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3 Ways to Caution Impacts of Currency Devaluation (Kwacha)
The recent devaluation of Malawi currency by the Reserve bank of Malawi has brought panic among the citizenry. Chiefly because the devaluation has brought about immediate financial consequences for consumers and the public.
When the RBM announced the devaluation many people wondered what it was. And why the central bank considered it important. In this post I share some basic knowledge on the topic.
What is Currency Devaluation?
It is thus imperative to first define currency devaluation before we dive deeper.
Currency devaluation is the deliberate measure of reducing the currency value in a country.
When a currency is devalued, it means consumers will need to spend more than before to buy the same amount of goods.
In this case where the currency has been devalued by 25%, it implies that every K100, has lost value by K25.
Why Currency Devaluation? Who does it Benefit?
I never knew there is anything good with currency devaluation. All I thought previously was that devaluation is an automatic recipe for economic trouble. However, that’s not always true.
Devaluation of a currency has some possible benefits. Precisely, devaluation is a double-edged sword. It has both advantages and disadvantages for the economy.
Usually, devaluation has both short term and long term effects.
In the next paragraphs are three benefits of why nations devalue their currencies.
Currency devaluation is believed to boost exports in a country. When a currency of a particular country is devalued it makes its export more competitive on the global market.
In other words, devaluation makes goods exported to other countries to be cheaper.
As a result, demand increases from the global market.
At the same time, devaluation makes imports more expensive. Thereby reducing demand for imported products.
In this regard, a country will benefit of it has enough produce to supply on the global markets.
Relief on Debt Clearance.
Countries with foreign debts that require servicing regularly get relief when they devalue their countries. With a devalued currency it becomes cheaper to pay for interests on loans.
Many countries and more specially developing countries rely on foreign debts to run development activities.
A country may choose to devalue its currency to narrow trade imbalances. To achieve this goal, currency devaluation encourages exports and discourage imports.
Increased exports increase economic growth in the country and may increase job creation in the export industry.
A large trade imbalance negatively impacts a country’s economy. Strong economies usually have small trade deficits.
Disadvantages of Currency Devaluation.
While devaluation has some benefits as outlined above, it also poses some challenges.
Currency devaluation is necessary only if its advantages outweigh the disadvantages. It is the mandate of the central bank to assess both merits and demerits of devaluation.
One of the disadvantages of currency devaluation is increased cost price.
In a country that depends on importation of machinery, equipment and raw materials, cost price increases. This in the long run may result in a decrease in production. Consequently, lowering product supply on the domestic market.
Another consequence of currency devaluation is price increase for imported essential goods such as fuel and fertilizers.
When the cost of goods increases, living expenses also increase.
Living expenses like rentals, public transport fares, and education expenses all increase. This puts more economic pressure on the poor majority and the middle income earners.
3 Ways to Minimize Negative Effects of Currency Devaluation
Ask For a Salary Raise
At an individual level, the impacts of devaluation can be minimized by increasing one’s monthly income.
For the employed person, this may mean negotiating a salary raise with the employer.
People in business may be cautioned from the effects of devaluation by raising prices of their products or services. Where necessary, economic hard times like these may be cautioned by market diversification. Instead of having one product, it would be advantageous to offer a range of related products.
Have Multiple Sources of Income.
The effects of devaluation also be minimized by finding additional sources of income. Extra earned income would be used to meet the gap created by the currency devaluation.
The idea of having multiple sources of income would be realized by finding part-time jobs or doing side hustles. Side hustles can either be offline or online. Some side hustles include consultancy, organizing professional training, master of ceremonies, and events management.
Cut Down on Daily Expenses.
As they say, hard times, calls for tough solutions. Another way to caution the effects of currency devaluation is to cut down on non-essential expenses/budgets such as entertainment, social expenses, and other luxuries. In order to reduce expenses, one may require to strictly live below their means.
I would love to see the conversation going. Share in the comment section how you understand devaluation, its impacts and how to caution the impacts it has on daily life of an ordinary citizen.