Currency Devaluations Touted by IIF to Aid Troubled Economies

(Bloomberg) — Troubled governments that devalue their currencies tend to benefit from the decision, underscoring the tool’s usefulness in the face of crisis, according to the Institute of International Finance.

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There’s been a pivot toward economic growth in countries just three years after authorities opt for major currency devaluations, economists Robin Brooks and Jonathan Fortun found in an analysis of the 51 largest and most-persistent episodes since 1990. Export volumes rise, according to the Washington-based banking trade group, and current-account deficits reliably narrow — with some even turning to surpluses.

“As asymmetric shocks – from climate change to heightened geopolitical risk multiply – we think the policy consensus needs to shift back to seeing exchange rate devaluations as part of the solution and not a problem to be avoided,” Brooks and Fortun wrote in a Thursday report.

Some of the world’s most-indebted nations have found themselves embroiled in debates surrounding currency devaluations this year as they weigh the drop in their exchange-rates needed to secure bailouts from the International Monetary Fund. Egypt, Pakistan and Lebanon are among those that have opted for devaluations in a bid to address dollar shortages and other fiscal challenges.

Argentina, too, has faced pressure to drop its peso exchange rate as discussions heat up with the IMF. A delegation from Argentina’s Economy Ministry is in Washington this week to discuss the fifth review of a $44 billion loan with the multilateral lender. Meantime, the gap between the official and black market rate widens past 100%.

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Governments are often hesitant to devalue their own currencies — a process that typically reduces the purchasing power of people in the nation.

“None of this is to say that devaluations aren’t painful,” the IIF economists wrote. “They imply meaningful disruption, especially when hard currency debt plays a big role.”

Still, they pointed to the benefits. After devaluations, countries tend to see their current-account deficits narrow, or even swing into surplus, they wrote. There is also a lift to growth in export volumes, which rises with the scale of devaluation. A rise in exports often becomes material about two years after the devaluation begins and lasts for years, Brooks and Fortun wrote.

–With assistance from Scott Squires.

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