News Feed

October 26, 2016 - Debt burden still a fiscal drag –– Forte No need for wild celebrations! That ... +++ October 26, 2016 - It’s Rubbish! Fresh from a recent bout of illness ... +++ October 26, 2016 - Pollard hits back Kieron Pollard has challenged the W ... +++ October 26, 2016 - Still hurting At one point Tuesday, Kenville Mayn ... +++ October 25, 2016 - Falling growth Government’s hopes of a near two ... +++ October 25, 2016 - Woeful Windies ABU DHABI, United Arab Emirates  ... +++

Devaluation – a bad idea

GUESTXCOLUMNCredit rating downgrades and International Monetary Fund (IMF) analysis suggest unsustainable fiscal deficits and balance of payments problems loom. IMF support often relies on, if not require, devaluation as a curative measure. Confusion, even anxiety, accompanies talk of Barbados dollar devaluation. This need not be.

Currency devaluation to stem foreign exchange reserve loss has a solid basis in economics. Price movements affect sales –– lower prices normally generate increasing demand. Devaluation works like daylight saving time. Change the conversion rate of a country’s currency and all relative prices realign.

After devaluation, imports cost more, exports less. As demand falls for higher priced imports and increases for lower priced exports, foreign exchange reserves improve. For this result, though, the export commodity can’t be salt! Folks don’t rush to buy more salt at lower prices.

The first principle therefore is that demand for Barbados’ exports and imports be price-sensitive. The second requirement is productive capacity. Nobody expects lowering sugar prices to cause increased demand which next year’s production cycle might fulfill. Plus, add a pinch of history: sugar has been the world’s most politicized commodity.

Negotiated price/quota arrangements defy ‘free market’ notions. The theorem underpinning devaluation as cure requires specific conditions not currently met.

Barbados is import dependent. Food, fuel, manufactures, freight and insurance charges –– costs rise as the level of domestic prices trend upwards. Can Barbados quickly cut back on these? Is uneven income distribution such that at the high end –– luxuries –– foreign currency expenditure reduction fails?

Would devaluation cause significant increases in tourism receipts? The 2008 Great Recession caused income and employment levels in major tourism markets to fall. Potential tourists’ wage and employment expectations tanked. Britain’s tax imposition didn’t help. Could Barbados control these events? No.

But there may be another problem. Tourism product is generally priced in US dollars. Devaluation doesn’t change this. It initially reduces Barbados dollar expenditure relative to receipts for all-Inclusives, for instance, enabling lower rack rates benefitting visitors through discounts. This can stimulate demand and increase expenditures. At issue: how much knock-on impact sloshes around creating jobs and economic activity elsewhere in the economy?

There’s also a potentially perverse feature of devaluation. Speculation and expectations are ubiquitous elements in foreign exchange demand. Today, unlike Jamaica in its period of fiscal and balance of payments difficulties, foreign exchange is neither hoarded, nor fetches a street price premium in Barbados. Should devaluation alter national resolve and confidence among the population that the currency is solid, these motivations may assume dominance. Expectations of currency realignment work like self-fulfilling prophesy. Merchants abandon available credit facilities and pre-purchase foreign exchange while consumers hoard foreign currency.

If devaluation is not the appropriate tool, what is? It certainly isn’t continuing so-called money printing by the Central Bank. As economic activity declines, so does government revenue. Expenditure however doesn’t move in tandem. Maintenance costs for hospitals and roads continue regardless of how many tourists choose to walk on them or ZRs hustle through.

This inertia quickly leads to ballooning budget deficits. Funding this by increasing domestic money supply in import-dependent economies immediately spills over to the foreign exchanges. No quick fix exists. For maximum impact, Barbados must boost productive capacity; generate efficiency and innovation particularly in the sphere of tradable commodities and services.

NOTE: this relates not only to the private sector but includes diverse services Government should provide as facilitator of economic activity and social development. The Canadian High Commission’s Marc Parisien’s concern about failure of a critical water project to materialize since 2008, although concessionary finance exists, speaks directly to this issue.

Parisien’s comments –– perchance driven by frustration as the nation faces a potable water crisis –– although skirting boundaries of diplomacy, prompt the question: how many capacity and efficiency-enhancing projects remain dormant through the gamut of endless meetings amidst indecision?

The “Wild Coot” [The Nation, October 10, 2016] makes this point well: “… ZR vans and minibuses ply their route 365 days a year while most of the Transport Blue buses lie uselessly idle at the Roebuck Street depot.” This is inefficiency writ large –– with big tax dollar waste! The column also asks when statutory corporations shall become accountable. Sir David Simmons raises the corruption issue. For economic recovery, efficiency cannot remain hostage to such conduct impeding productivity gain.

Austerity measures –– taxation and expenditure cuts –– wisely, carefully selected for impact and judiciously applied help. But they cannot be a solution. Fundamentally, without adjustments involving both public and private sectors –– capital/producers and labour/consumers –– that build productivity and robust confidence, success shall remain elusive.

(Wilberne Persaud is a consultant economist. Email:

One Response to Devaluation – a bad idea

  1. Hal Austin October 21, 2016 at 6:03 am

    Please Mr Persaud. Is this the best economic analysis you can come up with? Stop misleading the Barbadian people.
    The answer to the economic problems of Barbados is first to decouple from the US, we cannot have Janet Yellen setting our monetary policy; fix against a basket of currencies and commodities; use some of the foreign reserves to reduce debt and set up a locally domiciled bank; and introduce a series of fiscal reforms, including property tax based on the market value of the property and introduce an inheritance or death tax.


Leave a Reply

Your email address will not be published. Required fields are marked *