A country produces goods in the domestic economy and sells some of them in the domestic market using the national currency such as the kwacha. No matter how big the domestic market, most countries sell some of their products and services in foreign markets.
Selling in foreign market entails using a different currency, usually the one that is trusted by the supplier and buyer of goods. This currency may be gold or gold substitute such as dollars.
Furthermore, this entails fixing the exchange rate between domestic currency and the currency used in foreign or international trade. The exchange rate does not remain at the same level indefinitely because trade conditions change.
Last week, we discussed meanings of depreciation and devaluation. In this article, we will look at their opposite appreciation and revaluation.
Appreciation of a currency is a rise in the price of a country’s currency in terms of a foreign currency. This rise in value is a result of better performance of exports. Foreigners wanting to import a country’s goods or buy its currency first and sometimes scramble for it, thereby forcing up its prices according to the law of demand and supply.
When a country’s currency has appreciated, its value vis-à-vis other currencies or gold, foreign goods become cheaper. This encourages traders in the home market to import more goods to come and compete with domestic products. This may contribute to reducing inflation. At the same time, appreciation makes imports cheaper, it makes exports less competitive. This is the point commentators sometimes forget.
They think that when the kwacha stabilised in value, it benefits every sector of the economy. It may benefit consumers, but exporters may discover that now foreigners are buying fewer of their goods because in foreign markets and in the foreign currency, they are now more expensive or less competitive than imports from another country as well as domestic products.
Revaluation, the opposite of devaluation is a deliberate act by monetary authorities. It is less common than the devaluation. Revaluation, which raises the value of a currency vis-à-vis other currencies used in international trade is shunned because by making export dearer, this may lead to a fall in employment since exporting companies are failing to sell most of what they send abroad.
Those countries, which revalue their currencies, do so to encourage a flood of imports thereby stabilising prices. Imports are used as a weapon against inflation.
Usually, a country may revalue its currency as a result of pressure from its main trading partner. Trade relationships first between the US and Japan now between the US and China have been marred by the United States calling upon the Asian economic giants to revalue their currencies. The existing exchange rates of the Yen (Japan) and the Yuan (Chinese) are seen by American as deliberately too low to make Japanese or Chinese exports cheaper both in the American markets and other markets thereby under-selling American goods in the domestic and foreign markets.
During the regime of George Bush, the father, we used to read in magazines like Time and Newsweek a slogan from American free traders, but also fair trade. American traders have viewed the refusal of the Japanese and Chinese to revalue as a form of dumping their exports.
Pure floating exchange. Exchange rates between countries may be fixed by the monetary authorities or they may float freely. During the regime of former president late Bingu wa Mutharika, the exchange rate of the kwacha vis-à-vis a basket of foreign currencies was fixed. The International Monetary Fund (IMF) and the donors used to pressurise him to devalue the kwacha and let its value float freely.
Some countries of the world have floating exchange rates while others have fixed exchange rates. A pure floating exchange rate is that which is set by the market without any intervention by either the central bank or government.
A pure or clean float is contrasted with a managed or dirty float in which there is some official intervention in the foreign exchange market.
In practice, pure floating exchange rates do not exist because speculation by trader causes extreme fluctuations in the value of the currencies. This makes exchange of goods and services highly problematic.
Imagine you place an order for goods valued at K1 million. By the time the goods arrive, the exporter demands from you K2 million because the value of the kwacha has fallen in the exchange market. Under such conditions, it is difficult to conduct business.
Purchasing power. This refers to the amount of goods or services each unit of a currency will buy. It is not enough to know that someone earns K1 million a month. You must also know how many cows or bags of maize he or she can buy with K1 million.