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The decision to reduce the value of the exchange rate of the Iraqi dinar against the US dollar caused a sensation and raised fears that the country would enter a stage of economic collapse, which would aggravate the crisis that Iraq has been experiencing for years.
According to the Federal Reserve Bank of New York, it is possible for policymakers to devalue and revalue the value of a currency, which is generally associated with pressures from the domestic market.
The bank notes that the option to depreciate the currency can only be taken by the government of the country or the monetary authority in it, represented by the central bank in many countries.
The devaluation of the national currency is defined as a deliberate downward adjustment of the official exchange rate, which leads to a devaluation relative to other currencies.
According to the economic site “Investopedia”, the world has witnessed how many countries devalued their currency, as economies abandoned their gold pegs and began pegging them to other currencies or a basket of currencies.
Impact on exports and imports
The bank warns that currency devaluation makes a country’s exports less expensive and relatively expensive for those outside.
According to Investopedia, the devaluation of the currency makes imports into the country more expensive for the local consumer, which leads to reduced imports.
The devaluation is likely to cause psychological effects, weakening investor confidence in the country’s economy and negatively affecting the process of attracting foreign investment, according to the bank.
Potential economic growth
The Economics Help site indicates that currency devaluation can lead to an increase in aggregate demand, which can lead, in some way, to an increase in the growth rate of the country’s economy.
Devaluation includes measures taken by the state to strategically reduce the purchasing power of the currency.
Investopedia notes that some countries may pursue such a strategy to gain a greater competitive edge in world trade and reduce the burden on the state’s sovereign debt.
However, the devaluation is likely to have “unintended” consequences, leading to what the site describes as “counterproductive.”
The site links an increase in exports and an increase in demand for local products, leading to more job opportunities and faster GDP growth.
According to the University of Toronto, Canada, lowering the value of the official exchange rate helps in some circumstances to transfer the demand for specific goods and services from abroad to the interior so that it is reflected in the domestic product.
Increased domestic demand automatically increases demand for local goods, reflected in the need for producers and distributors of these commodities and those working to sell them to create more jobs, reducing unemployment and providing a boost to the local market.
According to the university, the devaluation of the currency in some cases leads to an increase in income in the country, which will positively affect the labor market.
It is well known in the economic world that an increase in demand over supply leads to an increase in prices, while an increase in supply leads to lower prices, which means that the conditions imposed by the economy on the sector The country’s industrial and commercial sector and the volume of production are likely to determine the effect of the currency devaluation on prices at the local level.
These circumstances are likely to generate a direct increase in the wages of the worker in the country that decided to devalue its currency, since the low currency will not constitute attractive conditions for a migrant worker to come to the country, which provides greater opportunities and options for the local worker in your country.
The website “Economics Help” gives an example of Britain when it decided to reduce the value of the British pound, which made migrant workers from Eastern Europe prefer to work in Germany over Britain, forcing factories locals to increase their wages to keep foreign workers with them, or offer more attractive offers to the local worker. .
The site indicates that wages may decline if currency devaluation causes inflation whose rate exceeds wage increase rates.
China has repeatedly faced accusations of devaluing its currency to benefit more from its economy, and US President Donald Trump has been China’s most prominent critic on this issue.
Trump had accused China of “manipulating its currency” in light of the escalating trade war between Washington and Beijing last year, according to “CNBC.”
Trump said at the time that “China has lowered the price of its currency to its lowest ever level … This is called currency manipulation.”
And China had allowed the yuan to reach its lowest levels in more than a decade, making Chinese goods less expensive, at a time when the United States had raised tariffs on Chinese goods.
