CURRENCY DEPRECIATION: ONE REASON WHY YOU MUST BE CONCERNED

There are many things that are of prime concern for every nation. Currency depreciation is one of such. The implications of this situation can be beneficial and, in some cases, can be detrimental for any economy. For example, the recent currency depreciation that were experienced by Turkey and Argentina has greatly disturbed these two economies.
To explain further, Consumer News and Business Channel (CBNC), an American-based satellite business news television channel, had this to say about the Turkish Lira, “At around 8:00 a.m. ET Friday (10TH August 2018, inserted mine), the lira had fallen to $7.081, an almost 11 percent loss for the session. It has since pared some losses. As recently as April one dollar bought about four Turkish Lira.” The situation has subjected the President of Turkey, Recep Erdogan to a somewhat “I do not know what can be done” state. CBNC reports Mr. Erdogan telling his people, “They have their dollars (to the people of United States of America, inserted mine), we have our God.”

In a similar development, Bloomberg.com reports that, “Argentina’s peso tumbled to a record low Thursday (June 18, 2018, inserted mine) amid reports a group of central bank directors will depart from the institution and a truck drivers’ strike threatened to disrupt the country’s economy.” Also, the President of Argentina was reported to have disclosed plans to reduce the number of ministries in the country and some others. “President Mauricio Macri said his country is facing ‘an emergency’ that required massive spending cuts and agricultural taxes. This year, Argentina’s currency has already lost half its value compared to the US dollar”, DW.COM reports. These give an idea of how currency depreciation can threaten the growth of an economy.

I present in brief some implications of currency depreciation. It must be noted that while currency depreciation is faced by a country at any time at all, its impact is usually felt by other nations, especially those that happen to be trading partners of the nation in question.

Currency Depreciation is simply the economic and financial situation whereby the value of a country’s currency in relation to the value of another country’s currency falls.

When there is currency depreciation, businesses, especially those that engage in importing of goods, see cost of production becoming expensive. This is because the raw materials or goods imported is bought at a high price due to the fact that the business needs more of its home currency to purchase the same amount of the foreign currency. Consider this example: A Ghanaian businessman who deals in importation and subsequent sale of phones buys 3500 phones at $200 per phone from China paying $700,000. With an exchange rate of $1 to GHC4, he will need GHC2,800,000 to settle the transaction. Now, if after a period of shortfall in stock and so the businessman decides to import a further 200 phones but now the exchange rate is $1 to GHC5, for the 200 phones still at a cost of $200 per phone amounting to $40,000, he will need GHC200,000 to settle the transaction instead of GHC160,000 an additional GHC40,000 needed. This extra could be used for other expenditure to enhance business growth but by dint of currency depreciation, it is lost with no economic gain in return. This example illustrates why businesses “cry” anytime there is currency depreciation. The businesses will have the option of pushing the increased price on consumers of its products. When consumers are not able to buy, their standard of living falls and the profit margin of the business declines. Shareholders are not spared as they see a fall in their value. Corporate taxes to be received by the state also reduce because corporate profit falls. The fall in taxes paid to the state also deprives the state from undertaking certain projects due to reduced funds. Citizens also see a drop in their standard of living as the state is unable to meet certain needs.

It is clearly seen that when there is depreciation of a country’s currency, all sectors of the economy and all manner of people are affected. Shouldn’t therefore be an effort by all and sundry, including you and me and should we not all be concerned and help in addressing it?

Source: Isaac Nana Opoku