Why may devaluation fail to achieve the objectives it is intended in an economy.
- Price inelasticity of demand for imports making devaluation to lead to more capital outflow.
- Price inelasticity of demand for exports, i.e. devaluation has little benefits on export volumes
- Rigidities in supply of major commodities that limit elasticity of demand for export..
- Other countries devaluating at a bigger margin nullifying the effects of devaluation and limits countries exports
- It may worsen imported inflation especially when the demand for imports is price inelastic.
- Most of importing countries have alternative cheaper sources of imports other than the devaluating country (Uganda)
- It causes smuggling as nationals will try to earn high value foreign currencies which increase per capita outflow.
- It increases the value of foreign debts because foreign currency becomes expensive.
- It leads to corruption in the civil service as they hoard foreign currencies so that they get higher profits in future when devaluation occurs.
- LDCs tend to have insufficient import substitutes making importation inevitable
- When devaluating country is experiencing inflation this leads to lower demand for the domestic products
- When devaluating country is not a major supplier/producer of export commodity in question
- When devaluating country lack export promotion structure to increase export volumes
- May lead to development of inferior goods
CATEGORIES Economics
TAGS Dr. Bbosa Science
