Don’t devalue the Barbados dollar!
That was the advice from former governor of the Central Bank of Ireland Patrick Honohan, who Thursday night warned that devaluation would take the country down a slippery slope to the point of no return.
Questioned during the Caribbean Economic Forum sponsored by the Central Bank of Barbados, Honohan said far from pulling the country out of the current economic slump, devaluation would make matters worse in the long run.
“Of course, at a particular moment it can seem very attractive to pull the lever, devalue, you’re going to be out of the problem. But the pattern of devaluing is not constructive, leads to high interest rates, which holds back the economy again,” the visiting economist told a local and regional audience who followed the forum on television, as well as those gathered at the Grand Salle of the Central Bank.
Honohan pointed to Barbados, the Bahamas, and the nine-country grouping of the Organization of Eastern Caribbean States, all with currencies pegged to the United States dollar, as those likeliest to suffer significant fallout from devaluation.
He said the authorities in these territories should not fool themselves into believing that it is, “just one devaluation, and we will be alright”.
The former economics tutor cautioned that the road to no return begins “with just one devaluation. So if the Bahamas are going to devalue once, they will do it again.
“You have to know what you’re doing in those pegged countries because it is a one-way trip,” Honohan said.
The former director of the board of the European Central Bank made reference to the experiences of Italy, Spain, and Greece, all of which had “leapt at the idea of a single common currency so that they would get out of the practice of just devaluing”.
He explained that prior to joining the euro, these countries quickly devalued whenever there were economic problems.
However, “just devaluing never worked”, the Irish economist said.
“Very quickly the loss of competitiveness arose again, the overspending of government arose again in those countries which were not very well run in the 1980s.”
Honohan, a fellow at the Petersen Institute for International Economics, also offered advice on dollarization, stating it would not help to use the US dollar as the currency of choice here.
He said the American dollar had become a virtual permanent fixture in the economies of the countries that had pegged their currencies to that of the US for lengthy periods. As a result, he said, adopting the “greenback” could end up being messy.
As an example, he pointed to a decade-long experiment by Argentina where the US dollar was adopted as the South American country’s principal currency. In the end, he said, it all came to naught.
“Same as the currency board that they had in Argentina. Those ideas don’t last forever. The currency board in Argentina didn’t last forever,” Honohan said.