Currency Wars: National Currency Devaluation — Part One

Posted on 28-6-2018

- "Currency war" is an old-new term; its arena is the financial markets and international trade. The term denotes a large number of countries rushing to follow the same tool, namely by devaluing their national currency simultaneously... in order to protect these countries' exports and increase the competitiveness of their goods and services in the international market. It is a move against market forces and their rules, which primarily determine the value of tradable currencies according to supply and demand.

- The monetary system of any country is represented by the stability of its national currency.. It is a principal sovereign instrument, and what happens to the currency through trading and transactions in international currency and commodity markets deeply affects the stability of that country's monetary and financial conditions... The national currency is a vital target for states in their pursuit of developing their economies.... And because countries cannot live in isolation from others, economic and trade warfare between countries begins with the national currency of the targeted country, so the war of money and currencies is waged in this conflict.... painful despite its non-bloody nature..

- Devaluing a country's national currency means lowering the exchange rate of the local currency against foreign currencies, so that the local currency's value equals fewer units of foreign currencies than it did before the devaluation.

- The devaluation of national currencies is not limited to developing and debtor countries only; advanced industrial countries that enjoy productive exportable goods across sectors also deliberately devalue their currency to increase the competitiveness of their exports. For example, China, a major industrial country, devalued its currency in 8-2015 to boost its exports and stimulate the Chinese economy, amid strong opposition from some Western countries, led by the United States of America. A group of emerging Asian countries and some other countries also devalued their national currencies, following China's example, to protect and increase their similar exports; at that time the number of such countries reached about 22. This raised international concerns about undermining global monetary stability, and these multiple currency devaluations were termed a "currency war"..

- It is also a currency war when a state or group of states targets the national currency of a country by carrying out speculative transactions and financial deals in global financial markets to devalue the currency of a country that has enjoyed continuous economic stability, reducing demand for it in the face of an excess supply of it in these markets, causing its price to fluctuate downward, thereby harming that currency's national economy and thus unsettling and disrupting the financial and consequently political system of that country. Due to hostility between those countries, the monetary authorities in the targeted country are forced to take and implement monetary measures to try to fix or raise the value of their national currency in global financial markets after such speculations. Some resort to buying large quantities of their national currency, i.e., increasing demand for it and reducing its supply, or by raising interest rates to stimulate investment and foreign capital to come and invest in that country, thereby increasing demand for its national currency. This is what happened weeks ago with Turkey, where the value of the Turkish lira began to decline in financial markets against other currencies, and, as Turkey announced, this resulted from speculative actions by two Muslim countries (meaning Saudi Arabia and the United Arab Emirates) against the Turkish lira in foreign exchange markets abroad. These speculative actions caused the Turkish lira to lose some of its exchange value vis-à-vis other currencies, so Turkey took measures to confront this impactful event whose conduct was economic and whose purpose was political. It raised the interest rate on الودائع, and also intervened in the money market by selling a number of foreign currencies in large quantities in exchange for its national currency, until the situation settled relatively..

- This also occurred in the context of a currency war with the State of Qatar, when Qatar accused the United Arab Emirates of attempting to undermine trading of the Qatari riyal in global financial markets in cooperation with some international banks, to affect the Qatari riyal and the economy of that country and drag it into a spiral of economic instability, the depreciation of its national currency, and the diversion of capital flows away from investment in Qatar.

- It is now happening in Iran as it faces the danger of destabilizing its monetary, financial and economic stability in light of the sanctions imposed on it by the United States of America, especially after the latter's withdrawal from the Iran nuclear agreement...

- A country's national currency is also confronted with a war in the economic direction when a debtor country, for example—most of which are developing countries—is forced to face its creditors, led by the IMF and the World Bank, in their demands for overdue debts and debt service. Most developing countries borrow in the morning and by evening find themselves shackled with debt and accumulating interest, and since loans are not always used for developmental purposes, part of them goes to public expenditure and another part to unproductive sectors... As a result, repaying loan installments and servicing the debt becomes difficult, and thus these debtor countries become captives of their creditors, who advise them to implement "structural adjustment" programs for their balance of payments.

- Devaluing the currency of such a debtor country is among the first conditions imposed by these international lending institutions if they are to assist it and reschedule its debts and interest in an ongoing process without end. Thus the debtor state is compelled, imposed upon, to devalue its national currency and to adopt other programs such as privatization, enacting corrective and new tax laws, increasing tax collection rates, cutting expenditures— including social spending—reducing tax exemptions, ...etc., as part of financial reform packages and projects for that state, in hope of increasing its exports and reducing its imports, lowering unemployment rates and increasing demand for labor, and controlling inflation rates as a result of devaluing its currency. However, most developing countries do not achieve the desired objectives from devaluing their currency, at least in the initial time periods, whereas devaluation is more effective in advanced industrial countries for several reasons, including that developing countries do not have the flexible industrial and commodity diversity found in advanced industrial countries. Some exports in developing countries are extractive industries—i.e., raw materials such as potash, oil, phosphate, etc.—which have international markets in which it is difficult to change prices, in addition to the existence of international agreements with long-term time and price linkages.

- Many countries also produce the same exports, so another country could devalue its currency to protect its similar exports, and therefore the state cannot control the prices of those exports as if it were the sole producer... This is due to the inelastic supply of exports, in addition to the inelastic demand for imports, because most imported goods are essential items such as medicines and foodstuffs, in addition to machinery and equipment, the demand for which often does not decrease when the importing country's currency is devalued, i.e., when their prices rise in local currency at the new value. It is difficult to find substitutes and replace these imported goods with domestic ones in the short term.. The elasticity of supply and demand for exports and imports is a condition for achieving the aims of currency devaluation.. This is the case in the majority of developing countries. Debtor countries meekly devalue their currency, yet they face several economic and monetary problems by failing to achieve the objectives to address existing imbalances in the balance of payments, in addition to the country's political situation, which may extend to provoking protests and internal unrest due to public rejection of reform packages and their outcomes that the current and coming generations largely bear the cost of, in addition to rising domestic prices because of higher costs of imported inputs, and rising wage incomes through corrective and relative adjustment policies, opening the door to higher inflation rates.

- International borrowing, based on the experiences of countries in past decades with international lending monetary institutions such as the IMF and the World Bank—especially most developing countries—can destabilize the monetary and financial stability of the borrowing country if that country's balance of payments suffers structural imbalances. Which ultimately means the accumulation of external debts and their interest; consequently, that country will be forced to devalue its national currency at an inopportune time for it. This will bring upon it monetary, economic and political instability...

·      These pieces of information are drawn from several foreign and Arab sources on the subject of money and banks, in addition to several research theses at the master's and doctoral levels, economic journals, and websites on topics related to international economics...