The term devaluation is used to describe external intervention in the economy by the government or central bank of the country that uses the relevant currency. With this intervention, the value of the local currency is reduced to a certain extent against other currencies, that is, it is devalued. There can be many different reasons for the devaluation. We have listed below the three most common and most dominant main causes of devaluation in a country.

Major Causes of Devaluation

• Increasing Exports and Decreasing Imports

Trade struggle is a common occurrence in the world market today. Every country wants its products to be demanded in the world market, to be traded internationally and to compete with the products of other countries. For example, consider a scenario on the basis of textile companies in Turkey and textile companies in the USA. If the TL depreciates against the Dollar, Turkish textile products, which were previously sold for X $ in America, will now be sold at XY $. Therefore, the price of the product will automatically decrease and imports from Turkey will be cheaper for America. Conversely, the appreciation of a currency negatively affects demand for goods by making exports more costly. In other words, currency devaluation may be seen as necessary in an effort to make exports more profitable and deter imports.

•  Narrowing the Trade Deficit

The difference between a company’s, or in this case a country’s, exports and imports is called the trade deficit. If the trade deficit is too large, the country’s economy will be adversely affected. Due to the trade deficit, the country goes into huge debts and eventually the economy is paralyzed. By increasing exports and reducing imports, the currency can be devalued to regain the balance of trade.

•  Reducing the Debt Burden

If the country is in multiple heavy borrowings that affect its economy, it may choose to devalue its local currency. In such a case, the regular amount of foreign borrowing and the interest of the debt are fixed, the local currency depreciates against the other currency, and in this way, it is aimed to reduce the debt burden in the economy.

What are the Negative Aspects of Devaluation?

The depreciation of the local currency against other currencies for the reasons listed above or for other reasons may cause many unforeseen problems. The most common examples of this situation are rising inflation and foreign debt becoming more costly in terms of local currency. In addition, devaluation may break the confidence of other countries and thus foreign investors in the local currency.

Even though the demand for exported goods increases when the currency is devalued, increased demand can normalize the devaluation effect, causing prices to rise. Also, although devaluation helps reduce the trade deficit, domestic borrowing may increase as the country’s loans are priced in the local currency. Therefore, devaluation is a process that must be carried out very carefully and with good planning.