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Devaluation: It is one of the most commonly adopted monetary by a country with adverse balance of payments.

Devaluation simply means lowering of the external value ( i.e., exchange rate) of a countrys currency by an official edict. This may be either in relation to the currencies of all the countries or I terms of gold or it might be done in relation to the currencies of only a few selected countries. For instance, the Indian rupee on June 6, 1966 was devalued 36% in terms of gold and by 57.5% in terms of US dollar and English pound sterling. Thus in terms of US currency the official exchange rate of rupee which was Re 1=22cents has been fixed at Re 1=13.3 cents after devaluation. It should be noted that the difference between devaluation and depreciation of exchange is that while devaluation is reduction of the external value of a currency as arbitrarily decided upon by the Government, depreciation stands for automatic reduction in the external value of a countrys currency by market forces. Sometimes the act of devaluing a currency might simply mean giving official recognition to what might be termed the de facto depreciation of the currency in foreign exchange market. In substance, however, both imply the same thing i.e., lower value of local currency in terms of foreign currencies. Similarly, both devaluation and depreciation produce similar effects- increase exports (by making local goods cheaper to foreigners), curtail imports (by making foreign goods expensive) and ultimately correct an adverse balance of payments and make it a favorable one. In modern times, generally a country resorts to devaluation of its currency when it intends to correct a chronic and fundamental disequilibrium (deficit) in its balance of payments. When there is persistent overvaluation of its currency which is the root cause of its adverse balance of payments, a country has no alternative but to devalue its currency. A countrys currency may be overvalued in terms of a foreign currency ( thanks to persistent inflation) and therefore, at the present official exchange rate the foreign currency is cheap and commodities are also cheap resulting ultimately in larger imports and lesser exports causing an adverse balance of payments and ultimately de facto depreciation of the external value of the currency in the exchange market. Devaluation will then be necessitated. In short, a country adopts devaluation for export promotion. When a country lowers its exchange rate, foreigners will find it beneficial to buy more from this country, so that its exports will expand while its imports will fall which tend to produce a favorable balance of payments for the country. However, the success of devaluation depends upon the following conditions: 1. A fair elastic demand: A fairly elastic demand for imports and exports will ease the way or the successful functioning of devaluation to achieve its desired goal. But if the countrys demand for imports and exports is inelastic devaluation will worsen the balance of payments position by increasing the total value of imports while at the same time reducing the total value of exports. It has been generally contended that devaluation will improve the balance of payments of the country if the sum of the elasticities of demand for imports and exports is greater than unity. If the sum is less than unity the balance of payments position will be worsened further by devaluation. 2. Structure of imports and exports: If the devaluing countrys export consists of non-traditional items and has a large demand from the rest of the world, it can gain by improving terms of trade due to increase in world demand for its product

induced by devaluation. But if the exports are largely consist of primary products and imports are of manufactured goods, raw materials etc., it will have always unfavorable terms of trade so it will lose more under devaluation. 3. Domestic price stability: Maintenance of internal purchasing power of a devaluing country is very essential to realize fruitful effects of devaluation. Success of devaluation requires that when the external value of the currency is deliberately reduced, the internal value of the currency, should not change otherwise the whole purpose will be defeated. In other word the cost- price structure of devaluing country should not alter. There should be no inflation. However, the cost- price structure of a country may change and inflationary impact may be set in by devaluation in the following circumstances: a. When imports of certain goods are curbed but their domestic production is not increased, scarcity of such goods will be felt which may cause a rise in prices of such goods. b. As impact of devaluation if exports increase, without adequate expansion of export industries, the supply of domestic market will decrease so that prices of such goods may rise, if the demand pressure in the domestic economy to remain the same. c. When the devaluing country is capital deficient, it continues to import necessary capital goods and certain import components even at high cost, as a result of which prices of its industrial output may rise. d. When owing to price rise of a large numbers of goods, cost of living tends to rise, higher wages may be demanded by labour unions so that cost push inflation many get further momentum. Under such inflationary bias in cost-price structure induced by devaluation, its efficacy is certainly undermined to a great extent. However, if a tight monetary and fiscal policy is followed with devaluation, its inflationary impact is minimized. 4. International cooperation: Devaluation will serve its purpose only if other countries do not retaliate by resorting to simultaneous devaluation. The rest of the world must be prepared to cooperate fully with the country devaluing its currency by not raising import duties or giving export bounties or devaluing their own currency which also may tend to nullify the beneficial effects of devaluation to the country under consideration. 5. Co ordination of other measures: If the act of devaluation is coordinated with a hike in import duties, lowering of export duties , liberalization of export licenses, fixing of import quotas, export promotion programme etc., devaluation will prove to be more efficacious. If however other measures are contrarily adopted the desirable effects of devaluation will be hampered. It may thus be concluded that though devaluation combines the advantages of both exchange depreciation and stable exchange rates, the device is not always successful in helping a country face an adverse balance of payments if other factors are operating unfavorably. Since the success of devaluation depends upon so many factors, a country must examine them carefully before resorting to this device.

Exchange control: Another most commonly adhered to method of correcting disequilibrium of the balance of payments is exchange control. It is surer method usually adopted by the government of a country to correct disequilibrium. Under the method all the exporters are directed by the exchange control authority, usually the central bank, to surrender their foreign exchange earnings to it and the foreign exchange is rationed out among the licensed importers. Thus under exchange control non but the license holders are allowed to import goods. A quota for different items of imports is also fixed from time to time by the authority. The balance payment is thus rectified by keeping imports well within the limits of export earning and the foreign exchange balances. In general however, control deals with balance of payments disequilibrium by suppressing the deficit that is only a symptom and not the basic trouble. Exchange control deals with only the deficit, not its causes, and it may aggravate those causes tending to create a more basic disequilibrium. In other words exchange control can prevent a complete breakdown, but it cannot eliminate a condition of disequilibrium. Thus exchange control offers no permanent solution to the problem of persistent disequilibrium. It can at best be justified only as a temporary measure, to gain time while other more fundamental adjustments ae made to restore equilibrium in the balance of payments. In fine a country facing an adverse balance of payments and forced to choose between deflation, depreciation, devaluation and exchange control, should weigh carefully the desirable and undesirable circumstances of each. In recent days, however , disequilibrium in the balance of payments situation of a country is corrected by seeking the help of International Monetary Fund which advises the member countries concerned to adopt certain measures.