Why a country devalues its currency

Ever wondered why a country devalues its currency? So have we. It seems to defy logic to do something like that, but there are lots of economic advantages to doing this. We’ll take you through the main pros and cons of this activity.

Encourage exports and discouraging imports

When a government deliberately devalues its currency it’s probably trying to encourage exports. As the commodities made by the country become cheaper to foreign firms, international business starts to trade more with domestic firms. This also has the opposite effect because devaluing the currency also discourages imports. That means that the nation’s people lower their demand for foreign items which means that domestic producers can get more from the market.

Balance of payment

There’s a purely financial reason to do this to, and that’s to correct the balance of payment. Devaluation makes the value of home produced goods cheaper and foreign goods more expensive which tips the balance of payment in favour of the country. An overvalued currency is also corrected by this action as an equilibrium is met between the internal and external valuations of the currency.

Foreign investment

A devalued currency in an underdeveloped nation like Pakistan or India often leads to help from agencies like the IMF. Devaluation is often used to end a period of uncertainty for the country’s economic state. This often leads to an increase in investments rates.

United Kingdom - Excite Network Copyright ©1995 - 2017