ON THE LEFT: Fixed exchange rate outdated
Is Barbados facing the threat of a currency devaluation?
Since 1971, we have been in a floating currency world. When former United States President Richard Nixon closed the gold window in the summer of 1971, that was essentially the end of the Bretton Woods system of fixed currencies, yet we have a currency that is really part of the era before that because we are fixed via peg to the US dollar.
Devaluation, the sudden adjustment, has a dramatic response to embedded problems in the economy. I think many commentators in the newspapers have highlighted some – high debt levels, high fiscal deficits, high current account deficits and all the rest of it.
So can an administered adjustment in the currency solve those problems? Yes, they can, if you first fix all the underlying and structural problems. But if you don’t fix them, then devaluation will be pain rather than prosperity.
The second part of it is, since we are now in a world of floating currencies, we should perhaps really look at where we earn our income.
We have a situation here where we are tied to the US dollar but our revenue comes from places like the United Kingdom and Canada, and if you take the broad dollar index in the last two years, it’s appreciated 25 per cent.
So that means the Barbados dollar has not devalued; it’s actually revalued since the end of 2014 by 20 to 25 per cent, and against the UK pound it’s gone much higher than that. Against the Canadian dollar, it’s 30 to 40 per cent higher than that. And that impacts our tourism and our international business.
So the question for me is not so much the mandate of sudden devaluation and adjustment, but the question we should be asking is: is a peg to a single currency still appropriate? Or should we be looking to do something like Singapore does, which is to peg or to float or to manage against a basket of currencies?
If you are unprepared to make the adjustments to your fiscal accounts, then something else has to happen.
You can’t keep spending and not have revenue coming in and drawing down on your savings indefinitely. At some point, your savings will run out and the bailiff comes for the furniture. So you have to figure out a different way to get some revenue in the door.
Perhaps the time has come to be a little bit more creative and a little bit more flexible and explore some different options.
We should be having an open and free discussion about this and the various options that are available to us.
I am not a big believer in devaluations because I have little confidence that governments will take the underlying steps they need to take in order to make it work. But at the same time, we should explore using our currency as a policy tool in order to get more income coming in the door and make our destination more attractive.
Michael Berry is principal and chief investment officer of Pencarrek Limited in Barbados. These views were shared at the 7th Annual Fortress Investment Forum last week.