BEHIND THE HEADLINES: Bitter medicine vs the poison
“Devaluation is poison.”
Andrew Holness, Jamaica’s Opposition Leader, wasn’t thinking of Barbados when he issued the warning at a Gleaner newspaper Editors’ Forum in Kingston recently.
Instead, his attention was riveted to his birthplace’s prolonged economic troubles which the current government there is hoping would end with an International Monetary Fund (IMF) package that includes tax reform and continued gradual devaluation.
“Tax reform is bitter medicine. [But] devaluation is poison,” was the way Holness put it. “We were clear in saying that tax reform should have been implemented immediately as opposed to a policy of devaluing the currency. Like it or not, the [Jamaica] government has tacitly agreed to the IMF’s policy of devaluation,” he added.
His remarks were made after Freundel Stuart, Barbados’ leader, used the dreaded “D” word seemingly in an oblique warning to Barbadians at a recent Government-sponsored consultation. Stuart’s message was straightforward enough: tough measures may be in store for the country if it is to reverse its declining economic fortunes.
And when Dr DeLisle Worrell, Barbados’ Central Bank Governor delivered his half-yearly economic report, the financial scribes who questioned him afterwards had it on their minds.
And for good reason: the foreign reserves have declined; the fiscal deficit has widened; a mountain of debt remains on the Government’s books; and the key sectors of the economy, tourism, financial services and manufacturing did not perform well.
In Holness’ case, he didn’t see any benefits from devaluation: “We have said the cost of devaluation is far greater in its implications for inflation, the level of debt, and the destruction of confidence, versus placing tax on everything and reducing the tax rate so the poor will have less impact on their bottom line.”
Obviously Holness and Sir Courtney Blackman, the first Governor of the Central Bank were on the same page.
“I have been warning against the dangers of devaluation for decades now, and it is good to see that Holness agrees with me,” said Sir Courtney.
“All devaluation has done in Jamaica and Guyana is to make things worse, you just go down. You wouldn’t gain any advantage in Barbados from a devaluation because we are pegged to the United States dollar. Pegging is our best option because we can’t float the currency.
“Our economy is too small to float. What the economic situation requires is fiscal discipline which we had for many of our years. We had it under Errol Barrow and Tom Adams. We didn’t have it under [Sir Lloyd] Sandiford and we got into trouble. We had it under [Owen] Arthur during his first two terms and we did very well.
“If you are in a situation in which you are short of foreign exchange, meaning you are in a foreign exchange hole, devaluation is not going to get you out. Every time you devalue, you worsen the situation and that’s what has happened in Jamaica and Guyana,” Sir Courtney said.
“The Jamaicans have devalued from parity with the United States dollar to JAM$100. There hasn’t been any improvement. If anything it has gotten worse. Devaluation isn’t something that should be done by small countries with small economies. You get poorer and poorer.”
The reasoning is simple: “If you devalue by say ten per cent, everybody loses. The value of your house would devalue by ten per cent because our assets are effectively in United States dollars. Everybody in the country would become ten per cent poorer,” he said. “Nobody in Barbados should be talking about devaluation.”
The figures for the first half of the year in Jamaica underscore the arguments of Holness and Sir Courtney. At the beginning of 2013, the Jamaican dollar was trading at JAM$92.97 for every US$1 but a few days ago its value had fallen to JAM$101.71, a decline of JAM$8.71. Clearly, Jamaicans are poorer today than in January and the prospects for improvements aren’t any better.
Still, the IMF is insisting that devaluation would make a developing country’s goods and services more competitive internationally, an argument which ignores the reality of the impoverishment of a nation’s people.
For tourism-dependent states, which import most of what is required to keep the industry attractive, any gains from devaluation are washed away and people are left poorer.