Effect of Global Remittance on the Economy

This report analyzes the effect of currency devaluation on the economy, using the economic crisis in Venezuela as a case study. It discusses the effects of currency devaluation, positive and negative impacts, and provides recommendations.

Running head: EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Effect of Global Remittance on the Economy
Name of the Student
Name of the University
Author’s note

1EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Executive summary
The aim of the report is to analyse the effect of currency devaluation on the economy of a
country. The economic crisis of Venezuela has been considered for analysis in the report. The
report explains the effects of currency devaluation on the economic situation Venezuela.
Further the report contains the positive and negative effects of the currency devaluation and it
concludes with the recommendation that how to use the advantages of currency devaluation
to fight against an economic crisis.

2EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Conclusion................................................................................................................................11
Recommendations....................................................................................................................11
Reference..................................................................................................................................13
Appendix..................................................................................................................................16

3EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Introduction
The unrest in the economy of the Bolivarian republic of Venezuela has put a negative
effect in the global economy. Inflation is not new in the economy of Venezuela ass the
economy of the country solely depend on the price of oil, which is the main source of revenue
for the country. Therefore, due to the collapse in the oil price affected the economy of the
country and the rate of inflation increased rapidly and become major problem for the
government.
In such a circumstance, the government take decision of imposing restriction on the
capital flight, which reduces the rate of inflation by 25%.Capital flight in economies, occurs
when the liquid assets rapidly drained out of the economy due to an economic crisis. This
leads to a sharp fall in the exchange rate of the country that is affected by the economic crisis.
The financial crisis also affects the currency of the Venezuela for which the country
formed an official body known as the CADVI which grants the citizen of the country foreign
currency at a discount. The effect of financial crisis forced a government of the country to
make changes in the overall structure of the financial policy.
Discussion
The effect of the financial crisis in the currency of Venezuela
Th government of Venezuela artificially controls the currency to control the inflation
rate of the country. The government used the foreign reserve to purchase its own currency to
stabilize the bolivar and to do that the country manipulated the value of the currency to its
citizens.
The country by inflating the currency has faced several problems that results in to the
fall of the value of the currency of Venezuela and the citizens of the country has to buy

4EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
foreign currency at rate which is very high in comparison to the global market. To control
that situation the Venezuelan government has decided to create a special body which is
named as the CADIVI.
CADIVI is formed to grant the citizens of the country foreign currencies at lower
value but that grants are only allowed if the people of the country fulfils certain criterion. The
main criterion is that the citizen has to give details of their bank account that the citizen has
enough bank balance to pay for the precious greenback, which at the SICAD exchange rate
would be approximately 11.36Bs. Per dollar.
The Venezuelans are only allowed to use their annual quota if they have bank account
in the Venezuelan bank. These strict rules has led the people of the country to find out
loopholes in the system and they started to manipulate the currency. The people started to
purchase false air ticket and then buy a dollar for 11.36 bolivars then later sell the dollar on
the black market for 65.30 bolivar creating an exchange rate bubble. It also affects the
government reserve, as the CADVI is government owned and operated.
The economic bubble causes the occurrence of the shortage of the commodities as the
people of the country started to create loophole.so a large portion of the imported goods are
smuggled and exported to south American countries like Colombia in exchange of dollars
and the money obtained is again sold in the black market. This activity of the country is not
only restricted with the imported goods but also domestically produced goods.
Therefore, despite of the fact that the country both produces and import goods in large
quantities most of these goods are exported and smuggled out, creating a shortage for the
Venezuelan citizens. The situation has made the business of smuggling become very popular
among the citizens of the country, which decorates the economic situation of the country to
collapse further.

5EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
The three other methods that the citizens of the country adopted to manipulate the currency of
the country are stated below:
The straight bribe
This is the most common methods that the citizens adopted, they offer straight bribe
to the officials.
The inflated invoice
The smugglers started to inflate the invoices and manipulated the currency. The
smugglers attended to import goods by and force the suppliers to inflate the price of the
goods. Then later by bringing it back to the swap exchange rate, the importer reduces the cost
of the goods (Dachevsky & Kornblihtt 2017).
The forgotten debt
The government has given out the foreign currency to pay debt. This gives the
smugglers an opportunity to manipulate the currency. They started to find out a company that
is bankrupt or in condition that it would never be possible for the company to repay the debt.
Then buy debt for ten or twenty cents on the dollar and then approach to the CADVI and sold
the dollars at 2.15bs per dollar the margin of profit in this method is huge so this policy has
become a common practice to manipulate the currency of Venezuela (Chinedum & Kenneth
2016).
This financial scam become a part of the whole financial system of Venezuela and as
the Venezuela’s oil reserve and booming oil industry the scam continue to grow further and
carry on its negative affect on the economy of the country.
To curb the negative affect of the financial bubble the government has taken a step to
devaluate the VBF (veterinary benevolent fund) to its normal rate leading to the increase in

