The devaluation of a currency means the reduction in the value of a currency in relation to the currencies of other countries. Most of the times, the countries devalue their currencies on purpose due to various reasons. In this article, you would find the top three reasons behind why different countries purposely devalue their currencies.
1.-To Raise Exports
In order to raise exports, sometimes the countries take this step of devaluation of their currency. When the value of a currency decreases, the prices of the goods (exports) of the same country into another country also decreases as compared to those countries which have higher value currencies. As a result, more people tend to buy the products (exports) of the country with devalued currency due to cheaper prices and cost saving. Almost every country sells its products to other countries and imports other countries’ products into one’s country. Through this way, the world market and businesses keep rotating and progressing.
For example, let’s compare the care manufacturers in America and Japan. Suppose that the American Currency is of high value while Japan devalued its currency. As a result, the price of the cars of Japan will decrease in American market. As a result, there would be more demand for Japan cars and hence more profits due to increased sales. For this reason, the countries devalue their currency to boost or raise their exports.
2.-To minimize the burden of Sovereign Debt
Almost every country is standing in sovereign debts in this modern world. It becomes really difficult to pay or clear the debts when the country already has a lot of financial burden. In such situations, the countries find the way to devalue their currency. This is done because when the currency is devalued, they have to pay less price to the sovereign authority.
For example, suppose that a country has to pay the sovereign debt of around $2 million dollars. If the economy of the country is already weak and they are facing financial instability, the country may think about devaluating the currency. If that country devalues its currency to about 50%, then it means that it has to pay the half amount now. Previously, it had to pay debt of $2 million but now it would actually pay $1 million. This $1 million would be equal to new devalued currency’s $2 million. In more simple words, the country would pay $2 million sovereign debt but as it devalued its currency, so it means that the real worth of devalued $2 million would be equal to $1 million dollars. However, special care should be taken to implement this strategy because if got caught, the worst would come to the country.
3.-To Reduce the Trade Deficits
It is very important to maintain a balance between the exports and imports. A country’s exports should be greater than the country’s imports. This is because if the exports are higher, the country would make more profits and the economy would be stronger. Trade deficit depicts the amount in which the cost of a country’s imports exceeds the exports’ value of the country. Such trade deficits would make the economy weaker and push the country towards more sovereign debts. In order to avoid such trade deficits, the countries devalue their currency. In this way, the demand for country’s export in the foreign market increases due to reduced prices. When this happens, the exports of a country ultimately start increasing and overcome the trade deficits. Therefore, the countries devalue their currency to achieve such benefits either for shorter or longer period of time.