Definition of Devaluation

This time we will discuss the meaning of devaluation and its purpose, cause and impact. Here’s the explanation …

 

Table of contents :

Definition of Devaluation

Currency Devaluation Purpose

Factors That Cause Devaluation

Impact of Devaluation on Export-Import

  1. Reduced Import Volume
  2. Increase in Export Volume
  3. Local Goods Are More Competitive
  4. Foreign Exchange Increase

Examples of Devaluation in Indonesia

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Definition of Devaluation

Devaluation is a form of policy undertaken by the government to reduce the value of a country’s local currency against the value of foreign currencies.

 

In short, devaluation is a situation in which local currencies have an exchange rate or prices that are getting cheaper internationally.

 

This state of devaluation greatly affects the economy of a country, especially in international trade activities.

 

Currency Devaluation Purpose

devaluation

 

To increase exports and reduce the number of imports. This is expected to increase the balance of payments.

To increase the use of domestic production. This can be achieved if imported goods are more expensive than local goods.

Achieve a balance of payments balance, so that the foreign currency exchange rate becomes relatively stable.

Factors That Cause Devaluation

As discussed briefly about the definition of devaluation above, the situation will cause the local currency exchange rate to be smaller.

 

This condition can affect national economic conditions in the short, medium and long term.

 

Devaluation itself is greatly influenced by people’s behavior in which import activities are the main factor causing it.

 

The high volume of imported goods from abroad, especially if it is not balanced with adequate export activities,

 

will result in increased demand for conversion of local currency rates to foreign currencies, from rupiah to dollars for example.

 

If the demand is higher, the buying exchange rate of the dollar will increase and the value of the rupiah will decrease which also affects inflation.

 

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Therefore, the government issued a devaluation policy as a form of mitigation to stabilize a country’s economy.

 

In short, the following are the causes of currency devaluation:

 

High import activity (basic materials, electronics and other necessities)

Export activities are only for food and marine biota

High unemployment rate in a country

Impact of Devaluation on Export-Import

International trade is the area that has the closest relationship with currency values. A decrease or increase in the value of a country’s currency will have an impact on small volume of exports and imports.

 

The impact of devaluation on the export and import business is:

 

  1. Reduced Import Volume

Devaluation causes the price of foreign goods to be more expensive so that people will find it more difficult and burdened to buy them.

 

This will gradually change the mindset of people to buy domestic goods so that the volume of imports decreases.

 

On the other hand, the use of local goods will increase which in turn can affect a country’s per capita income.

 

  1. Increase in Export Volume

If the value of local currency is low internationally, the price of local goods will also be considered cheap by foreigners. This will encourage demand for goods by the foreign community so that the export volume can increase.

 

The increase in exports can increase the circulation of foreign currencies such as the dollar in a country so that it can increase the position of BOP ( balance of payment ) and BOT ( balance of trade ).

 

  1. Local Goods Are More Competitive

The devaluation condition can be a stepping stone for local entrepreneurs to compete in international markets. Local goods offered to foreign communities will be increasingly diverse.

 

Even the prices of local goods that are considered cheap abroad change the mindset of foreigners so that they prefer cheaper imported goods to their local goods which tend to be more expensive.

 

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In addition, this situation will also cause local overseas entrepreneurs to reduce their prices.

 

  1. Foreign Exchange Increase

The imbalance of export-import activities in which the volume of exports is higher than the volume of imports will provide an advantage in international trade so that foreign exchange reserves will increase.

 

Foreign exchange reserves can be used to develop or establish companies that can provide employment to reduce unemployment.

 

Examples of Devaluation in Indonesia

The Indonesian government itself has carried out a currency devaluation policy several times.

 

As explained above, the devaluation carried out by the government is an attempt to stabilize the country’s economy.

 

However, it should be noted that this condition also has negative impacts in the short term such as an increase in the price of local goods due to increased demand.

 

In addition, local residents who have foreign debts will increase in value.

 

The following are some examples of devaluation policies that have been carried out by the Indonesian government:

 

  1. Devaluation Policy on March 30, 1950

 

President Sukarno’s government, through the Minister of Finance Syafrudin Prawiranegara (Masyumi, Hatta RIS Cabinet) on March 30, 1950 devalued money.

 

Syafrudin Prawiranegara cut banknotes worth Rp. 5 and above, so that the value is halved. This action is known as “Syafrudin Scissors”. Source Wikipedia

 

  1. Devaluation Policy on August 24, 1959

 

President Sukarno’s administration through the Minister of Finance who was simultaneously held by the First Minister Djuanda reduced the value of Rp. 10,000 currency with elephant image and Rp. 5,000 in the tiger image.

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