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the inflation rate but it helps to put an end of the currency fraud in the country (Kulesza
2017).
Devaluation of the Venezuelan currency
The government of Venezuela has devalued the VBF at 9.25 to 1 the government
declared that it is the fifth time that the government has devalued the currency to control the
increasing pressure of currency manipulation( Drenik Pereira & Perez 2018).
The new law currency reforms is introduced to stop speculation in the foreign
currency and bonds. The main objective of this step is to ensure that the currency between
amounts of 10000 to 20000 USD could not be moved without the knowledge of the central
bank and if any founds guilty of doing that, he will be punished with monetary penalty
(Cannon & Browne 2017).
The Venezuelan government is forced to devalue the currency for several times to
keep the currency bubble under control and at the. It then introduces the SITME the
transaction system for foreign currency denomination securities, which is another
government policy to set the rate used by the business to gain access to hard currency like the
US dollar to pay for the inputs and imported components (Bellinger & Son 2019).
The creation of these organisations led to the creation of the black market in the
Venezuelan economy. However this black-market become the key indicator that of the value
changes from demand and supply.so when the black market rate started to raise rapidly then
the business owner of the country started to increase the prices of their product to make up
the loss they have to face for the manipulation of the currency rate (Álvarez Espinoza &
Hansen 2017).
This lead to the creation for barter system in there economy of Venezuela involving
the use of Venezuelan relic known as the Cimarron. The process of the system is like that if

7EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
any one comes to the country market with goods for barter could exchange them for
Cimarron ,this policy though, does not sustained for long time and the Cimarron was
abolished from the market very quickly. The government as a measure to get relief from the
capitalist system promoted this method (Kohler 2017).
The battle of the Venezuelan government against the inflation has become a lesson for
the other countries. It shows how inflation can be controlled by devaluation of the currency of
a country can reduce the effect of inflation, as well as the negative impact of artificial
manipulation of the currency (Brigo Pede & Petrelli 2015).
The positive and negative effect of currency devaluation
All most all countries in the world have devalued their currency for any specific
reason the main objectives of currency devaluation are stated below
To encourage exports
It is a common practice of every country to devalue its currency to promote export. If
the currency of any country is undervalued then the products of that country will become
inexpensive for other countries and they will raise their demand, which will lead to the
generation of more foreign earnings for the country which devalued their currency (Schmitt-
Grohé & Uribe016).
To discourage imports
As the value of the currency decreases the cost of the foreign products becomes more
costly for which people in the domestic market reduces their demand for foreign items.
To reduce the deficit in the balance of payments
The government of any country adopts the policy of devaluation of the currency when
their is unfavourable balance of payments. Due to the under valuation of the currency the

8EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
value of imports increase but the volume of exports increases as the volume of exports is
greater than the value of imports, which results in to favourable balance of payments (Bolton
2016).
The positive effect of the devaluation of currency are specified below
Reduction of deficit
The devaluation of currency makes the home goods cheaper in the foreign market that
increases the demand of the domestic products in the foreign market similarly the price of the
imported goods increased and for that reason, the demand for the foreign goods decreases
which leads to the reduction in deficit of balance of payments (Santos 2017).
Balance of currency value
The undervaluation brings balance when the currency is overvalued, it helps to bring
equality in the internal and external worth of the currency to remove the various disparity in
the economy (Marigonda & Nguyen 2018).
Increase in foreign aid
The institutions like the International monetary fund The international bank for
reconstruction and development which lends money to various countries insist on the
devaluation specially in the underdeveloped countries of south America, Africa and some
Asian countries. Foreign investors also likes to invest in these countries, which have devalued
their currency (Grier & Maynard 2016).
End of unpredictability
The unpredictability in the business environment ends with the devaluation of the
currency as it increases the demand of the domestic products and the investment rate
increases.

9EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Inflow of money
The citizens of the country who are working in foreign countries will prefer to send
money to the home country as it will increase the value of their wealth, which will leads to
the more inflow of currency in the economy and the flow of liquid cash in the economy, will
increases (Ribeiro McCombie & Lima2017).
Increase in the economic growth
The devaluation of the currency results in to the increase in the volume of exports and
aggregate demand for the domestic products will also increase which will lead to higher
economic growth.
Interest rate reduced
If the currency is devalued than the central bank can cut the interest rate as its no
longer required to sustain the currency with high interest rate (Vera 2017).
Negative impact
The negative impacts of the currency devaluation are stated below
Temporary curve
Undervaluation is short-term curve for the unfavourable balance of payments. The
effect of the devaluation is for temporary period. Some backward countries adopted this
policy but it cannot sustain for a long period and within a few month, it is abolished from the
economy (Farhi & Werning 2016).
Price increases

10EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
As the cost of imported goods increased it results in to the increase in the rate of the
inflation in the country.as inflation rate increases the cost of the goods lso increase in the
local market which creates problem for the consumers (Nguyen et al 2017).
The burden of debt increases
The foreign liability increases due to the devaluation of the domestic currency. This is
a retardation for the underdeveloped countries. The increase in the foreign debts increases the
burden off the country for which the government increase the rate of interest in the banks of
the country. The common people has to suffer more for the increase in the rate of interest for
taking loan from the banks (Ellis 2017).
Competition in the devaluation
It is often found that many under developed countries adopted the policy of
devaluation of currencies for which the main objective of the devaluation of currencies does
not get fulfilled( David & Oluseyi 2017).
The investors gets frustrated
A rapid devaluation can frustrate the foreign investors. It reduces the investor’s
interest to hold government debt as the undervaluation effectively reduce the actual value of
their holdings. In some case rapid diminution of the currency, results in to the occurrence of
capital flight (Purcell 2017).
Reduces real wages
In a period of devaluation of currency, the real wage rate reduces which cause in the
rising of the import prices, which will make many consumers feel low. This was an issue in
the UK during the period of 2007-08.

11EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
Reduces the purchasing power
The devaluation of currencies reduces the purchasing power of the citizens of the
country which have adopted the policy .The citizens will found that the cost of any imported
items has increased rapidly.
Conclusion
Based on the above discussion it can be ascertained that the countries reduces the
value of their currencies when they have no other options left to rectify their past economic
errors. The trade shortfall surpassed the country’s gross domestic product that leads to the
unfavourable balance of payments .the policy of devaluation of currency has been well
adopted by the government of Venezuela. The country by devaluing their currency reduces
the negative effect of the financial bubbles in the economy and become successful to bring
control in their economic condition.
A country may decide to devalue to bring an equilibrium in the external and internal
economic environment. In extreme situations when the government denies to reply to the
market indicators of economic affliction, it may be forced to devaluate the currency. The
international and local speculators will take advantage of the weakness of the government
and will buy foreign exchanges from the government until its reserve are depleted and the
government does not have money to even to import the basic needs. Thus forced by the
speculators the government has to devaluate the currency and buy back the foreign currency
at higher price from the speculators to whom it has sold these at a cheap price.
Recommendations
It can be recommended that unlike the government of the Venezuelan government
every country should devaluate the currency rates to fight against the increasing rate of

12EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
inflation. Inflation is a serious problem for the economic growth of any country no country
can avoid the problem of inflation. With the increased pressure from the global market, every
country should adopt the policy which will increase the volume of the export and thereby
reduce the trade deficit. The devaluation of currency has both negative and positive effects it
is the responsibility of the government of a particular country to make proper utilisation of
the policy of the devaluation of the currency and bring stability in the economic condition.
The devaluation of the currency will help the government to fight against the
speculators of the currency market and will lead to generate more liquid inflow in the
economic cycle. The gross domestic product of the country will also improves due to the
devaluation of the currency and the government will be able to bring more opportunities for
the local manufacturers of the country. The negative affect of inflation can only be reduced
by the successful implementation of the currency deficit policy of a particular country.

13EFFECT OF GLOBAL REMITTANCE ON THE ECONOMY
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Vera, L. (2017). In search of stabilization and recovery: macro policy and reforms in
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Appendix

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