Introduction

Since the breakdown of the Bretton Woods Accord in 1973, and the advent of floating exchange rates, there has been renewed interest in the effect of devaluation on the trade balance of both developed and developing countries. Developing countries facing balance-of-payments problems due to expansionary financial policies, a deterioration in the terms of trade, price distortions, higher debt servicing or a combination of these factors, have often resorted to devaluing their currencies (Nashashibi, 1983). The aim of such a policy is to promote export-oriented growth by liberalizing their markets. As pointed out by Katseli (1983), ‘it is by now well understood that the use of the extended facility of the International Monetary Fund or approval of standby loans involves the undertaking of comprehensive programs of adjustment that include policies required to correct structural imbalances …’ (p.359). The standby agreements, Katseli notes, require severe tightening of expenditure through contractionary fiscal and monetary policy measures such as the imposition of ceilings on net government borrowing and/or net domestic assets of the central bank or an upward adjustment of nominal interest rates in cases where rates are fixed by the government. Katseli further notes that the approval of funds also involves an ‘understanding’ with the IMF on exchange-rate policy and exchange-rate arrangements whereby devaluation becomes a component of a restrictive package for improving a country's balance of payments and its foreign-exchange reserve position.