Currency Wars: The Balance of Payments and Currency Devaluation — Part Three

-        Posted on 30-6-2018

-        The balance of payments in every country essentially shows the country's economic position vis-à-vis other countries. This balance of payments, which the International Monetary Fund requires members to provide annually, is, in brief, a regular accounting record of all trade exchanges. It operates according to double-entry accounting theory and contains two sides: a “from” side — the debit — in which all of the state’s financial obligations to other countries are recorded, such as the value of imports of goods and services; and a “to” side — the credit — in which all of the state’s claims on other countries are recorded, such as the value of its exports of goods and services.

-        In addition to one-sided transfers such as financial aid provided to the state from abroad. The current account or the trade balance represents the most important structural element of the country's balance of payments, since this account represents the value of the country’s exports and imports of goods and services. When exports exceed imports there is a surplus, and vice versa. Thus, when a deficit appears in the current account it is interpreted as a result of imports exceeding exports by the value of the deficit — which is the case for the majority of developing countries. In those countries, and especially debtor countries burdened with debt, the deficit may be persistent, which constitutes a danger to that country’s economy and an indicator of the necessity to intervene to correct such imbalances in the balance of payments. Devaluing the country’s currency may be one of the powerful options, although it is considered a last resort to reform a country’s financial and monetary system. Obtaining new loans from international lending institutions, led by the IMF and the World Bank, to address structural imbalances in the balance of payments — such as low foreign exchange reserves in the country, weak exports, rising imports, and accumulation of external indebtedness —

-        is not an easy option to obtain. Developing countries that suffer a balance of payments deficit — one of its main indicators — try to attract external financing from international lending institutions, as we noted above. Obtaining that financing depends on a high degree of confidence that international lending institutions such as the IMF and the World Bank place on the economy of the countries seeking finance, and winning the trust of those institutions is difficult. These international institutions seek to exercise control over some levers of the economy of borrowing countries in order to ensure the stability and balance of those countries’ balance of payments and the repayment of external loans. Accordingly, these international institutions send teams of economic experts whom they commission to prepare economic reports that often present a pessimistic view of the country’s economic situation and its balance of payments... These reports are issued according to a prepared prescription for such countries when they request advice, guidance and financing...

-        In addition, internationally accredited institutions in the United States that specialize in sovereign credit ratings accompany the IMF’s request for a report from these rating agencies on countries’ credit standing and their rating level. A country’s credit standing is downgraded due to its economic, political and social circumstances and its balance of payments, and thus the risk of lending to such countries is raised. The nature of the work of these credit rating agencies and groups of international economic experts is like the nature of intelligence work and forcible interrogation, and like the method of “simulated drowning” in which the prisoner responds and surrenders to the jailer’s will. Consequently, countries seeking financing to cover a deficit in their balance of payments will comply with the IMF and the World Bank’s requests, which they present as “advice” in the form of reform programs for the borrowing country’s financial and monetary system. Among these reform programs are new ways to increase government revenue collection and the state’s revenue sources, reduction of subsidy programs for low-income groups, reduction of tax exemptions, adjustment of tax policies, and adoption of privatization programs which open the way for major public sector institutions and companies to be preyed upon by international companies and investment institutions.

-        Currency devaluation is in itself a policy of the issuing state, and the state is supposed to choose the timing of devaluation or revaluation according to its economic and political circumstances. However, in negotiating with international lending institutions such as the IMF, a state relinquishes its sovereignty over its monetary policies and, in some of its aspects, those policies fall into the hands of these lending institutions. It is noticeable, from experiences with currency devaluations in various countries, that these reform measures — with devaluation at the forefront — do not achieve the expected objectives, whether in the short or long term....

-        A currency’s depreciation in foreign exchange markets, international foreign currency markets, and international markets for the exchange of goods and services can be either an indicator of a balance of payments crisis in the currency-issuing country, or the result of other factors such as high inflation rates and price increases, and a decline in the country’s foreign exchange reserves due to imports exceeding exports. It is certainly also the result of increased national indebtedness and difficulties in that country’s ability to service its debt regularly. The state then implements fiscal, monetary and economic measures with the assistance of the IMF and the World Bank to reduce the balance of payments deficit of the country, and these measures can extend to affecting the country’s currency by devaluing its exchange rate against foreign currencies in global foreign exchange markets, in the hope of producing results that will remedy the balance of payments deficit, even if over a not-short period of time, to prepare the economic conditions in the country to align with the new economic situation under the new monetary measures.

-        A country’s currency may weaken in foreign currency markets abroad and in the international market for goods and services as a result of one or more states manipulating the exchange rates of the targeted country’s currency against other currencies and engaging in speculation to change the international market forces of currencies and commodities — supply and demand — which fundamentally determine the value of world currencies in the market. A massive quantitative and qualitative intervention sometimes begins to gradually and continuously reduce the value of the targeted country’s currency against other currencies, which affects the domestic market and the economy’s components. This is a form of the currency war referred to in Part One of the article. An example, as we have mentioned, are the currencies of Turkey and Qatar, targeted by Saudi Arabia and the United Arab Emirates. And here is Iran, as a result of the economic embargo imposed by the United States after its withdrawal from the international Iranian nuclear agreement, whose currency began to weaken in recent days as a result of some intervention in the international market, forcing Iran to take austerity measures such as banning the import of 180 commodities until it remedies the escalating situation caused by the embargo — which clearly began to make the Iranian currency pay the price. It is the currency war in the global international market to affect economic conditions and thereby reap political gains, and to attempt to create internal repercussions through economic impacts, especially on the currency and bans on goods and trade with Iran, leading thereby to the collapse of the system in Iran as sketched by the United States of America and its allies.....