Financial Education - Devaluation and lack of confidence in the local economy

Devaluation is limited to situations in which a country has officially fixed or "anchored" its exchange rate in relation to one or more foreign currencies. In this case, a devaluation occurs when the fixed exchange rate changes, as the price of the currency falls. A revaluation occurs when the official price rises.

According to what was expressed in the previous paragraph, devaluations occur in economies that have an exchange control imposed through laws or decrees by governments in order to stop the flight of foreign currency.

In this sense, it can be inferred that devaluation occurs when a greater amount of national currency (nominal) is needed to obtain one unit of foreign currency (in the case of Venezuela, bolivars are compared with dollars).

Likewise, the devaluation of a currency may have many causes, however, it generally occurs because there is no demand for the local currency or there is greater demand than supply of the foreign currency.

In relation to the above, the devaluation is produced by the lack of confidence in the local economy, in its stability, in the currency itself, in addition to the non-assertive policies in economic matters. In relation to the Venezuelan case, there are three fundamental problems: high inflationary index, shortages, and the loss of purchasing power of the currency.