The concept of devaluation, which is an economic term, is a topic of interest for investors and citizens closely following economic developments. Typically, devaluation decisions are made consciously by a country’s central bank due to economic necessities. Devaluation has both positive and negative effects on the economy. So, what is devaluation exactly, and what does it mean? What happens when a country experiences devaluation? Devaluation refers to the deliberate depreciation of a country’s national currency against foreign exchange rates by the government or central bank. Usually applied in fixed or semi-fixed exchange rate systems, this method is used to promote exports, improve trade balance, and support economic growth. **WHY DOES DEVALUATION OCCUR?** Devaluation decisions are usually made due to economic necessities. Here are the main reasons: **Closing the Trade Deficit:** By making imports more expensive, it promotes domestic production and exports. **Preserving Foreign Exchange Reserves:** When a country’s foreign exchange reserves decrease, devaluation aims to reduce the value of the local currency to control foreign exchange outflow. **Increasing Competitiveness:** With local products becoming cheaper in foreign markets, there is an increase in exports. **EFFECTS OF DEVALUATION** **Positive effects:** **Increased Exports:** When the value of the local currency decreases, local products become more attractive to foreign countries, resulting in an increase in exports. **Reduced Current Account Deficit:** More expensive imports and increased exports can help in reducing the trade deficit. **Promotion of Local Production:** With imported goods becoming more expensive, the demand for local production increases. **Negative effects:** **Rising Inflation:** Due to increased costs of imported goods and raw materials, general price levels rise. **Increased Debt Burden:** Since external debt repayments are usually in foreign currency, repayments become more difficult when the national currency loses value. **Loss of Investor Confidence:** Sudden and aggressive devaluation can undermine investor confidence and lead to financial instabilities. **WHAT HAPPENS WHEN DEVALUATION OCCURS?** When devaluation takes place in a country, consumer prices rise, and import costs increase. This situation can reduce the purchasing power of the public. Additionally, due to inflationary pressures, there might be a need for increased interest rates. Nevertheless, a controlled devaluation process can support long-term economic growth.