Devaluation takes place when a state lowers the value of its currency compared to other currencies. A country’s currency can be devalued due to the prevailing rate of inflation. When maintaining the fixed exchange rate of a state becomes difficult, the country has to buy its home currency back using reserves in the foreign currency. The action is intended to make the currency stable. Policymakers assert that devaluation is a way of enhancing exports while discouraging imports. Other countries will find that goods in the country of origin with a devalued currency are cheap, thus demanding more products. On the other hand, goods from other countries become very expensive hence reducing people’s demand for imports.
Research reports show that devaluation can also be done to ensure that the domestic currency increases. Besides, devaluation results in increased demand for goods, which may reduce the rate of unemployment since many people need to work to meet the increased demand. Besides, devaluation ensures that economic imbalances are offloaded in the long run. In fact, it brings the value of the currency both internally and externally to an equilibrium point. Devaluation also attracts foreign aid and investors.
According to Vyas, devaluation only works for a short period and is not a permanent solution to a failing economy. Most economies of the world have used the devaluation strategy at various times. When foreign goods become expensive, the consumer suffers. For instance, with devaluation, imports normally become expensive while exports are reportedly cheap. The situation causes the trade terms to go down. Besides, foreign aid got through devaluation increases a country’s debt. Exchange rate manipulation intended to give a country a competitive advantage is a risk a country should not take. Although the devaluation restrains shortages in the current account, the state is bound to fail in the end.