The concept of devaluation, an economic term, is often of interest to investors and citizens closely following economic developments. Usually, devaluation decisions taken due to economic necessity are made consciously by a country’s central bank. Devaluation has both positive and negative effects on the economy. So, what is devaluation, and what does it mean? What happens if devaluation occurs in a country? Devaluation is the process where a country’s national currency is consciously devalued against foreign exchange rates by the government or central bank. This method, generally applied in fixed or semi-fixed exchange rate regimes, aims to promote export, improve the 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 encourages domestic production and exports. Protecting Foreign Exchange Reserves: When a country’s foreign exchange reserves decrease, devaluing the national currency aims to control foreign exchange outflows. Increasing Competitiveness: With domestic products becoming cheaper in foreign markets, an increase in exports is achieved. EFFECTS OF DEVALUATION Positive effects: Increase in Exports: When the value of the domestic currency decreases, domestic products become more attractive to foreign countries, leading to an increase in exports. Reduction in Current Account Deficit: More expensive imports and increased exports may help to close the trade deficit. Encouragement of Local Production: Due to the increased prices of imported goods, demand for domestic production rises. Negative effects: Rise in Inflation: Due to increased costs of imported goods and raw materials, prices increase overall. Increase in Debt Burden: As foreign debts are usually repaid in foreign currency, when the national currency devalues, repaying debts becomes more difficult. Erosion of Investor Confidence: Sudden and sharp devaluations can undermine investor confidence, leading to financial fluctuations. WHAT HAPPENS IF DEVALUATION OCCURS? When devaluation occurs in a country, consumer prices rise, and import costs increase. This situation may reduce the purchasing power of the population. Furthermore, due to inflationary pressures, interest rates may need to rise. However, a controlled devaluation process can support long-term economic growth.