A country’s currency may be devalued to gain a competitive advantage in global markets, reduce sovereign debt burdens, or boost domestic consumption and GDP growth. In countries with managed exchange-rate systems, central banks can instigate a currency devaluation by adjusting interest rates or altering reserve requirements to influence the value of their currency. Whether or not this strategy is successful depends on the goals of the nation and its economic resources.
A lower national currency makes exports more affordable in international markets and a country’s citizens can buy goods from local stores at a discount, which supports higher volumes of exporting and drives economic growth. At the same time, a higher cost of imports may encourage residents to buy locally produced goods, which bolsters the economy’s overall balance of trade.
A weak national currency can also help nations with a budget deficit as it can make their foreign-denominated loans cheaper when priced in the home currency. In the 1990s, South Africa devalued its currency to make its imported goods less expensive, which lowered costs of living and improved its economy by reducing its budget deficit. However, ongoing deficits are unsustainable in the long run and can erode people’s confidence in their country’s domestic currency. Therefore, international organizations have outlined principles to prevent repeated rounds of currency devaluation and retaliation among nations.