Barbados Economic Recovery and the Falling Pound

Benidorm in Spain was a small fishing village, then the big boy’s moved in the Spanish Govt rubbed their hands €€€€€€€€/ now look at it. Barbados a wonderful little golden island in the sun and the big boys are wanting to move in, Gov’t is the $$$$$/ €€€€€€or ££££££so important that you become the concrete Benidorm of the Caribbean, LET US HOPE NOT!Gavin Dawson

There are significant trends unfolding in the global financial markets that will impact Barbados. The perilous condition of the local economy – vulnerable to exogenous shocks –  demands that the government and citizenry demonstrate an alertness to ensure there constructive dialogue. We allow the politicians and talking heads vested in the ‘system’ to lead a narrative that is decoupled from national imperatives.   It explains why we are in the deep hole we find ourselves.

The commitment of successive governments the Barbados dollar pegged to the US dollar  has attracted criticism and support. The decision by the Federal Reserve Chairman to reduced interest rates by 25 basis points will spur the debate.

Of greater concern is the trending of the GBP/USD currency rate.  The currency rate has experienced a 2-year low of 1.21603 as at closed of trading. The political uncertainty in the UK over BREXIT and the flavour of politics practised by new prime minister Boris Johnson could see the pound free fall to a parity with the US dollar. This is what leading market analyst Morgan Stanley and others have speculated.

If the forecast is proved correct the immediate concern for Barbados given how the tourism sector is positioned- it contributes the most to GDP both direct and indirect – should be a matter of concern. In simple terms the average UK tourist travelling to Barbados will see a reduced spending power in such a scenario. The statistics read that the UK tourist spends more and vacations longer than those coming from other countries. There is also the investment factor. The wealthy Brits have always targeted Barbados as a preferred country to invest in a second home especially on the West coast of the island.

Relevant links:

Why is the conversation important some will ask?

If we listen to Prime Minister Mia Mottley and members of her government, Barbados economic recovery and growth plan is being placed mainly on tourism.  Barbadians are being conditioned to expect a hotel corridor to be built along the Bay Street area. With the slide of the pound to USD and UK being our most important tourist and investment market should we have a plan B? The blogmaster recalls when the global economy went south in 2007/8 so too did Cinnamon 88 and the Four Seasons project to cite this example to expose the fickleness of a tourism investment pipeline of 1 billion dollars?

One gets the impression we have hitched our hope of recovery to an economic model whose shelf life has expired.

Thanks to John A for prompting this blog.

Maintaining Currency Stability In A Small Open Economy

barbadosdollarIf it is one thing the macro-economists agree on is that currencies will depreciate, there is nothing a government through its agents the Central Banks can do about it. Countries respond to the challenge of managing the volatility of depreciating currencies in mainly two ways, a free floating exchange rate e.g. the USA and the dollar, and secondly share a common currency e.g. the EC and the Euro or the OECS and the EC dollar. A similar option to sharing currencies is to adopt a major currency e.g. Barbados adopting the US dollar. The Barbados dollar has been pegged to the US dollar since 1975.

Key things to watch for with a pegged currency: the fortune of the country will rise and fall based on the performance of the country to which its currency is pegged and the country will have to manage and dedicate its monetary policy policy to supporting the exchange rate.

In a nutshell the Barbados dollar peg is primarily a tool to assist planners in both the private and public sectors of a small, open but narrow economy avoid the costs and speculative forces of exchange rate fluctuations. By hinging the Barbados dollar to a credible currency like the US dollar expectations of inflation are kept in check and fears of depreciation minimised.  These, in turn, are key factors for achieving sensible wage negotiation outcomes and uninterrupted flows of capital investment among the key considerations.

Sounds simple. But much depends on what external currencies drive import and export prices (i.e. who one’s main trading partners are); and what money domestic public debt is denominated in. By matching up the weightiest of these factors to the composition of the peg the aim is to eliminate – or mitigate so far as is possible – external currency impacts on the domestic economy. The peg has usefully served these goals since 1975.

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