Currency devaluation occurs when a country intentionally lowers its currency’s value. The country’s central bank might do this to boost its economy. Typically, the goal is to make its exports more competitive in foreign markets and encourage domestic spending and investment.
When the currency devalues, it makes a nation’s goods cheaper to foreigners and its residents. This can boost a country’s trade balance and economic growth.
The devaluation also makes its imports more expensive. This may increase the cost of things like petrol, food and raw materials. This can reduce demand for imports and discourage consumers from purchasing them. In some cases, a country might use tariffs to prevent a large change in import costs.
A country’s dependence on exports, the state of the global economy and its debt burden all have a major impact on whether a devaluation will have positive or negative consequences. If a country is heavily in debt, devaluation may exacerbate inflation and make it more difficult to service debts. Rising prices could cause consumer discontent and social unrest. Foreign investors might withdraw their investments from a country if they expect future devaluations, increasing its vulnerability to financial crisis. The devaluation may also strain relationships with trading partners if it is seen as a sign of instability. In addition, if the country has borrowed in foreign currencies and is dependent on these debts for growth, it’s important to avoid repeated rounds of devaluation that would push interest rates into unsustainable levels.
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