What is devaluation?

"Devaluation" is the official reduction in value of a currency relative to one or more other currencies, where this reduction in value is not based on free market forces but results from a policy measure by the central bank. Previously, this also meant a reduction in value relative to gold, under the gold standard.

Devaluation makes the domestic currency cheaper relative to other currencies, which has two important consequences: the country's exports become relatively cheaper for foreign buyers, while foreign products become more expensive for domestic consumers, which discourages imports. As a result, devaluation can contribute to increasing exports, reducing imports, and lowering a current account deficit.

At the same time, devaluation can increase the prices of imported goods, which can fuel inflation. This can ultimately lead to a wage-price spiral, nullifying the positive effects of the devaluation. Devaluation is sometimes used as part of broader economic shock therapy to stabilise or stimulate an economy.