Saving Tourism: Should Barbados devalue its currency?

Watcher: “Devalue our Currency!”

Beefcake: “Devaluation won’t help tourism!”

Could Barbados succeed like Singapore?

BFP readers Beefcake and Watcher squared off so well in the comment section of Another Barbados hotel folds, that we knew we had to make it a post. If the discussion continues, we’ll try to update this post…

watcher
October 14, 2011 at 2:13 pm

A lot of the high costs of Barbados comes from a currency that is far overvalued on a fixed currency basis. When the currency matter is resolved, the high costs of Barbados will be resolved. It will eventually resolve itself when the Government gets to the point of not having enough “traded currencies” coming in to pay for everything that is imported. If we can’t be competitive we wont have foreign exchange coming in. These monies will be going to other places where, for the tourist, the value for money is much greater. The expenditure level in Barbados can’t be sustained.

Beefcake
October 14, 2011 at 4:56 pm

Devaluation only helps exporters (manufacturers and raw materials).

You need to replace the Barbados dollar with the US dollar, and by extension, get rid of the Barbados Central Bank.

watcher
October 14, 2011 at 5:55 pm

@beefcake
The way I see it is the vast majority of things consumed have to eventually be paid for in currencies other than the Barbados dollar. Right now pretty well all payments are based on the US$. Just a matter of time before the foreign exchange reserves are depleted. Looks like the bank is printing money to pay for Government deficits. These deficits include payments for various things that have to be paid for in US$. If there is not a free market to exchange Barbaods dollars for other currences, where is the Government going to get the money to boost foreign exchange reserves to pay the import bill. Part of the soloution rests in making the tourist product more competitive. That is going to mean belt tightening for everyone as well as a much greater emphasis on internal production and import replacement.

Beefcake
October 14, 2011 at 9:12 pm

Barbados is a small island developing state, and proudly hosted a conference to that effect nearly 20 years ago.

Import Substitution Industrialization is not likely to work here as we lack critical mass. It has worked in Singapore and Brazil, but they tend to be the exception than the rule. However, for ISI to work, you must focus on external sales as the goal.

The tourist product will not be made more productive by weakening the currency. Much of the money stays overseas anyhow, with payments being made to tour operators or corporate chains who bill in USD and charge package rates anyhow.

Barbados tourism is faltering because of lower disposable incomes + increased travel taxes + increased fuel costs that are affecting travel to long-haul destinations, Barbados tourism is also faltering due to poor quality service. Barbados tourism is faltering due to harassment relating to vendors, drugs, etc.

The problem with weakening the Barbados dollar is the reliance on imports for everything, especially fuel. Devaluation will further weaken the disposable income of ordinary Barbadians who are already suffering enough under the economic mismanagement of the government. Wages will stay the same (or result in hyperinflation), but cost of living will increase substantially, and people will have difficulty paying for food or transport. Look at how devaluation (and IMF programs) have negatively affected common people in Guyana and Jamaica. Furthermore, property prices will skyrocket, out of the grasp of people who earn Barbados dollars, since property prices are influenced by overseas interests.

There is no free market to exchange Barbados currency because it is a weak-form economy. It would probably benefit from adopting the USD. Bajans hoard USD and buy it wherever they can; Bajans travel mainly to the US.
Drop the value of the Barbados currency, and you are keeping the people of Barbados down and will have eroded all they have worked for. Imagine telling someone who has worked and saved their entire lives, put $60,000 into the bank, and then tell them the next day their savings are only worth $30,000?! It is like buying a pound of fish, getting home and finding you only got a half pound, because the vendor devalued the pound by 50%.

Back to tourism – why does the Mediterranean get so many more British visitors than Barbados? I think the answer is more Value for Money than a currency issue.

Dropping the value of a currency may work in A-level Economics, but that is in theory and on paper. People’s decisions for travel are far more reflected in Behavioural Economics. You’ll get some people that are influenced by a change in price, but not significant amounts.

The increased poverty will drive further visitors away. Under your model, you’ll turn Barbados backwards.

22 Comments

Filed under Barbados, Barbados Tourism, Business & Banking, Economy

22 responses to “Saving Tourism: Should Barbados devalue its currency?

  1. watcher

    It is not a question of devaluing the currency, it is a question of letting the currency find its own value. The problem we seem to be facing is that the deficits of Government are being financed by printing money that has no free market for it to trade in. So if everything that is imported is paid for in foreign currency there had better be some way of being able to obtain that foreign currency to pay for these goods. If foreign currency being paid out is greater than that coming in, at some point in the future there will be no foreign currency available to make payments for imports. So where will the currency come from to make these payments. If there were a market to trade Barbados dollars in, then those dollars could be sold for foreign currency. Without such a market foregin currency has to come from among other things, the selling of prime assets such as Barbados Light and Power.

