Currency Depreciation: What It Means for Your Imports and Exports

Before we start with this article, we highly recommend reading the previous article as it delves into the flip side of currency fluctuations.

In business, understanding the impact of currency fluctuations is crucial for making decisions. One of the key factors that affect international trade is currency depreciation. Depreciation occurs when a currency’s value decreases relative to another currency, which makes imported goods more expensive as well as benefits exporters.

In this article, we’ll focus on how currency depreciation affects both importers and exporters!

Let’s take the case of Anthony, who imports sweets for his local market. The economy has faced a downturn, causing the local currency to depreciate. As a result, Anthony’s currency is now weaker compared to others. For the same amount of money, he can import fewer sweets than he could before the depreciation!

This means Anthony’s costs will rise, and his profitability could decrease unless he adjusts his pricing or cuts his costs. If Anthony didn’t understand how currency depreciation works, he might struggle to adapt to the rising costs of his imports!

Now let’s consider Ayaan, a cotton exporter from Pakistan. When his country’s currency depreciates, it actually benefits Ayaan. A weaker Pakistani Rupee makes his cotton cheaper in foreign markets. Let’s see this with an example;

Before Currency Depreciation:

Ayaan sells 1 unit of cotton to the US for 100 USD. At the exchange rate of 1 USD = 167 PKR, Ayaan receives:

100 USD × 167 PKR = 16,700 PKR

After Currency Depreciation:

The Pakistani Rupee depreciates, and the new exchange rate becomes 1 USD = 180 PKR. Ayaan still sells 1 unit of cotton for 100 USD, but now he receives:

100 USD × 180 PKR = 18,000 PKR

Result:

Before depreciation, Ayaan earned 16,700 PKR. After depreciation, he earns 18,000 PKR. This means Ayaan gains an additional 1,300 PKR because the weaker Rupee increases the value of his sales when converted to local currency.

Even though foreign buyers still pay 100 USD, Ayaan gets more PKR for the same cotton. This not only increases his profit margin but also makes his cotton more attractive to foreign buyers, as it is now cheaper in their local currency terms.

Currency depreciation can have various effects on importers and exporters. For importers like Anthony, it means higher costs and fewer goods for the same amount of money. However, for exporters like Ayaan, it creates an opportunity to increase profits and remain competitive in the global market.

Written by Daniil Eremin

Edited by Riya Kalapurakkal