Why not devalue?

The US dollar is wildly overvalued, and our Central Bank’s stubborn adherence to a 2:1 US dollar parity is going to stall all our attempts at economic recovery in Barbados. It is nothing short of folly to have our dollar fixed to the world reserve currency.

The uncontrollable global hoarding of US dollars will keep pushing its value higher and higher. Our US dollar-denominated labour and tourism prices are obviously going to be artificially inflated, making us no longer competitive even for American investors and travellers – and making Barbados an exorbitantly expensive destination for European, Canadian and Caribbean visitors.

It is hard to believe that we are not even discussing currency adjustment as a policy option when all but a few sovereign states in the world have reacted to the US dollar’s unabating overvaluation and let their currencies float downward against it or devalued rather than maintain parity and loose competitiveness. Dr. Honohan’s Ireland not the least.

People have come to associate a government-induced devaluation with a loss of prestige – a policy prescription that augurs rising food import costs, less money to travel with, skyrocketing fuel costs . . . but even if there will be some degree of inflation “because Barbados is a net importer” – the fact is that unless we do something to restore our export industries’ competitiveness, we  will never get out of the straitjackets of debt and deficits and certainly never return to being the net “exporter”. It is time for all Barbadians to apply some self-discipline in our consumption habits, and devaluation will enforce this in ways that can be more sparing on fixed income earners in the community.

The Pound Sterling is the oldest surviving currency in the world. In 1940, the pound was converted at US$ 4.03 to the Pound. Over the years, the Bank of England has adjusted the Pound’s convertibility to take advantage of the country’s development opportunities and devalued the Pound to US$2.80 in 1949, to US$2.40 in 1967 and since October 2016 has been floating for about US$1.25.

Due to the continuing economic and political unrest following Brexit, further depreciation can be expected. The fall of the Pound against the US dollar since Brexit means that a holiday in Barbados will cost a British visitor at least 25% more than it cost last year!

Money is a “good” just like any other good – it has its usefulness as a fairly predictable store of value that people can use to trade with instead of them having to swap goods and services between each other to get what they need. But a purchaser has to have enough of the specific currency that the vendor will accept for an exchange to be satisfactory to both parties.

We wouldn’t want to be paid any Algerian dinars in Barbados in exchange for a two-week hotel stay unless we were in the market to use Algerian currency to purchase a product from Algeria . . . . even if they offered a bucketful of dinars, we could only use it as a door-stop!! To facilitate trade therefore, both contracting parties have to find a commodity that the buyer has and the vendor wants.

To solve this potentially intractable barrier to global trade, a United Nations conference was held in 1944 at Bretton Woods in the United States at which the world’s sovereign states, agreed that in the absence of any other convertible commodity, the United States dollar should be accepted as the world’s reserve currency. All member countries in the world at that time admitted to having trading or investment interests in America and were already holding a stock of US dollars or wanted to hold a stock for future business.

This would be recognized as the start of a process that could hopefully lead to the ideal of a single global currency. Since Bretton Woods however, the number of sovereign nations in the world has grown from 67 to 193, and each newborn state has insisted on having its own symbols of sovereignty including the control of their own currencies, and so the best alternative exchange rate system to a global currency was for each currency to establish its own level of convertibility against the US dollar.

The trouble is that under this arrangement, every country in the world is endeavouring to have a large reserve of US dollars as a “cover”, and the scarcer the supply of this financial commodity, the more its price is inflated.

The coming austerity programme is going to be painful and long. We can avoid the second punishment if we adjust the Barbados dollar to suit the dynamics of our economy. Fiscal measures will also be necessary, but they will have more space in which to be effective. We will fall forward.

Source: Lee Farnum-Badley The Warri Man

41 Responses to Why not devalue?

  1. James W May 16, 2017 at 11:02 am

    Sadly, the UK pound’s weakness means that many of us will not be making the trip to Barbados this year. The Barbados dollar floated free of the US dollar would make much more sense.

    Reply
  2. F.A.Rudder May 16, 2017 at 11:03 am

    Serious national thought and focus on this subject matter is needed but first and foremost nationals need to curb the food import and fossel fuel bill; this can be done by productivity in the local agriculture and produce markets.

    Reply
  3. L.Allan Wilkie
    L.Allan Wilkie May 16, 2017 at 11:06 am

    I remember posting a long while back, that we were going to be told why devaluation is in our best interest. Here we go.

    Reply
  4. Wayne Edwards
    Wayne Edwards May 16, 2017 at 11:12 am

    More poverty, more crime = less tourists = more poverty, more crime = less tourists =……….. a downward spiral. Bye bye Barbados gem of the Caribbean

    Reply
  5. Nico HL Beckles
    Nico HL Beckles May 16, 2017 at 11:30 am

    Who’s the Johnny that wrote this?

