Devaluation

Devaluation is the intentional downward adjustment of the value of a country’s money. Governments that have a fixed or semi-fixed exchange rate use this monetary policy tool. Devaluation is distinct from depreciation, which is not a direct, intentional readjustment of a currency’s exchange rate. The government of a country may devalue its currency for political or economic reasons.

A government may decide to devalue its currency to correct a trade imbalance. Devaluation reduces the cost of a country’s exports and increases the cost of imports, making the country’s exports and currency more competitive in the global market. However, it also devalues the savings of citizens, making them poorer.

Devaluation to correct a trade imbalance also benefits domestic producers by making imports more expensive, therefore incentivising domestic consumers to purchase domestic goods and strengthening domestic businesses. At the same time, domestic consumers see the price of goods rise. As exports increase and imports decrease, the trade imbalance shrinks.