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ON THE RIGHT: Devaluation no magic bullet


Charlie Skeete, economist

ON THE RIGHT: Devaluation no magic bullet

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Is Barbados facing the threat of a currency devaluation?

 

When I do hear or read anything about devaluation in Barbados, I am always reminded of King Canute who took his throne down to the seashore and dared the waves to wet his feet.

So I always get the impression that Barbadians feel that you could pass a law or declare devaluation as something that can’t happen here and that is the end of matter; and it isn’t true.

The Central Bank puts out quarterly reports with tables attached. All those people who are nervous about devaluing the currency, should check Table 3 in the quarterly reports of the Central Bank.

And you look at three things: you look to see if you have a current account deficit –  we have had it since 2008; you look to see if you have a capital account surplus and if that surplus is smaller or larger than the deficit. If it is smaller than the deficit, you look to see what the overall balance is.

In six of the last eight years, Barbados had a negative balance on the overall balance.

Where does that difference comes from? It comes from the stock of reserves.

So I am telling you how to decide for yourself, when the report comes out look at Table 3 and ask yourself if there is going to be another draw down on the foreign exchange reserves.

See how long that happens and ask yourself: “how long can we keep this up?” Because if you can’t keep it up, the Barbados currency will devalue itself.

If you run, consistently, and we have for the last six years, a deficit on the current account of the balance of payments, by definition that means that you are consuming more than you produce. The difference has to come from somewhere. You can do that as long as you defend the exchange rate. The exchange rate defence, if you are consistently drawing on the difference between what comes in and what goes out, after a while the reserves will run out.

When that happens, that’s the end of it. It’s not a question anymore about whether or not you will devalue.

What has Trinidad and Tobago or Jamaica done in order to deal with very similar circumstances?

You suppress consumption. I know people don’t like to hear this. The International Monetary Fund and the institutions call it austerity.

Austerity means that we will stop people from consuming at the same level that they were consuming before.

You can call it adjustment; you can call it austerity.

If you are consuming more than you produce, you have to suppress consumption. There are three ways to suppress consumption – raise the interest rate, cut the fiscal deficit or devalue.

And Trinidad, in their last budget, did all three.

We only depend on reducing the fiscal deficit and we have carried that one step further; we don’t like to cut spending so we just raise taxes.

If you devalue, you will still have to keep wages down. You will still have to keep the fiscal deficit under control and you will still have to decide that you will not consume more than you produce.

Devaluation will not remove the necessity to do all of these other things.

 

Charlie Skeete is a a retired senior economist of the Inter-American Development Bank. He gave these views at the seventh annual Fortress Investment Forum last week.

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