    Reply
  6. Daisy Suzanne King
    Daisy Suzanne King May 16, 2017 at 11:32 am

    Look at the state of the Caribbean territories which have devalued, and see their social problems magnified and are not yet under control? Why are people who write this nonsense so hell bent on destroying Barbados? Barbados has always been envied by some of the “bigger” territories because of our efficient management of our economy and social peace and tranquility. We were by no means perfect ,but it was a well managed economy which resulted in peaceful and orderly society .I remember the Hon. JM GM “Tom “Adams saying to the Jamaican government that we could advise them on how to run the country,a snide remark,as was his style. We now have an incompetent ,dishonest government who seem hell bent on ruining this country. I pray we can hold on and avoid devaluation until the government changes in 2018. Wayne Edwards you are on point. As a historian, I deal with evidence,not supposition.

    Reply
  7. Neelia Williamzz
    Neelia Williamzz May 16, 2017 at 11:43 am

    when they devalued the Jamaican dollar i was a toddler!!! i wish I didn’t grw up to face these times… wrong move barbados !!!!! people will suffer!!!

    Reply
    • Jermel Pierre
      Jermel Pierre May 16, 2017 at 7:40 pm

      you do know that their is something called a controlled or managed flotation of the currency where the Government controls the level of devaluation .. just like what T&T have atm .. however flotation like that benefits countries of has a heavy trading capacity as it make imports cheaper and helps maximize exportation… However i don’t Think its wise for Barbados to devalue (even tho the currency is artificially high) for the simple reason that you’ll don’t really export anything and the primary source of Forex is tourism .this is the reason why the currency is at a false high and also why it should not be devalued .. but its only a matter of time before its devalued ,as the country needs to be earning a certain level of Forex (which its not) in order to keep the peg at a particular level …. China for example has their currency artificially low …because they produce a lot hence their economy had outgrown the US and calls has been made for them to increase the value of their currency by the US , who claim they have an unfair advantage and they are cheating … same principle applies to Barbados.

      Reply
    • Eric Eder
      Eric Eder May 16, 2017 at 9:32 pm

      “”The US dollar is wildly overvalued”” According to who ? The US dollars value is determined by the markets . It is not overvalued .

      Reply
  8. Ibukunoluwa Ayanfe Ozioma
    Ibukunoluwa Ayanfe Ozioma May 16, 2017 at 12:04 pm

    “…restore our export industries’ competitiveness”… this is key in terms of developing wealth in the country as too much of our money is going out when we import more goods than export. However, the reason, most likely for the destabilization of the economy thus far may be due to the dollar or other currencies not being anchored to a “commodity” such as gold!!

    Reply
  9. Alex Alleyne May 16, 2017 at 12:05 pm

    All these high-fliers that talking such foolishness of Devaluing the BDS$ will be no where in BIM after it happen to feel the hardship. Along with them ,plus their children, Mum and Dad will be off to the North or Europe and leave the rest of us here to “suck-salt”.

    Reply
  10. John JT Titheridge
    John JT Titheridge May 16, 2017 at 12:35 pm

    Very easy to work out for us tourists!

    Reply
  11. jrsmith May 16, 2017 at 12:37 pm

    History is yesterdays news , but we are surviving on all our yesterday , if we could use lines from history what would they be and who would have said them…..
    I am not claiming to know anything about financing, but I was very successful in business , ……
    **************************************************
    Would some explain to me and masses of bajans , our barbados $ ,I would deem to be a strong currency looking at where it sits between the (US dollar) and the (UK £ )..
    Who came up with this stupid idea of labeling our products in Barbados as in (US) dollars..as if we have no confidence in our nation heritage……why not used the (UK £ ) as we are always hearing , the most visitors is from the (UK) some one explain…..

    Reply
  12. Simon Gooding
    Simon Gooding May 16, 2017 at 1:35 pm

    Look.,.Buhbaydus people .. there’s going to be a devalue of your dollar regardless what your MoF differs to say…the U$ is on a downward trend and it’s the only alternative to balance the Buhbaydus economy to come out of this financial crisis ….Bware of the Banks….

    Reply
  13. Albert Edwards
    Albert Edwards May 16, 2017 at 2:04 pm

    Even before the US Fed started raising interest rates and the US dollar started to rally, it was totally clear to any tourist that the Barbados dollar was overvalued. Even if 2:1 was the ‘right’ and competitive exchange rate when it was fixed, differential inflation and productivity growth rates have led to a sharp rise in the Barbados REAL exchange rate v the US. The only way to maintain compeativeness is perpetual relative deflation in wages and living standards. Why do you think China broke with the US dollar in August 2015? And given your Central Bank Governor was recently fired by the Finance Minister because he balked at printing money to finance the budget deficit of 5% of GDP, Barbados is undoubtedly destined to devalue. Economics 101 tells you that in a fixed exchange rate regime, Barbados monetary policy is determined by its Balance of Payments and with a 5% current account deficit that is already huge mountain to climb. If the Finance Mininster thinks he can continue printing money to finance the governments budget deficit and maintain the 2:1 link, he needs his head examined. The IMF have told them this in no uncertain terms that this policy will end in enforced devaluation. And of course they will tell all and sundry they have no intention of doing so – until they break their promise.

    Reply
    • Daren Mootoo
      Daren Mootoo May 16, 2017 at 4:12 pm

      They should hire you to advise on monetary policy. You speak sense!

