The Value Of The Currency Alone Will Not Improve The Trade Balance

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There are too many factors that may limit the growth needed to reach the balance to get out of debt. Devaluing the currency alone will not improve the trade balance. Instead, there becomes a need to limit the consumption. In the case of food imports, which accounts for about 12 percent of import expenditure in Sri Lanka, the government expects the price increases to result in import substitution, which will likely take time. The most forceful argument for devaluation is that it ensures the competitiveness of exports. The question here is whether the extent of depreciation would be adequate to ensure that the real effective exchange rate would ensure competitiveness.
Again, there are some governments that do try to attempt to influence the value of their currency by ways of intervention. The most notable offender in recent years is that of China, who has sought to keep its currency undervalued to make Chinese exports more competitive against other heavily traded Asian markets. They can do this by buying US dollar assets, which increases the value of the US dollar to Chinese Yuan ratio. (Factors Which Influence the Exchange Rate) Because the current financial status is so heavily dependent on exporting, the continuous management of the exchange rate to ensure export competitiveness is essential for China and Sri Lanka. A reduction in exports could affect the economy seriously as a decline in exports could affect economic growth, employment and incomes. (Sanderatne)
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