What is devaluation?
What is a devaluation?
devaluation (devaluation, derived from Latin de - decrease and valeo - to cost, to have value) - is a decrease in the exchange rate of the national currency of a country in relation to generally accepted standby and stable currencies, as well as to the world monetary standard, the decline of the real gold content.
Who declares a devaluation?
Devaluation is an instrument of the Central Bank of the state to manage the exchange rate of the national currency, which is driven by economic policy.
Why is devaluation being announced?
Reasons for announcing a devaluation may include:
- Balance of payments deficit
- High inflation rates
Within the framework of the decision on devaluation, the Central Bank of the state may apply the following measures:
- to announce the withdrawal of support for the exchange rate of the national currency;
- to officially depreciate the national currency;
- announce the abolition of pegging of the national currency to other currencies;
The application of these measures is aimed at stimulating domestic production and increasing the competitiveness of domestically produced goods in foreign markets.
What types of devaluation can there be?
Devaluation can be of two types: overt and covert.
Open devaluation
- The Central Bank of the state announces an official decrease in the exchange rate of the national currency, withdraws old money signs from circulation and introduces new ones.
Hidden devaluation
- The Central Bank of the state lowers the national currency rate by all available methods, but the depreciating money is not withdrawn from circulation.
How is devaluation different from inflation?
Inflation always accompanies devaluation. The essence of these concepts is much the same, but inflation is a decrease in the purchasing power of the national currency in the domestic market of the state, and devaluation is a decrease in the purchasing power of the currency to the monetary units of other states.
Devaluation is a provoking factor for inflation. Due to the depreciation of the national currency, producers are forced to increase the price of goods produced, thereby increasing the rate of inflation.
It is necessary to understand the main difference between inflation and devaluation: inflation is a difficult to control and spontaneous process, while deflation is a deliberate measure taken by the Central Bank.
What's bad and what's good about devaluation?
Any type of devaluation contains positive and negative consequences.
What good is devaluation:
- demand for domestically produced goods increases in the domestic market;
- consumption rates are decreasing ZVR States;
- exports of domestic goods to foreign markets are stimulated.
What's wrong with devaluation:
- the rate of growth of consumer inflation is increasing;
- confidence in the national currency is being lost;
- imports are declining as the price of imported goods is constantly rising, causing a slowdown in production that utilizes foreign technology and materials;
- bank deposits in the national currency are depreciating;
- due to the reduction of wages and social payments, the purchasing power and activity of the population decreases.