      Reply
  14. Lionel Gittens
    Lionel Gittens May 16, 2017 at 2:28 pm

    Too much foreign exchange going out by Barbadian and Caribbean Nationals

    Reply
  15. Lionel Gittens
    Lionel Gittens May 16, 2017 at 2:32 pm

    All Barbadians can help to promote tourism on social media. Remember it’s your country.

    Reply
    • Ras Small
      Ras Small May 16, 2017 at 7:10 pm

      Tourism wid no vision is one of de reasons we in this predicament.

      Reply
    • Lionel Gittens
      Lionel Gittens May 16, 2017 at 7:24 pm

      They are trying but things are hard all over the world.

      Reply
    • Lionel Gittens
      Lionel Gittens May 16, 2017 at 7:47 pm

      Once heard a Minister said that the President of Guyana is smart. He let the people travel because they bring in plenty foreign exchange. But the Black man in Guyana still suffering. And they have so much resources.

      Reply
  16. Anthony Webster May 16, 2017 at 3:24 pm

    What a bunch of hog wash

    Reply
  17. Barker Antony
    Barker Antony May 16, 2017 at 3:30 pm

    Who is the jackass that wrote this

    Reply
  18. Barker Antony
    Barker Antony May 16, 2017 at 3:32 pm

    ECONOMIC RECOVERY WITH A DEVALUATION

    Reply
  19. Haskell Murray May 16, 2017 at 3:35 pm

    This article is well written, but it is well written nonsense because allowing the Barbados dollar to float will create hardship for every body with rising prices etc. Look what happened in Jamaica and Guyana when their dollar was allowed to float. Today in Jamaica one us dollar is worth $130 Jamaican dollars and don’t talk about Guyana because in Guyana to buy a box of 12 eggs you need a wheel borrow full of Guyana money to pay for it.
    Do we want this for Barbados ? I say NO.
    In my opinion, if we have to make an adjustment to the Barbados dollar,I suggest to the government make it on parity with the us dollar , just like what the Bahamas has done. In the Bahamas the us dollar and the Bahamian dollar have equal value.

    Reply
  20. Maureen Sho
    Maureen Sho May 16, 2017 at 3:41 pm

    I feel robbed. If the dollar is 2:1 why the Barbados public workers cooperative credit union offer 1.98:1.

    Reply
  21. Kaye Foster
    Kaye Foster May 16, 2017 at 5:41 pm

    Can’t find the words to give my opinion on the above article… well I can but am to angry and they might all be cuss words. Who wrote this bunch of crap?

    Reply
  22. C. Louis King, (BSc Hons, Econ & Mgmt.) May 16, 2017 at 5:49 pm

    DEVIL IN DETAIL

    I just wrote, elsewhere, that very often the devil is not in the detail, but in the perception. Now I see the same syndrome at work here, in this case, PUBLIC perception, in the absence of pertinent information.

    Someone needs to come on here, or to publish a follow up article, to explain to readers the difference between pegging a currency against another, (as we have done,) and floating a currency on the money markets of the world. People also need to know the difference between an enforced devaluation as an IMF condition, (as in the case of Jamaica and Guyana,) and a devaluation by central bank fiat, as a considered economic strategy. A paragraph on the difference between fiscal and monetary strategies, would also help.

    That being said, devaluation is not a step to be taken lightly, or by economic neophytes, because, once taken, there is no going back to the previous status quo.

    Reply
  23. C. Louis King, (BSc Hons, Econ & Mgmt.) May 16, 2017 at 5:59 pm

    Mr Haskell Murray

    The article is apparently not well written enough, because the following excerpt proves that the writer is NOT advocating a float. Actually, it sounds like you are both advocating the same thing.

    (“We can avoid the second punishment if we adjust the Barbados dollar to suit the dynamics of our economy. Fiscal measures will also be necessary, but they will have more space in which to be effective. We will fall forward.”)

    Reply
  24. Nealiho Hope
    Nealiho Hope May 16, 2017 at 6:32 pm

    Raise minimum wage……….

    Reply
  25. Ras Small
    Ras Small May 16, 2017 at 7:13 pm

    Just ta let wunna know de dollar has been devalued, just not ” officially”.
    And den wunna gine get de wage increase dat has eluded de ppl.

    Reply
  26. Janette Reifer
    Janette Reifer May 16, 2017 at 7:38 pm

    A lot of idiots at large. I believe that they belong to a different planet.

    Reply
  27. Brian Gibson
    Brian Gibson May 16, 2017 at 7:56 pm

    Jonathan Gonsalves Shane Edward Harris Nigel Reece

    Reply
  28. Boom May 16, 2017 at 9:26 pm

    Um. If the key issue is the tie in, what if we went from 2:1 to 3:1? maybe local product start to be more competitive? Just putting this out there

    Reply
  29. Andrew Simpson May 17, 2017 at 8:54 am

    If only we might exercise the discipline without the devaluation.
    It was Norman Manley who suggested that we have “Cadillac mentality and bicycle economy”. Do we ever listen?
    Curb wastage and recalibrate tastes now, before we have no choice in the matter. Culture shift, heart change. #TEAMBarbados.

    Reply

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