A currency devaluation occurs when the authorities in charge of a given currency decide to decrease its value. This decrease in value or exchange rate is done in relation to a reference currency. Currency devaluation is done intentionally, politically. Many currencies are devalued for various reasons. This article will provide information on the motivations and consequences of currency devaluation.
Why is currency devaluation done?
Currency devaluation does not happen randomly. There are reasons for it. First of all, a currency is devalued if its national value is to be lowered. This will increase the price and value of imports made in other currencies. In a second step, one devalues for <<volume effect>>. In other words, the products to be exported will be lowered and will allow the country to increase the quantity of products sold abroad. The increase in the cost of imports provides an incentive to import fewer products unless they are unavoidable.
The decrease of a currency is done for other reasons. Thus one devalues
– When the conversion rate of that currency is no longer significant, to prevent the loss of foreign exchange reserves.
– To prevent a currency from being attacked or depreciated.
– To benefit a nation’s economic policy by balancing its trade balance.
To devalue if one wishes to balance the public finances.
Consequences of currency devaluation
The devaluation of a currency has enormous consequences. These consequences include
– The decrease of a currency weakens the purchasing power of the population and makes those who own the currency poor.
– Reduced expenditure and turnover of economic operators.
– Decrease in revenues and incomes.
– The decrease in real values. Consequently, relative demand is increased and products sold in the devalued currency.
The devaluation of the currency leads to an increase in real prices. This causes the relative demand for goods purchased with the devalued currency to fall. Currency devaluation also makes local industries less productive and less competitive. Imports become expensive because of the lower value of the purchase price.