EFFECT OF CURRENCY DEVALUATION ON PERFORMANCE OF BANKING SECTOR IN CROATIA
Abstract
Purpose of the study: The study sought to examine the effect of currency devaluation on performance of banking sector in Croatia.
Research Methodology: The study relied upon the findings of the previous studies to make inferences. The study was conducted out thoroughly by examining the previous studies rather than physical investigations.
Findings: Currency devaluation reduces the performance of the local business while increasing the performance of the external businesses. Currency devaluation increases the prices of imports while reducing the market prices of exports. The study noted that currency devaluation weakens the confidence of the investors, thus reducing bank opportunities to obtain resources from those investors. The exports are relatively cheaper to foreign customers and on the other hand, imports are more expensive. When exports are high and the imports are low it makes the aggregate demand increase by the assumption that demand is relatively elastic, in normal situations higher aggregate demand is probably to cause higher real GDP and inflation. The increase of the aggregate demand can increase demand-pull inflation.
Conclusions: The study concluded there is a statistically significant and negative relationship between currency devaluation and performance. The currency devaluation makes the imports very expensive and exports cheap and this lowers the assurance of the investors. Investors are not willing to invest in countries that are having lower returns on exports. Devaluation decreases the hope of people in terms of deposits in the domestic currency.
Recommendations: The study recommended that currency devaluation needs to be avoided by the countries. Counties need to look for alternative strategies that could increase the level of exports rather than currency devaluation. The currency devaluation was found to have a negative effect on the entire economy. Investors are not willing to go to countries with low returns of the exports and this will drive away investors. It is also recommended that if the government wants to devalue the currency to achieve the monetary policy, it should also raise short-term interest rate under their control. The motive to raise the short-term interest is to make the domestic assets more attractive and higher interest rates should strengthen the currency.
Keywords: Currency devaluation, performance, banking sector, Croatia
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