    There has to be a lot of thought put into making tourism more competitive if it is to generate the substantial foreign exchange needed to pay the import bill on a long term basis.

  2. Distant Voice

    I agree with Beefcake and Watcher. Devaluing is not the answer.
    Improve the product and open up the foreign exchange. If a person knows they can move money freely, maybe they would be less worried about bringing it in.
    USA sees Barbados as an important strategic location.2 AWACs at the airport. I suspect that the UN has strong interests here too. Any trouble in the region (remember Granada) and our airport (and DW Harbour) will see the arrival of masses of troops and hardware.
    Fear based policies dont work. Open up, dont close in. At least Owen understood this. The DLP are not all bad either. How about a coalition with transparency and a proper form of accountability to the public.?

  3. 140

    It’s naive not to think devaluation is the end-game. It will not be our decision – it will be imposed on us by the IMF when we run out of foreign exchange in the next couple of years.

    Foreign exchange was “earned” under the previous administration by selling off Barbados’ prime real estate to foreign investors. That is not a sensible nor sustainable long-term economic strategy.

    Manufacturing is not the answer. We are a small island with a lack of natural resources and high energy costs. Local manufacturing is struggling to export intra-regionally, never mind beyond Caricom.

    International business is not the answer. The international business sector is drying up – no new business can be found because of the international intolerance of offshore finance now that developed countries are seeking to maximise their own tax revenues.

    We have 2 things to offer – cheap, educated labor, ripe for exploitation, and tourism.

    Both will be benefit from the coming devaluation.

  4. Barbados Used To Be

    How to save Barbadus Tourist Industry

    you used to have clean beaches

    you used to have safety for tourists. Tourists were untouchable.

    You used to have a police force that came when called.

    you used to have half the cars on the road that you have now.

    you used to have friendly Bajans.

    Your city core was clean and did not smell of urine wafting from the alleys.

    Your police kept the dirty thieves and crazies out of the tourist areas.

    When you had the trial of the Irvings who were pistol whipped in their own home you made a complete mockery out of the police.

    Didnt’ have tourists raped and murdered and shot and robbed tour buses in daylight.

    People notice this. People notice more.

  5. Luc

    Devaluation would lp but only temporarily. Remember, devaluation also triggers inflation. And to say that devaluation ‘only helps exporters (manufacturers and raw materials)’ is completely incorrect. In this context, a hotel should also be seen as an exporter.
    The thing that makes one country cheaper to visit than another is mainly to do with the cost of living in that country… i.e. the wages and the taxes. Not the exchange rate. Sometimes, when the exchange rate has changed quickly ( faster than prices of goods and services have moved), the cost of visiting can change for the better or the worse, but the effect is only temporary (because local prices quickly adjust ) and very brief ( visitors generally pre-book their visit and don’t change plans because the rate has changed).
    Remember the USD twice as strong as the Barbados dollar, yet goods and services are cheaper in the USA. The Canadian Dollar is slightly weaker than the US Dollar but things are slightly more expensive in Canada than the USA. Goods and services are cheaper in India than all the above, not because of the exchange rate but because wages are much lower.
    Barbados has a double blow in the form of relatively high wages and crushing taxes.
    You want Bajans to prosper??
    Pressure government to use their brains and do something of real value. If you think about it, beyond the vital basics provided by the Errol Barrow government ( water for everyone, free medical care, free education) subsequent governments have not done enough to to add value to what was given to us by nature or God ( good climate, beaches, etc.) and by our culture.
    Bajans need opportunities and jobs. You can only create a small number of jobs with government money, because it’s all extorted from people who work, thus destroying jobs. The way to have more enterprise and more jobs is to remove the impediments to their creation.

