Different countries handle currency crises and economic downfall differently due to their policies and structure. An excellent example is the distinction between the response by Russia and Britain. The rapid decrease in the value of money renders the financial plight. The key solution to fighting the impasse in a nation involves the use of foreign exchange reserves (Alaminos et al. 2019). However, in the case that a territory’s repertoire fails to equal the devaluation impact, the government focuses on decreasing the monetary value. The decrease in the domestic value is an advantage mainly because of the ability to foster stabilization from the negative effect of the inadequate financial resources.
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A prolonged currency crisis threatens the emergence of a financial and eventual economic plight. The major consequence of financial adversity enshrines the increase in the inflation rate and unemployment due to the unsustainability in the management of businesses.
An excellent example of the negative impact of the situation is an enterprise that entirely depends on foreign exchange. In this case, a corporation manager resolves to purchase goods and services using the stable U.S. dollar. It is a condition that fosters the massive expenditure of the fiscal resources due to the decreased value hence depleting the company’s sustainable profit (Alaminos et al. 2019). Therefore, the organizations lack confidence in the domestic monetary entity and focus on engaging in trade activities based on a different foreign element for profitability operations.
Turkey is one of the countries that experienced a significant currency crisis in 2018 due to the loop caused by the massive debts to the U.S. government. Between 2010 and 2018, the Turkish government focused on massive borrowing from foreign administrations and denominated the domestic fiscal under the U.S. dollar. Therefore, a change in the monetary policy in the U.S. dollar highly influenced the value of the Lira and the Turkish cash.
However, in 2018 the foreign investors lacked confidence in the authority’s performance in economic growth and development (Alaminos et al. 2019). As a result, the territory experienced a decreased rate in foreign exchange, a phenomenon that negatively reflected the Turkish shekels. While the lira currency value decreased, the amount of debt to the U.S. dollar increased, thus forcing the country to exhaust the reserves to pay off debts (Alaminos et al. 2019). This led to the emergence of a significant pecuniary disaster in Turkey.
Indonesia experienced a significant currency crisis due to the change in the percentage rate of foreign exchange. Although the country featured a profoundly stable economy, the rupiah destabilized in 1998, and the country’s monetary value depreciated at a sharp rate that led to the lack of confidence among the traders and further reduced the foreign exchange rate across the country. As a result, the state experienced a proficient currency crisis that forced the government to focus on developing solutions to the problem. Another example is Brazil that experienced a currency crisis due to the exhaustion of the financial reserves (Alaminos et al. 2019).
In the case a country’s financial reserve declines, traders lack confidence in the government and resolve to utilize foreign currency to conduct trade. Apart from the currency crises causing a downfall to the economy, it is a factor that contributes to economic growth, such as in Iceland. The currency crises in Iceland caused by the significant borrowing from international agencies led to the development of economic policies to prevent the occurrence of a financial plight in the country. It is a similar situation to Indonesia that led to its proficient utilization of a balance in debt and monetary regulations.
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It is essential that governments focus on enhancing a country’s economic growth based on the currency value. The approach boosts the traders’ confidence in the nation’s financial stability and invests deeply in fiscal resources. The key solution to fighting the monetary plight involves the use of foreign exchange reserves. However, in the case that a community’s reserve fails to equal the devaluation impact, the administration focuses on decreasing the domestic currency value.
Alaminos, D., Becerra-Vicario, R., Fernández-Gámez, M. Á., and Cisneros Ruiz, A. J. (2019). Currency crises prediction using deep neural decision trees. Applied Sciences, 9(23), 5227.
Holton, N., Kinsella, M., Mangan, O., McLaughlin, S., and Quill, P. (2020). Consistency in a Globalised Economy: Aligning the Treatment of R&D in the Irish National Accounts and Balance of Payments. Economie & Statistique, (517-518-519), p.191.
Honohan, P. (2021). Is Ireland really the most prosperous country in Europe?. Economic Letters, 2021, pp.1-8.
McCormack, L. (2020). The impact of non-performing exposures on Ireland’s economic growth (Dublin, National College of Ireland).