What do these economic senarios mean?

Question

How do aid packages and remittances overvalue a currency

"opening large letters of credit to a country's factories"
These letters of credit allow exports of commodities.
If a portion had already been financed and exported, the letters of credit were already opened.
a gov't froze the letters of credit for its exporters
a country runs up more in orders than was allocated by an accord.
companies order raw materials on a credit basis, unless they were paid, their bankers would default so the currency lost some of its value
What does all this mean in layman's terms-in
simplified English and also why can't the country have another
send more exports to make up for the differencefor the
letters of credit.


If foreign exchange
reserves were very low and much capital is held abroad had, how does this affect value of currency?

Answer 1

OK. Read it thru a few times and I got it.

The letters of credit are rainchecks for that country's commodities. At some point, the country ended up with too many orders to fulfill, so it froze its accounts in order to catch up. For some reason, the exporting country wasn't paid for its goods since the rainchecks were not fullfilled on schedule and the country's currency became devalued in order to pay off its own debts (country's devalue their currencies in order to make their goods cheaper and easier to purchase abroad hence bringing in quicker revenues).

Effectively, this means that because the country stacked up too many orders, those order lost value because other countries had to pay less money in order to pay off their accounts. This exporter had its currency devalued, so the buyers could pay with less of their currency than at the time of when the raincheck was issued.

If another exporter were to fulfill the orders, this exporter would have to first purchase those goods or sell the contracts. The problem is that it would get shortchanged so much that it would be more lucrative to just continue selling its commodities and the reduced rate (countries don't bail each other out of contracts cheaply since they know they can get much better prices on the world market).

If reserves are low and capital is spread out, then devaluation shouldn't be too drastic since the other countries recognize the value of the exporter's currency within their own economies (if devaluation was too strong, those countries would lose a lot of money because of the exporter's currency being involved in all sorts of transactions).