The governments bring different measures time and again to strengthen their economy as well as currency on the global platform. One such move is the devaluation or depreciation of the currency.
Why countries devalue currency:
The devaluation of currency takes place when a particular country’s currency, such as the U.S. dollar or Indian Rupee, falls in value as compared to a foreign currency. It is done for different purposes; some countries do it intentionally to boost their exports and decrease their imports. Also, there are times when devaluations are forced on a nation when it can no longer protect its exchange rate. This move turns out to be both, good as well as bad, for small businesses that trades with foreign parties.
The impact of the devaluation of currency on a small business depends on the type of transaction carried out. However, the disadvantages of devaluation are still almost parallel equal to its advantages.
The impact of devaluation on Businesses:
Here are some of the major impacts on a business when the currency of a specific country is devalued.
- Exports become cheaper: The devaluation of currency is likely to have a positive impact on sales of a small business with to foreign companies, irrespective of their currency. In case your business needs payment in U.S. dollars for the exports carried out, your clients may end up purchasing more of your items as their currency would convert to more of U.S. dollars. It might also be advantageous for you if you take the payment in a foreign currency. Because of the hiked exchanged rate, you might get more U.S. dollars on converting the currency.
- Imports become costly: The impact of devaluation of the currency on the imports of a business varies according to the currency used to carry out the transactions with the suppliers in other countries. Your business will not be affected when you pay the foreign supplier in U.S. dollars as you will not be converting any currency for this deal. Simultaneously, your costing will rise if the suppliers recommend you to pay them in their currency as you will be required to spend more U.S. dollars to convert it into foreign currency.
- Inflation: This is an important impact as imports become expensive and the overall costing of the business goes high.
- Devaluation of currency is a great measure for the countries to accomplish their economic policy. If your currency is weaker as compared to the entire world, it will most likely boost your exports, shrink trade deficits and decrease the cost of interest payments on huge debts. On the other hand, there are several negative impacts too of this move. An uncertainty is generated in the global markets that can lead to recession.
Find out more from HBSwiss about how you can secure your finances in case devaluation of the currency is announced by the government.