How do countries intentionally reduce the value of their currency?
Payments
Asked by Question Bot05/Jun/20141 answer
1 Answer
F
Faisal Khan
Answered 05/Jun/2014
They do this to essentially reduce their Current Account Deficit.
In simple English, when a country's import bill is higher than the export bill, the difference starts costing the government, they would need to buy foreign exchange to pay for the difference (either tap into foreign exchange reserves or borrow money).
The goal of every economy is to have the Current Account Deficit as small as possible, if not negative.
Central Banks will devalue their currencies to enable more export proceeds (i.e. earn much needed foreign exchange) and hopefully as the same time make it more expensive to import things, which they hope, that non-essential imports would head towards a decline (think mobile phone, computers, luxury cars, consumer electronics, etc.), the catch is you also increase the cost of importing oil, etc. which makes your transportation more expensive, and manufacturing more expensive.
In simple English, when a country's import bill is higher than the export bill, the difference starts costing the government, they would need to buy foreign exchange to pay for the difference (either tap into foreign exchange reserves or borrow money).
The goal of every economy is to have the Current Account Deficit as small as possible, if not negative.
Central Banks will devalue their currencies to enable more export proceeds (i.e. earn much needed foreign exchange) and hopefully as the same time make it more expensive to import things, which they hope, that non-essential imports would head towards a decline (think mobile phone, computers, luxury cars, consumer electronics, etc.), the catch is you also increase the cost of importing oil, etc. which makes your transportation more expensive, and manufacturing more expensive.