Foundations
Devaluation
What are we talking about?
Under fixed exchange rates, the Central Bank will typically need to use its foreign exchange reserves to buy domestic currency and thus to prop up its value to match the peg.
However, this activity is limited by the amount of foreign currency reserves the Central Bank owns; the prospect of running out of these reserves and having to abandon this process may lead a central bank to devalue its currency in order to stop the foreign currency outflows.
Why do we care?
Devaluing the currency by increasing the fixed exchange rate can result in domestic goods being cheaper than foreign goods (which improves the trade deficit), boosting demand for workers and increases production (which increases foreign reserves), and making sovereign debt comparatively cheaper to repay.
However, investors are well aware that a devaluation strategy can be used, and they build this into their expectations (and into their commercial contracts). The perception that a devaluation is imminent may lead speculators to sell the local currency in exchange for the country's foreign reserves in anticipation, increasing the pressure to make the devaluation but diminishing its actual effect.
The main impact of devaluations on humanitarians is programmatic. Poorer segments of population tend typically to have more difficulty to find substitutes for the part of imports in their expenditures (typically agricultural products, energy, etc).
The devaluation in itself will typically not affect humanitarian agencies in their operations, as most budgets as established in foreign currency and preparedness measures will have been already taken against depreciation to mitigate the risk of exposure in local currency.
How do we monitor it?
A devaluation is an official decision that is taken by the authorities. So you will usually know about it in advance.
Useful signs to monitor in order to anticipate a possible devaluation include the gap between the official and the market exchange rate, the lack of dynamism of external trade, and the unsustainability of external sovereign debt.