Reasons for Devaluation of Currency
1. Exports Encouragement: Every country wants its product to be more competitive in the international market and devaluation of currency helps them do so. In case, the currency gains value, exports will be costly, creating a negative impact on demand and not be so much of a help to the home country.
2. Reduction of Debt Burden: Currency Devaluation makes the repayment of debts easy. As the currency becomes weak, it makes the payment of instalments less expensive.
3. Narrowing the Trade Deficit: A negative trade balance can affect the country’s economy adversely and can lead to borrowing. Thus, currency devaluation can encourage exports which will help the trade balance to reduce, and/or cut down its deficit balance.
Trade Balance = Exports – Imports
Devaluation of Currency| Meaning, Reasons, Effects, Example and Critical Evaluation
Sometimes there arise some situations when the value of the domestic currency tends to increase drastically and faces monetary barriers. The government and the central bank intervene with some effective monetary policies for the correction of exchange rates, trade deficits, etc. One of these practices is the Devaluation of Currency. Devaluation of Currency is a monetary policy tool practised by the government of a country in order to adjust the prevailing exchange rate.