In Guyana, South America, in August, 1978, to deliver a 3 day astronomy workshop to teachers, I saw first hand the havoc wrought by currency devaluation. While staying at the Park Hotel in the center of Georgetown -- the capital- I was told to never venture onto the streets after dark, and certainly not while wearing my (gold) wedding ring. Roaming thieves would hack my ring finger off with a machete to get the gold. At that time, the Guyana dollar was worth maybe 10 cents on the U.S dollar. Today, looking at the exchange rates from the Republic Bank of Guyana, it would require 207 G$ to make one U.S. buck. (Can you process a half-U.S. cent equal to another nation's whole dollar? Imagine how many Ipads you can buy with that?)
This is the way devaluation of currency rolls: downward! Look at all the nations of the Caribbean that have devalued since the 1960s: Guyana, Trinidad and Tobago, Jamaica - all have been on a downward slide, their populations growing ever more poverty stricken and restive as their respective dollars have continued sliding downward relative to currencies to which they originally had been pegged.
This is why the recent remarks of Jamaica's Opposition leader Andrew Holness (to The Jamaica Gleaner)for an editorial confab, bear attention. 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 [
government has tacitly agreed to the IMF’s policy of devaluation,” he added. Jamaica
Barbados hitherto has avoided devaluation (though not austerity measures, as in 1991 after the island had tried "Reaganomics" and tax cuts), usually sought by the Neoliberal institution known as the International Monetary Fund or IMF - because it "makes a nation's goods more affordable for trade partners". But the dirty little secret is that it impoverishes the people! (In 1991 the IMF demanded and got an eight percent cut in all civil servants' wages.)
Now, however, Bajans are worried. Recently, earlier than Holness' comments, Barbados' Prime Minister Freundel Stuart obliquely warned Barbadians by invoking the dreaded "D-word". His message was tied up with a broader one, that "tough measures" may be needed for the country if it is to reverse its declining economic fortunes. I had blogged on a number of these earlier: E.g. http://brane-space.blogspot.com/2013/02/is-barbados-soon-to-go-way-of-greece.html
Therein I noted that Barbados bonds were downgraded to junk by Moody's - this six odd months after Standard and Poor's did the same - which was disturbing in the extreme. The downgrade lowered the country’s foreign and local currency bond ratings to Ba1 from Baa3. (note: a junk bond, is defined as one that is “below investment grade” due to a heightened risk of default, is any bond with a rating of Ba1/BB+ or lower, according to the system used by Moody’s.)
Standard and Poor’s lowered Barbados’ rating to junk in July, 2012. Moody’s accompanying statement held that Barbados’ outlook remained negative, and cited two factors in the downgrade: Barbados’ “continuing lackluster economic performance,” and “ongoing deterioration in the government’s debt metrics.” Barbados’ economy grew by 0.6 percent in 2011 and 0.2 percent through September of 2012, well below expectations.
But the news from the Barbados' Central Bank that likely prompted PM Stuart's ominous warnings was the $200m loss in foreign reserves over the past year and resulting increased deficits. This and continued very low growth bodes ill for the island and all of us with connections there, including financial. For example, a 50% devaluation of the BDS$ - while it wouldn't wreck our retirement finances - would inflict a grievous hit. Probably very few vacations, maybe only to Vegas or Yellowstone, if that. And then only every few years.
We have seen how difficult it is, for example, when Krimhilde (my sister-in-law and an Eckanckar adept) comes up for Eckanckar conferences in Minneapolis or to AZ and CO for vacations from Trinidad, whose dollar is worth about one sixth the U.S. $. She has to save for many months and then every bundle of U.S. dollars she spends (i.e. for her portion of hotel accommodations when going with Janice to Aspen, or Pagosa Springs) has to be re-computed in TT $.
Former Governor of the Central Bank, Dr. Courtney Blackman, agrees with Holness that devaluation marks the beginning of a trip to economic hell. As Sir Courtney recently put it in an interview with a Barbados Business Journal:
"All devaluation has done in
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
I totally agree with this, having seen first hand the wreckage from devaluation. Let's hope it isn't done in Barbados and that Freundel Stuart finds alternatives to what may be demanded by the IMF and its Neoliberal junkies who don't really care if people are eventually reduced to eating "dirt pies" as in Haiti.