Quick facts about Devaluation

Q. What is Currency Devaluation?

A. Devaluation is a deliberate downward adjustment to the value of a country’s currency, relative to another currency, group of currencies or standard. It is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is neither depreciation nor revaluation.

A rise fall in the value of the domestic currency in terms of other foreign currencies in the case of fixed exchange rate system is referred to as devaluation, according to the Central Bank of Nigeria.

For Nigerians, it would mean the deliberate downward adjustment of the value of the naira relative to dollar.

Q. How will devaluation affect export?

A. Devaluation of a country’s currency will make exports more competitive. Devaluation makes export goods appear cheaper to foreigners. This automatically increases demand for exports, meaning more revenue for the owners of the devalued currency.

 

Q. How will devaluation affect imports?

A. The effect of devaluation on imports is directly opposite its effect on exports. It will make imports more expensive. This will in turn reduce demand for imports. Imports become costlier because the country’s currency is now reduced in value when compared to the exchange rate.

 

Q. What would be the effect of devaluation on indigenous goods?

A. Devaluation will, in a way, ‘force’ consumers to buy indigenous goods. This is because imported goods will become costlier when compared to indigenous products.

Q. What is the difference between devaluation and depreciation?

A. While devaluation is a deliberate adjustment, depreciation is a decrease in a currency’s value caused by unfavourable market conditions.

 

Q. Does devaluation have any disadvantage?

1. Yes, it may lead to inflation.

While devaluating a currency can seem like an attractive option, it can have negative consequences, says investopedia.com. By making imports more expensive, it protects domestic industries who may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.