The impact of devaluation on the economy

How does devaluation affect the economy? 29 / 03 / 22 William Hunter Visitors: 141 Rating: ★★★★★

Let's discuss what processes are behind the depreciation of the currency, what devaluation is and what it provides.

Devaluation is a decrease in the exchange rate of the national currency in relation to more stable and stable exchange rates in the financial market, for example, against the US dollar or euro.

Devaluation and inflation - what's the difference?

The two terms are often found in conjunction in the analysis of the economic situation, but this does not mean that they are equivalent. The difference is in the content and prerequisites of attractiveness. With devaluation, the price of the US dollar and the euro rises, the cost of goods rises, inflation follows the depreciation of the national currency and the country's financial resources, which corresponds to the volume of production and solvency.

Devaluation can be open and hidden. In the first case, the Central Bank now officially intervenes and foreign exchange reserves are activated. In the second, the process occurs through the regulation of market mechanisms.

The Central Bank uses reserves to control and regulate state exchange rates. If they are not enough, the process of currency depreciation is inevitable. What precedes devaluation? Here's the full list of reasons:

All these reasons lead to the fact that the state includes the full capacity of the printing press, engages in foreign exchange trading and thus affects the national economy.

Risks for access and ordinary citizens

An objective assessment of risks associated with a number of factors and the rate of loss of the national currency in the market. Let's consider in more detail.

Smooth devaluation - a decrease in the national currency to 5% per year, when the norm is considered within the validity period and is not very typical for a country's deal.

Moderate - a loss of 5-15% per year leads to export stimulation. At this rate of devaluation, the country can benefit from:

Fast - the growth of import prices and export promotion become apparent when the national currency depreciates by 15–25% per year (with a positive trade balance and export coverage by an increase in the cost of imports, the situation can stabilize and regain lost foreign exchange positions).

Rapid - catastrophic for the country's economy, since the currency accounts for 25% per year and leads to a total crisis, the expression of consumer demand, the depreciation of the savings of legal entities and individuals.

The most dangerous rapid and uncontrolled by the Central Bank and the devaluation of the state leads to the final consequences:

How to do business

Depending on the pace of speed, the position of the business develops according to various scenarios. In the worst case scenario, experts recommend that entrepreneurs choose the following strategy:
Investing in assets that rise in price and act to achieve the moment.
Transfer of funds into the currency that is needed for business settlements.
Contribution to the development or re-equipment of the business, the launch of products that are relevant to the market.
Search for partners at fixed prices and without reference to the expected period.
Revision and organization of logistics to reduce costs and increase orders.

What to do with loans

The terms of the loan must be met in accordance with the contract. Market experts note that those who have income in hard and stable currency and credit in the country will benefit.

Devaluation is not the best time to take out a loan.

With the devaluation of the national currency, banking and financial structures react to sensual directions:

The impact of devaluation on the life of the population and doing business is mostly negative and creates an unfavorable background for the issuance of borrowed funds.

How to save money

The depreciation of money does not happen instantly, there are always obvious reasons. To reduce the risk of losing capital, do not panic. It is recommended to focus on the acquisition:

  1. large purchases that were in strategic plans and really needed;
  2. products and goods for personal and daily consumption;
  3. assets that are not affected by a volatile market.

In general, the main task is the diversification of capital and assets, a careful analysis of the current situation.

What not to do in a situation of instability:

Summing up

The danger to the economy, investment and personal savings is the rapid devaluation of the national currency. For the safety of funds, it is required to adhere to a diversification strategy.


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