Tuesday, November 5, 2013

Devaluation in Barbados Imminent? Looks That Way!

The news in this morning's online Barbados NATION is exactly what many of us who used to live there, and still hold assets there, didn't want to hear. That it isn't a question of whether or 'if' a devaluation will occur, but what manner it will take.

According to the brief article, THREE DEVALUATION OPTIONS have been presented to the Caribbean (specifically to Barbados) by the Inter-American Development Bank (IDB), which also "hailed Barbados as having successfully implemented one over two decades ago." That was the one I was there for, which entailed an eight percent cut across the board in civil servants' wages. That was also the one that drove wifey and myself back to the States, realizing that if we remained we'd be in endless penury and not even be able afford "poor man's" food of chicken and rice or macaroni pie or salt fish and cuccoo. (For reference, imagine having your wages cut 8% and paying up to $14 for a box of cereal, never mind bacon at $6 a lb. and eggs for $1.50 each- in the money you earn.)

As I pointed out in a letter published in The Financial Times, in 2008, the lead up to that "internal" devaluation - whereby the fiscal deficit was reduced from eight per cent of Gross Domestic Product (GDP) to two per cent by 1992, and capital expenditure diminished by 50 per cent- was a "tax cut" implemented in 1986. At that time the then newly elected DLP government decided to hand out generous tax cuts based on the Reagan "supply side" nonsense in the U.S. Like many others, I strongly argued in the Bajan press against this, given that: a) Barbados was not the U.S., and b) the loss in revenue would seriously compromise Bim's balance of payments issues, as well as banking liquidity.

This proved to be prophetic, as less and less revenue was collected leading up to 1991, and the conditions became so unstable that they drew the attention of the International Monetary Fund, or IMF. The IMF insisted on a full currency devaluation (fiscal) devaluaton, but the administration wisely begged off, seeing what such moves had already done to Trinidad, Guyana and Jamaica. The result was an across the board permanent wage cut for hospital radiotherapists like my wife, and for college physics teachers like yours truly. Within another year, we'd left for Columbia, MD given we couldn't break even or save a dime working our regular jobs plus two after-hours jobs (tutoring physics for me, repairing VCRs for wifey).

Anyway, in its latest policy brief the Washington-based IDB listed "external, internal and fiscal devaluation" as the main choices in the face of reduced competitiveness and a sustained current account deficit across the region, while noting that Barbados "had successfully implemented the internal option in the 1991 economic recession." Let's understand here that the reasons for the current morass are the under-utilization of the tourist industry, and the essential regression of the island's offshore banking business - no thanks to Neoliberal ideologues like France's (now deposed) Nicholas Sarkozy who several years back (at an OECD confab) complained about "offshore banking outlaws" in the region. Most of the island nations with offshore banking went apoplectic at the scurrilous lies, given that this was one of the few financial pillars that remained, after the loss of tourist dollars and the downscaling of the sugar cane industry.

The other problem is Barbadians are spending beyond their means, to be sure, as I pointed out in a blog back in May, 2010 ('Will Barbados Fall to the Sovereign Debt Crisis', Pts. 1 and 2). In terms of food, nearly all has to be imported and fuel costs add to the import costs. Bajans do grow a lot of their own, e.g. chickens for example, but it can't meet the island's demands. Another drag is the ever prominent "motor car" - which now clogs the island's narrow highways and biways. Each also must be imported, as does petrol, and the costs of both are eating up precious capital. Coupled with loss of income in an ongoing aggregate demand crisis (worse than in the U.S., obviously) the island has barely seen one percent growth in the past year - while it' s suffered credit downgrades.

So, the writing may now be well on the wall. In the brief entitled The Question Is Not Whether To Devalue Or Not To Devalue, But Rather What To Devalue, IDB senior economist Inder Jit Ruprah stated that “the typical example of success, given by proponents of internal devaluation, is Latvia. Rarely is Greece or Barbados mentioned”. True, but the fact he is mentioning it now again, indicates that Bajans - as well as other Caribbean island nations- may soon be expected to follow suit. Again, for Bim. But at least an internal devaluation would be a bit more tolerable than a fiscal (currency) devaluation. Ruprah added that before 1991 Barbados’ external position had begun to rapidly deteriorate but after the implementation "the current account improved."

Realistically, however, we can expect any current account enhancement will only be temporary - irrespective of devaluation (if at all forthcoming)- unless Bajans learn to somehow live within their means! One also hopes this can be achieved without acceding to the increasing demands from the local Neoliberal bastions (mainly former sugar plantation owners and long time, inherited business types) to "cut pensions" or "privatize" them.


Unknown said...

Anarchy, it's just around the corner. Island has a high literacy rate, however this does not mean the political leaders are SMART.

Barbados has only managed to survive since Independence not because of good management but by LUCK. A nation of 280,000 thousand cannot survive by themselves nor can they manage to make agreements (CARICOM)that would help. Every politician only wants to line his/her own pocket. As the saying goes --- cannot see the forest for the trees.

Copernicus said...

EXCELLENT points, Roger!