Currency Wars: Exchange Rate and National Currency Devaluation — Part Two

-        Published on: 29 -6-2018

-        Shortly before the end of World War II, in 1944, the United States of America invited 44 countries to attend the Bretton Woods conference in the state of New Hampshire in the United States. This meeting aimed to lay the foundational building blocks for a system governing the movement of capital between countries as a basis to facilitate world trade. From this meeting, international monetary institutions such as the International Monetary Fund and the World Bank emerged, both of which still operate today. Several adjustments were made to these agreements; one of them was in 1971, when the United States announced its abandonment of the gold backing for the issuance of the U.S. dollar as an international currency, on the basis of which currencies are traded in the world...

-        National currencies of countries are considered a sovereign instrument and are used in domestic trade operations, where the value of goods and services is paid in the local currency. As for the value of imports of goods and services and transfers, their values are paid by exchanging the value in the national currency for its equivalent in foreign currencies, according to an exchange system, which is the concept by which the local currency is exchanged for foreign currency. That exchange rate is determined by main factors such as supply and demand in global financial markets, according to countries’ needs for imported goods and services, their trade with other countries, remittances and capital flows, and interest rates.

-        We give here an example of linking a national currency’s exchange rate to the U.S. dollar: the Jordanian dinar, which is the national currency of the Hashemite Kingdom of Jordan, which began circulating in 1950 in Jordan as a replacement for the Palestinian pound that circulated in Palestine in 1927 during the British Mandate, at a time when Jordan was called the "Emirate of Transjordan." The Jordanian dinar was pegged to the U.S. dollar in 1995 at a fixed exchange rate of 710 fils per one U.S. dollar, noting that the Jordanian dinar had been linked to the British pound sterling in 1967 and was later replaced by the Special Drawing Rights unit with a margin of 2.25%, then it was linked to a basket of multiple currencies, and then it was fully revalued between 1988 and 1989.

-        The pegging of the Jordanian dinar to the U.S. dollar had an effect of subordinating some aspects of the monetary authorities’ measures in Jordan to monetary decisions issued by the U.S. Federal Reserve, such as decisions related to interest rates. On the other hand, the peg to the U.S. dollar imparted a kind of stability in exchange rates in financial markets, which encouraged Jordanian expatriates to remit their transfers to Jordan and thereby support the Jordanian economy. It likewise encouraged foreign and Arab investors, especially Gulf investors, to invest in the Jordanian financial market due to the stability of the dinar’s exchange rate within its linkage to the U.S. dollar.

-        Despite that, the Jordanian economy is burdened by external debt and its accruing interest, which is reflected in the balance of payments that suffers from many structural imbalances and a near-permanent deficit. This negative situation in Jordan’s balance of payments prompted it to seek advice from the International Monetary Fund and the World Bank, which are among Jordan’s principal creditors, and which advised Jordan to implement a package of financial and monetary system reforms in the country, including enacting an amendment to the Income Tax Law in Jordan according to new tax bases and additional rates, in addition to reducing government spending and cutting government social support programs for low-income groups, etc. These implementations ignited a wave of demonstrations and protests in Jordan against the enactment of the amendment to the Income Tax Law, which resulted in the dismissal of the previous government in Jordan — the Mulki government — and the assignment of a government headed by Dr. Razzaz, who promised upon his assignment to withdraw the aforementioned draft law from parliament, as it had been sent by the previous government to parliament for discussion and approval...

-        Many questions arose amid these events in Jordan about the possibility of devaluing the Jordanian dinar or floating it, but that was not addressed either at government levels or by international monetary institutions, and the Jordanian government denied any intention to do so. It is worth noting that devaluing a country’s currency, at the suggestion of international monetary institutions, is considered the last resort of financial and monetary reform programs after other priority reform programs have been discussed, especially if the state has adequate foreign currency reserves. However, devaluation is not entirely in the hands of debtor countries; rather, consultation, coordination and advice come from global monetary institutions such as the IMF, which have the authority to chart the course of financial and monetary reform, and devaluing the currency of the indebted country remains a predominant means to confront the fundamental structural imbalances in that country’s balance of payments...

-        A decision by a country’s monetary authorities, after consultation with global monetary institutions, to reduce the value of its currency means that the value of that currency equals less than before in terms of foreign currencies. Thus the exchange rate for trading the national currency falls, and its purchasing power abroad decreases accordingly.

·       This information is drawn from several foreign and Arab sources on the subject of money and banks, in addition to several master's and doctoral theses, economic periodicals, and electronic sites on topics related to the international economy...