Revaluation is the opposite of devaluation.
It refers to a deliberate upward adjustment in the official exchange rate of a country’s currency relative to a foreign currency or a fixed standard, such as gold.
Similar to devaluation, revaluation is a policy tool primarily used by countries operating under a fixed exchange rate or a pegged exchange rate system, where the government or central bank actively manages the currency’s value.
It signifies a strengthening of the domestic currency in relation to other currencies.
Revaluation should be distinguished from currency appreciation, which is an increase in a currency’s value in a floating exchange rate system driven by market forces of supply and demand.
Why Revalue a Currency?
Governments might choose to revalue their currency for several economic reasons, often in response to specific economic conditions:
- Combating Inflation: If a country is experiencing high levels of inflation, a revaluation can help to lower the cost of imported goods. This can directly reduce imported inflation and exert downward pressure on overall domestic prices. As imports become cheaper, domestic consumers benefit from lower prices, and businesses may face lower costs for imported inputs.
- Reducing Trade Surpluses: A revalued currency makes a country’s exports more expensive for foreign buyers and imports cheaper for domestic consumers. This can help to reduce a persistent trade surplus, potentially easing trade tensions with other countries that feel disadvantaged by the imbalance.
- Increasing Domestic Purchasing Power: A stronger currency increases the purchasing power of domestic consumers and businesses when buying goods and services from abroad. This can lead to a higher standard of living and potentially lower input costs for domestic industries that rely on imports.
- Attracting Capital Inflows: A strong and stable currency can make a country more attractive to foreign investors seeking a safe haven for their capital. Revaluation, especially if perceived as part of a sound economic policy, can further enhance this attractiveness.
- Reducing the Local Currency Value of Foreign Currency Debt: If a government or domestic entities hold significant debt denominated in foreign currencies, a revaluation of the domestic currency will reduce the local currency cost of servicing and repaying that debt.
Mechanics of Revaluation
In a fixed exchange rate system, the central bank maintains the peg by buying or selling foreign currency reserves.
To revalue its currency, the central bank will officially announce a new, higher exchange rate at which it will be willing to buy and sell foreign currencies.
This effectively increases the value of the domestic currency relative to the reference currency or standard.
Consequences of Revaluation
While revaluation can offer potential benefits, it also entails certain drawbacks and risks:
- Reduced Export Competitiveness: A stronger currency makes a country’s exports more expensive for foreign buyers, potentially leading to a decrease in export volumes. This can negatively impact export-oriented industries, reduce economic growth, and potentially lead to job losses in these sectors.
- Increased Imports: Cheaper imports can lead to a rise in import volumes, potentially widening the trade deficit and harming domestic industries that compete with foreign producers.
- Potential for Deflation: While combating inflation is a primary goal of revaluation, a significant or poorly timed revaluation could lead to deflationary pressures if the decrease in import prices triggers a broader decline in the price level.
- Negative Impact on Export-Oriented Sectors: Industries heavily reliant on exports may experience reduced profitability and potentially face difficulties competing in the international market, leading to lower investment and employment in these sectors.
- Psychological Impact: If a revaluation is unexpected or perceived as a sign of economic weakness in other countries, it could trigger capital outflows if investors anticipate further currency movements.
- May Not Address Underlying Economic Issues: Revaluation is a monetary policy tool and may not address fundamental structural issues within the economy that are contributing to trade imbalances or inflation.
Examples of Revaluation
Historically, instances of deliberate revaluation are less common than devaluations, often because countries are more inclined to boost exports than to deliberately make them more expensive. However, some examples exist:
Germany (Post-World War II): The Deutsche Mark was revalued several times in the post-war period as the German economy strengthened, reflecting its growing economic power and to manage trade surpluses.
Switzerland: The Swiss Franc has historically been considered a safe-haven currency, and its strength has led to periods where its appreciation (market-driven, but sometimes with central bank influence) has had similar effects to a revaluation.
Netherlands (Historical): Similar to Germany, the Dutch Guilder was revalued on occasion during periods of strong economic performance.
Revaluation is a strategic monetary policy tool that can be employed to combat inflation, reduce trade surpluses, and increase domestic purchasing power.
However, it also carries the risk of reducing export competitiveness and potentially harming export-oriented sectors.
The decision to revalue a currency requires careful consideration of the prevailing economic conditions, the potential impacts on various sectors of the economy, and the likely responses of trading partners.
It is a policy tool that is typically used cautiously and in specific economic circumstances where the benefits of a stronger currency are deemed to outweigh the potential drawbacks for export competitiveness.
