Sometimes, countries decide to reduce the value of currency intentionally in a fixed exchange rate. Devaluation means the value of a currency will fall. The economy of a country benefits from the devaluation of currency in various ways that is why the decision of devaluation of currency has a crucial impact on the economy.
- For foreign buyers, exports become more competitive and cheaper. This boosts domestic demand and leads to increased job creation in the trade sector.
- A higher level of exports means improvement in the current account deficit. If the country has a large current account deficit then it is important to devalue the currency in order to decrease the deficit.
- When the number of exports as well as the aggregate demand increases, it indicates higher economic growth.
- To restore competitiveness devaluation is less damaging than internal devaluation. Internal devaluation damages the internal economy which is more disastrous. Devaluation reduces the damage to the domestic economy and also without reducing the aggregate demand which is much better than the internal devaluation.
- The central banks no longer need to ‘prop up’ the currency with higher rates as they can cut interest rates.
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