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What’s the Effect of Devaluation of Currency on Expats?

By October 31, 2018 No Comments
What's the Effect of Devaluation of Currency on Expats?

Within the context of modern monetary policy, the definition of the term “currency devaluation” is actually quite straightforward. It simply describes the practice of a deliberate, downward adjustment of one particular country’s currency relative to that of another. This can happen due to a wide range of reasons, like if one country attempted to combat a trade imbalance with one of its partners in the region, for example. The costs of the original country’s exports would be decreased, allowing them to remain competitive on a global stage. But for as clear cut as this definition is in a technical sense, it still brings with it some major implications that people must be aware of—particularly when it comes to expats working abroad.

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Expats and Devaluation of Currency: What You Need to Know

When an expat goes on an assignment in another country, they are usually paid in that country’s local currency as opposed to their home country’s. Oftentimes, this is done to keep things as easy as possible for everyone involved from an administrative position.

But when this happens, those expats will sometimes experience a moderate or even large degree of fluctuation in their payroll compared to what they would be making were they paid in the currency of their country of origin.

For longer assignments that go on for months or even years at a time, this could be particularly detrimental to the expat. Depending on the degree of currency devaluation that is experienced, they could ultimately lose a significant amount of money from those fluctuations. All of this because the currency in which they are being paid is no longer “worth” what it once was when the assignment began (and was being negotiated).

It’s a concept that has ramifications across that expat’s daily life, too. If they were given a specific allowance when their assignment first started to cover routine expenses, for example, that total may be appropriate today. But if there is suddenly a big shift in the value of the local currency, that same amount may not cover what they are paying for as soon as six months down the road. It could even cause that expat to receive what is essentially a different amount of money for the same job every month, depending on the conditions’ fluidity.

But this doesn’t just have downsides for expats; it can also impact their employer. Currency devaluation could easily increase the final cost to the employer for the employee and assignment, especially if they’re offering some type of a bonus to cover major fluctuations in the currency. In that situation, if a dramatic shift is experienced, it could cost that business a huge amount of money in a short amount of time.

Understanding Expats’ Options

For many, a solution to this comes by way of a periodic reconciliation. Many companies operating on a global stage (or those who are in the process of expansion) will review salaries and exchange rates at least once per year, or even as often as six months, to help gain visibility into the current situation from a financial perspective. During that reconciliation period, it may be determined that a raise is in order to try to “cancel out” the negative effect seen by currency devaluation.

This type of practice can also take into account certain factors like price inflation and general changes to someone’s cost of living. The expat would still technically be making a comparable salary to what they’d always received, but the total dollar amount would be different depending on what has happened with the local currency since the last reconciliation.

Likewise, many companies choose to use an interim review – but this is a much more time-consuming approach from an administrative point of view, as it’s done month to month instead of over much longer periods of time. Despite that additional burden, this too would be effective for taking into account factors like price inflation and cost of living adjustments.

Grow Your Global Team with A Proven Expansion Solution

Currency devaluation affects countries differently, but it can hit expats working on assignments abroad in a particularly negative way if both they and their employers are not careful. If anything, this underlines the continued importance of working with a partner with global experience in these and other administrative issues during expansion.

Velocity Global’s International PEO (Professional Employer Organization) solution assists companies with each step of the expansion process—including building your global team. If you’re considering sending an employee overseas as part of or to lead your global expansion, reach out to us today to learn more about how we can help you establish your global presence quickly, efficiently, and compliantly.

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