loses tax bases and tax vessels when the business class exits abroad out of fear of devaluation, and the valuation value of their assets erodes after their country’s currency is devalued. Also, holders of deposits in banks and citizens’ savings are significantly affected and the purchasing value of the country’s currency is eroded; thus a person whose savings account balance before the devaluation was the amount 70,000 Jordanian dinars — which is equivalent, for example, to the amount 100,000 US dollars — after the devaluation, say the devaluation was 20% of the currency’s value, the value of the 70,000-dinar deposit when converted to US dollars would be 80,000 US dollars — i.e., a loss of one-fifth of the deposit’s value in its US dollar equivalent. Any person who spends on his children abroad to complete their education will be affected, any person who wants to import a basic commodity will be affected, and any outward transfer for any reason such as tourism and recreation expenses will be affected. In this era of globalization the world is affected by economic events in multiple countries, directly and indirectly, and depositors will incur losses after the devaluation in terms of the valuation of currencies against other currencies. Thus holders of deposits in the local currency are forced to convert them into other foreign currencies — what used to be called hard currencies — unless the country’s monetary authorities move and take some incentive measures, such as raising local-currency deposit rates, or enact laws that prohibit such internal transfers.

-       Another matter in the process of national capital departure abroad before a currency devaluation is profit-seeking goals. The value of these investors’ assets will fall after the devaluation according to accounting valuation programs; however, the value of these assets after the national currency is devalued, and after these capitals and assets return to the country once political and economic conditions stabilize following the devaluation, will be higher relative to the new exchange rate. Consequently, returning investors can repay debts and dues owed by other investors prior to the national currency devaluation, and tangible profits will result for those returning investors as well.

-       Foreign capital seeks to enter a country that has devalued its national currency, and after economic, monetary and security conditions stabilize there, these funds begin to flow into the market due to the lower value of the country’s currency and of goods and services in that country, and the higher interest rates on deposits there as well — a result of the devaluation and the complementary monetary operations — thereby yielding revenues from these price differentials in goods and services in addition to the interest.

-       Below we cite what the Jordanian newspaper Al-Ghad reported from an interview with a former Jordanian prime minister about what happens after a country devalues its national currency...

-       "Mudar Badran in the twenty-fourth episode of Al-Ghad’s program ‘A Politician Remembers’ stated that he learned in February 1988 that the Jordanian dinar would fall, and there were indications to that effect. He called Cairo Amman Bank, which had asked him for a loan a few days earlier in the amount of 80,000 Jordanian dinars, and informed the bank of the necessity of converting the loan amount from Jordanian dinars into my currencies, the US dollar and the pound sterling; he bought the dollar at 36 piasters and the sterling at 50 piasters, and after the dinar’s value was devalued, he repaid his debt when he sold the dollar at 89 piasters and the sterling at 130 piasters, achieving profits that enabled him to repay his loan to Cairo Amman Bank after he converted the amounts in dollars and pounds sterling back into Jordanian dinars post-devaluation, and he had an additional sum left after repaying the loan, with which he built a house for his son in Amman..."

-       A country’s currency devaluation is a process preceded by the currency’s decline in the money and foreign-exchange markets. The currency of a country declines when the decline is natural and influenced by factors and the structure of the issuing state’s economy, such as high inflation rates, rising prices, exports lower than imports, sluggish national economic growth, rising and accumulating external debt, and a persistent balance-of-payments deficit. Consequently, demand for the country’s currency in global financial markets is less than the supply of that currency, and therefore the value of the national currency relative to other currencies and conversions to other currencies begins to fall. If the decline continues, the concerned countries devalue or float their currency, as Algeria and مصـرَفي العقود السابقة did so. Note: the phrase "مصـرَفي العقود السابقة" in the Arabic appears unclear/possibly a typographical error; it could mean "the banks of previous contracts" or "banks of earlier administrations" — the best reading is that the author intended to name Algeria and certain banks or banking authorities from prior decades. There is, moreover, the risk of generating a black market for foreign exchange as a consequence of devaluing or floating the national currency.

-       It is noticeable in financial and monetary reform programs that the IMF advises debtor countries to implement within the "structural adjustment" package to address and correct imbalances in their balance of payments, that these programs are policy- and procedure-oriented reforms rather than long-term developmental measures. These international institutions focus on financial and monetary systems; for example their experts try to guide debtor-country governments to amend or implement new programs such as adjusting the income-tax scheme by reducing exemptions and opening new tax bases, reducing public spending, cutting social-support programs, reducing wages or tying them to fixed rates, raising interest rates on deposits to attract and pull in foreign capital and to repatriate fleeing national capital. Most of these programs aim to increase state revenues and reduce public expenditure.
- As for implementing permanent development plans to solve unemployment, the IMF does not engage in long- or medium-term lending; rather its lending is always short-term, unlike World Bank lending — which is developmental and long-term.

-       Spending of loans received from the IMF depends on their distribution across targeted sectors and on correcting the imbalances in countries’ balance of payments, and it is the responsibility of government financial officials to implement the programs transparently. Yet we read of many leakages of these loan funds and allocations to influential parties inside the borrowing country, disguised under general headings to obscure their auditing and review. It is clear that many corruption incidents emerge in the relationship between the IMF and some governments of developing countries. For example Iraq, where the accumulated external debt in recent years exceeds 70 billion US dollars, while oil revenues in Iraq over the past ten years exceeded 800 billion US dollars... Suspicions of corruption pervade these countries, whose arenas are often the setting for conflicts and disputes and for force majeure conditions that create realities in which oversight and transparency are weakened.

-       Countries must put an end to external borrowing, follow a strict austerity policy, and adopt precautionary measures to reduce borrowing, which should also be used for developing the national economy rather than for consumption. Continuous oversight of public spending must be observed, and austerity followed so the country can progress appropriately. Borrowing is a scourge that exposes countries to undermining their sovereignty, destabilizing them, and creating opportunities for global financing funds to control those national economies and run them according to the interests of major global corporations behind them. Developing countries should also seek the doors of other international lending institutions such as the BRICS organization... to break the IMF’s dominance and negotiate to create better conditions and terms for the country...."

·      These pieces of information are drawn from several foreign and Arab sources on money and banking, in addition to several master’s and doctoral theses, economic journals, and websites on topics related to the international economy...

 

· This information is drawn from several foreign and Arab sources on money and banking, in addition to several master's and doctoral theses, economic journals, and websites on topics related to the international economy...