![No one can purchase imports anymore](images/pg_5balt.jpg)
You immediately
announce a devaluation of your currency, the CFA franc, which
is set to the value of the French franc. The old value was 50 CFA francs
per French franc. Now it is 100 CFA francs per French franc. Devaluation
comes as a shock. People used to buying imported goods are unhappy
because their purchasing power is lower.
Ms. Chang,
the IMF economist, explains that people here are now living within their
means. Before the devaluation, exporters were subsidizing
them by making imports cheaper than they should have been.
Here are
the good things that happen because of the devaluation:
- Exports
are now competitive again without changing wages or taxes.
The Trade Ministry reports that exports increase enough to continue
payments on your foreign debt. Because imported goods are more expensive
now, local industries expand to make and sell cheaper substitutes
for imported products. That employs more people and adds to
the size of the domestic economy.
- Tourism
increases because foreigners visiting your country don’t have
to spend so much of their money on hotels and services. This increases
the amount of foreign exchange coming into the country.
- The
IMF loan of foreign exchange comes through. This money allows
your government to pay your other foreign debts while the economy
improves. Your central bank is able to make foreign exchange
available to allow businesses to continue to buy imports.
Because
of the IMF loan, the economy recovers fairly quickly. You are re-elected
as President.
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