Should the East Caribbean dollar be devalued?

Tue June 4, 2013

by Nilio Gumbs

In the past two weeks, Moody’s rating agency, in a gloomy outlook for the Organization of Eastern Caribbean States (OECS),recommended that the Eastern Caribbean dollar be devalued.”The uncompetitive nature of these island economies leaves them with no choice but to devalue,” Moody said.{{more}}

It must be noted that any devaluation of the EC dollar will require a unanimous decision among member territories of the East Caribbean Currency Union.

There are also many variables which ought to be appraised or considered in contemplating such a move.

No one can deny that the economies of the OECS, reeling under high public debts and unemployment, have taken a battering from the global economic recession, forcing some territories such as Antigua and Barbuda and St Kitts and Nevis to seek financial assistance from the International Monetary Fund.

So, what are some of the variables that OECS governments may have to contemplate before making such an audacious move? Any devaluation of the EC dollar will require a close examination of the structural nature of these economies in the first place.

Tourism, the mainstay of all these islands economies, has nosedived after the global recession, creating fiscal problems on the revenue side for these islands. For instance, tourism arrivals suffered a downturn during the period 2009 to 2012, highlighting the vagaries of having mono-service economies, since the decline of agriculture.

Most of the countries in the currency union have debt/GDP ratios hovering around or in excess of 100 per cent. St Kitts and Nevis epitomizes such adversities, by having the second highest debt/GDP ratio in world, second only to that of Japan. Such high debts relative to yearly economic output have placed a strain on governments to meet their repayment obligations, now and in the foreseeable future.

Manufacturing is virtually non-existent in these islands, hence most manufactured goods have to be imported. Agricultural exports no longer feature prominently among the exports of the Windward Islands, with the demise of the banana industry.

So what are the pluses and minuses of such a devaluation? Devaluation is basically a deliberate reduction in the exchange value of a currency, relative to that of another. In this case, the United States dollar, that to which the EC dollar is pegged.

A point to note is that a devaluation of the dollar is never announced in advance. You wake up one morning to the new reality that confronts you.

The premise of any devaluation is to make your exports cheaper, while at the same time curbing more expensive imports and the outflow of valuable foreign exchange.

Any devaluation of the Eastern Caribbean currency will result in import led inflation, as these islands import most manufactured products and basic staples. The price of meat (chicken, turkey, beef and pork), wheat flour, rice and sugar, like all other imports, will be directly impacted upon and become more expensive. Opponents of any such devaluation of the EC dollar have argued that given the low manufacturing and export base of these economies, it will be foolhardy to depreciate the currency.

A devaluation can make our exports cheaper. From the 1960s to the mid 80s, St Vincent and Grenada had a thriving business of exporting primary products to Trinidad and Tobago. Many Vincentians should be able to remember the days when an area in the vicinity of the Peace Memorial Hall was a hold and processing area for animals and agricultural produce exported to Trinidad and Tobago. The devaluation of the TT dollar in the latter part of the 1980s significantly made our exports more expensive in that markets, hence a fall in trade conducted mainly by those cavalier and ubiquitous traffickers.

Any downward valuation of the exchange rate of the Eastern Caribbean dollar will make our tourism product cheaper to foreigners. One ought to be reminded that tourism is an export of a service from these islands, once a foreigner comes to these shores to indulge in such leisure.

The opening of the Argyle international airport can just be the fillip that is needed to jolt start the tourism sector in this country, making us as competitive with markets in Barbados, St Lucia or Grenada. However, having an airport is one thing, marketing your country as a tourist destination is another. At present, St Vincent and the Grenadines is the least recognized country in the CARICOM grouping. Looking at international magazines, you are likely to come across all of the islands except St Vincent (barring Montserrat), being advertised. Montserrat, itself doesn’t need much advertising, since it received a lot of publicity from the eruption of the Soufriere Hills volcano a few years ago.

The issue of devaluating the EC dollar is whether such a move will be a “sweetener” to foreigners to take the bait or bitter pill to locals, that they cannot stomach!