Posted on

THE ISSUE: Exchange rate change remains a hot topic


THE ISSUE: Exchange rate change remains a hot topic

Social Share

IT IS ONE OF THOSE ISSUES that apparently is never far away from the public eye or thought.

Even the mere mention of the word sends shivers down the spines of politicians in this part of the world and elsewhere.

Devaluation, specifically of a country’s currency, is a concept that likely will remain for as long as there is something called money with a value attached to it.

The issue of exchange rate devaluation, otherwise referred to as currency depreciation, was rekindled in a recent paper issued by the Central Bank and authored by a group of economists, including its Governor Dr DeLisle Worrell who is a strong opponent of such a policy for small very open economies like Barbados.

With Barbados’ economy struggling for the last seven years – with foreign exchange earnings plummeting throughout that period, devaluation has continued to be a hot topic.

However, Barbados is not the country where it usually drives fear into the hearts of men and women in and out of Government. Outside of Barbados, another Caribbean currency that is considered to be strong is the Eastern Caribbean dollar. This fact has not stopped islands in the Organisation of Eastern Caribbean States (OECS) from falling into economic difficulties and, in most cases, remaining there to this day.

Last year, Caribbean countries like Barbados which have their dollar pegged against the United States dollar were advised to consider currency depreciation as a way out of their challenges. The suggestion was made late last year by Professor Nouriel Roubini, of New York University’s Stern School of Business and chairman of Roubini Global Economics.

Roubini, who was senior economist for international affairs in the White House’s council of economic advisors during the Bill Clinton administration, said while there were many benefits from having a currency that had a fixed exchange rate or was generally considered stable, it could be argued that in light of other negative factors, currencies could be over-valued.

“The large current account deficits, the existence of low reserves and so on, and the large stock up of foreign debt implies that there is some degree of over valuation. If there is going to be a negative impact on the terms of trade, whether they are export oil or energy or other traditional commodities, that negative extent of trade makes the external balance of the country less valuable,” he said.

Speaking at an international economic forum, the economist said “currency adjustment” was part of the solution.

“I know that’s a sensitive something that many countries have a lot of resistance to, but it’s something that’s to be discussed openly, because the alternative of continuing to have large imbalances, and loss of competitiveness eventually, can lead – like it happened in a number of other episodes in emerging markets – to fixed rates that become unsustainable, and the collapse of the fixed rate eventually.”

Eastern Caribbean Central Bank Governor Sir Dwight Venner was among those reacting to Roubini’s suggestions. Sir Dwight said beyond the fact that devaluation was seen as a sign of economic failure, there was no need for the countries like OECS to devalue their dollar.

“The peg [against the US dollar] has worked for us for 38 years because in terms of certainty you know the value of money . . . [for] both foreign investors and our own people. It’s very difficult for us to look at devaluation unless there is something particularly drastic,” he said.