Dollar 'safe'

Ricky Jordan,

Added 21 February 2014


FEAR OF DEVALUATION of the Barbados dollar is misplaced and the Government has adopted the correct strategy to deal with the ailing economy. This is the view of world-renowned economist Dr Fred Bergsten who, in the first Caribbean Economic Forum at the Grande Salle of the Tom Adams Financial Centre Wednesday night, said he was “enormously impressed” at the widespread national consensus against devaluation of the dollar which has been pegged to United States’ currency since the 1970s. “This is obviously a vibrant democracy. There’s lots of debate about how to implement the adjustment policy but I’ve been struck, unless I’ve missed something big, that nobody, including the Opposition party and the intellectual leaders, is proposing a devaluation of the currency or anything other than a policy that’s aimed at defending the peg,” said the founder of the Washington-based Peterson Institute for International Economics. Bergsten, who is here on sabbatical, said the local authorities were seeking to maintain the foreign exchange reserves and resume a sustainable prospect for the currency, which would then counter any fears of devaluation. “The record of this country since Independence is pretty clear when crises have occurred . . . the currency has been defended. Certainly that’s the strategy now, the implementation is being worked out, the details are being debated, but it seems to me that the prospect is very strong that that will succeed again. So the spectre [of devaluation] may be in some quarters, but it seems to me it’s misplaced,” he said in response to a question from the audience, which also included television and Internet viewers from as far as the Philippines. “I therefore wouldn’t be thinking of new currency unions or dollarisation or anything else at this point. It seems to me the current strategy is the right one,” he said. The American veteran economist added that Government must put its house in order first by limiting spending while providing a conducive framework for the private sector to start expanding investment activities once more. Specifying two strategies – fiscal responsibility and structural reform to foster growth – he said these would result in significant changes in the labour markets along with incentives for private investment, but Government must simultaneously rein in its spending. “That’s the challenge for Barbados and other Caribbean countries. Indeed that’s the challenge the United States is facing now,” he said. Noting that one lesson from previous similar financial crises that had been driven by financial disruption, was that government debt burdens tended to double, and this has been the case in Barbados. “If you look at the debt to GDP [gross domestic product] ratio of many of our countries prior to the crisis, and look at them now only five, six or seven years later, they’ve doubled. That then means the governments have to deleverage, reduce the debts they’ve built up by gradually working back their spending level and promoting more rapid economic growth, on which basis their revenue base will increase,” he explained. “That’s the challenge. It’s very difficult for governments,” he said, adding that Barbados had fallen into the “twin-deficit syndrome” of big budget deficits and big external deficits”.


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