Devaluation
Devaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.
Also called: currency devaluation · devalue · official devaluation
The word applies to fixed and managed exchange rates. When a floating currency loses value through market trading, the correct term is depreciation. A devaluation is a decision: the authorities announce a new, weaker parity. The best-known African example is January 1994, when both CFA francs were devalued by half against the French franc.
Governments devalue to restore competitiveness or because they have run out of reserves to hold the line. The effects are immediate for anyone with cross-border exposure. Importers pay more in local money for the same invoice, foreign-currency debts become heavier, and balances held in the local currency lose external value.
Because a devaluation is often expected before it is announced, it tends to be preceded by capital flight, a widening parallel-market premium and tighter controls. Those are the signals a payments operator should watch.
Example
A supplier invoice of US$100,000 costs an importer 60 million units of local currency at the official rate of 600. After a devaluation to 900, the same invoice costs 90 million, although nothing about the goods has changed.
Commonly confused with
| Term | How it differs |
|---|---|
| Depreciation | Depreciation is a market-driven fall in a floating currency. Devaluation is an official change to a fixed or managed rate. |
See also
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
- Capital FlightCapital flight is the rapid movement of money out of a country by residents and investors who fear devaluation, inflation, confiscation, default or political instability. It drains foreign exchange reserves and often triggers the controls it was trying to escape.
- Parallel Market RateA parallel market rate is the rate at which a currency actually trades outside official channels, in a country where the official rate is not obtainable. In a tightly controlled market it is often the only rate at which real business clears.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- Forward ContractA forward contract is an agreement to exchange one currency for another on a future date at a rate fixed today. It creates a binding obligation on both sides — which is what makes it useful for certainty and dangerous if the underlying payment never happens.