THE UNITED STATES 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 lose competitiveness.
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 straightjackets of debt and deficits and certainly never return to being the net “exporter”.
Self-discipline needed
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, it 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 it to US$2.80 in 1949, US$2.40 in 1967 and since October 2016, it 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 per cent 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.
World reserve currency
To solve this potentially intractable barrier to global trade, a United Nations conference was held in 1944 at Brettons Wood in the US at which the world’s sovereign states agreed that in the absence of any other convertible commodity, the US 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 recognised 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 as large a 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.
– LEE FARNUM-BADLEY