Devaluation (Causes, Consequences, Types, and Examples)

Category: Finance

The currency does not have a real value, it has a repressive value of the wealth of the country from where it is, that is why when it comes to monetary devaluation, the decrease in the nominal value of a specific currency must be understood when compared to a currency of another country.

There are varied causes and consequences that a process of devaluation of the currency generates in a country, these effects can be both positive and negative, in addition there are different types of devaluation, each of these aspects are presented below.

Causes of Monetary Devaluation

There are many and varied causes that can generate the devaluation process of any currency, it should be noted that to start a devaluation requires at least one of the following causes:

  • Overestimated value of the currency against foreign currencies.
  • Currency leakage.
  • Foreign capitals avoid investing in the country.
  • Mistrust in local socio-economic policies and in the economy of the country in general.
  • Imports exceed exports, there is a deficit in the trade balance.
  • Financing of public spending by printing inorganic money, for example.
  • Shortage of the local currency , as well as its absence.
  • Increase in demand for foreign exchange.
  • To balance the largest amount of banknotes in circulation against the least amount of reserves, in this case the Central Bank of the country can implement the devaluation process.

Consequences of the Monetary Devaluation

The processes of devaluation of a currency usually have several consequences, some positive others negative, some of them are:

  • Negative effects for local people and businesses, not so for exporters.
  • Generalized loss of the real value of wages and salaries, the most affected are retirees, employees, those who maintain a debt in currencies but have economic income in national currency.
  • Increase in the cost of goods, services, as well as freight, money remittances, telephone calls and practically everything.
  • Decrease in purchasing power associated with the devalued currency.
  • The decrease in the real value of the debts is a negative consequence for the lenders and positive for those who borrowed, as long as they have done so in the local currency.
  • Encourage local tourism and the visit of foreign tourists.
  • It promotes the purchase of products made in the country and exports.
  • Increase inflation rates in the country.
  • Political cost in the face of population dissatisfaction.
  • Prepare the ground for an economic crisis.

Types of Monetary Devaluation

Experts have classified the devaluation of the currency into several types, including the following:

1.- Monetary Devaluation

This type of monetary devaluation can be generated by several causes, including public distrust in the local currency , which in turn generates other problems such as the increase in costs in the production of consumer goods, the increase in public services or the increase in inflation rates, among many others.

2.- The Internal Devaluation

This type of currency devaluation is implemented by the authorities of the country, with the intention of reducing the deficit or adjusting wages and income, in another sense, this measure is also usually taken as a way by which competitiveness can be regained , if this has decreased in large proportions

3.- The Competitive Devaluation

It is characterized by the competitiveness between the currencies of two countries, through this process, each of these countries makes its best attempt to position its currency at an exchange rate that is beneficial and favorable for its nation and its international commercial relations.

4.- The Fiscal Devaluation

With this type of devaluation it is about manipulating the price of some tariffs and taxes, it has the purpose of increasing export levels, minimizing production costs and improving the country’s positioning in commercial competition worldwide.

Example of Monetary Devaluation

The fictional country of Paislandia has assets valued at $ 10,000.00, which are represented by 10,000 coins of $ 1.00.

The Central Bank of Paislandia identifies the need to devalue the country’s currency, so it orders the new issuance of 10,000 coins.

Currently, after the devaluation of its currency, Countryland has 20,000.00 coins of $ 1.00 for its assets valued at $ 10,000.00

Then the value of a $ in Paislandia is worth 0.50 of the old $.

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