  6. Luc

    @watcher: A stable currency is the point of pegging. It allows business and visitors to plan. The value of the US dollar is slowly dropping anyway, so too our own. If we de-peg now the volatility of our currency will be too difficult to cope with; like a cork bobbing up and down in a stormy ocean.
    We could consider re-pegging and a lower value but the benefits of that would be only short-term. And probably too brief to make any lasting good of it. If Barbados were larger, relaxing immigration (and therefore creating more demand in the economy) would be a good option , but we’re already over-crowded. Our form of this is the tourist industry – temporary, high spending immigrants who come (hopefully many times) with money, buy stuff here and leave to go get more money. The faster they can do that, the better we are.
    In the fractional reserve and fiat money systems we operate in now, money is not created by trading in currencies. Having a traded currency does not create money. It is created mostly by debt (giving our word, promises or obligations about the future) and a small amount by fiat, an arbitrary order of an authority such as a central bank. The amount of fiat money created is very small when many people are willing to give their word about what they will do in future and many other people are willing to believe them. But in times like now, the opposite holds true. Banks don’t trust anyone’s word, so no money is being created. And many are fearful of giving promises about the future anyway. This kills cash-flow. The amount of money in circulation drops. Money literally disappears. And the more already existing debts that get repaid the worse it is. No debt equals no money. So to keep the music playing someone has to create some money; the only entity that remains to do that is the central bank. So, they create some money and spend it. They can either buy government bonds (putting the government in debt and therefore raising your taxes), corporate bonds (if they trust the corporations to survive to repay the bonds), or they can purchase existing, usually national, assets such as power generators or any other secure national asset. Purchasing existing assets means money is injected into the economy but without debt; with no pressure to increase in taxes.
    Whomever sold those assets to the central bank (generally the government) now has some cash to use. How they use it will determine if the whole exercise will succeed. Will they spend it on white-elephants or will they use it to reduce taxes, improve education services, etc.?

  7. rasta man

    @luc: Some very interesting points here.However is anybody listening?

  8. Green Monkey

    For anyone who finds it difficult to grasp how or why in our current fiat money systems “no debt equals no money”, watch the video Money as Debt or the latest, revised version Money as Debt II. Both are available at Youtube.

    In fact, here’s a link to Youtube playlists for both the original Money as Debt & the newer Money as Debt II (look in the top right of the page under “Playlists”):
    http://www.youtube.com/user/compelled2283#p/p

  9. watcher

    @Geen Monkey

    where will Barbados get the foreign exchange to pay the import bill if there is no free market to exchange Barbados dollars and the sources of Foreign Exchange income are descreasing.

  10. 17

    @Luc

    Neither Canada nor India has a fixed exchange rate.

    Printing money to buy government and private debt when the balance of trade is worsening, and at the same time trying to maintain a fixed x-rate, is going to lead to a forced devaluation sooner or later.

  11. Green Monkey

    @watcher who asked
    where will Barbados get the foreign exchange to pay the import bill if there is no free market to exchange Barbados dollars and the sources of Foreign Exchange income are descreasing.

    Obviously, apart from remittances sent home by overseas Bajans, Barbados can’t get foreign exchange unless it has something to sell that some foreigners want and perceive to be of value and are therefore willing to part with their own foreign currencies to pay for it.

  12. Spinelli

    Hi Beefcake and Watcher i an not a business/economic major yet, but I totally agree with you devaluation will not improve the situation( we only need to look at Guyana and Jamaica) I have jamaica friends and they regret the day they devalue their dollar. Keep barbados currency where it is, and work on the other areas to restore what we had for tourism. Many of my friends here take several trips to barbados yearly because they love the stable currency and there is no hassle in planning.

  13. Weston

    It’s hard to create wealth in a country which is over regulated. When you think about all the potential economic activity which requires a permit, licence or exchange control approval, which can all take months and perhaps eventually be refused, entrepreneurs will look elsewehere or not bother.

  14. Peltdownman

    Luc has it spot on. In particular, the point about adding value to what we already have, wihout having to sell-off the remaining land, which is obviously non-sustainable, leaving our descendants nothing of their own. The trouble is, instead of adding value, we seem to be hell-bent on destroying it, sometimes out of ignorance, and somethimes out of malice. We need to know what it is that attracts visitors to the West Indies and to Barbados, in particular. It is not just sea and sand, which they can find much cheaper. Some say it’s our people and their warm and friendly manner, but our Youth Ambassador tells the world that we all call each other c**t. We have wonderful and evocative old buildings. In countries around the world, these fronatages are cherished and preserved, even if modern business operate within them. Take Chester or York in England. Their medieval appearance is preserved by law, and tourists flock in their thousands. We burn down Sam Lords, we destroy the Three Sisters, and we make plans to destroy the carenage waterfront, and allow countless other magnificent buildings to rot away. And we wonder. We turn beautifully manicured countryside into bush in order to make some real estate profit down the road. And we wonder why our tourism product is failing. Devaluation could never solve this problem, only Bajans can.

  15. millertheanunnaki

    @ Peltdownman:
    Couldn’t agree with you more!! The problem lies with our tourism planners and those entrusted with the task of protecting our built and natural environments.

    Preserving old historic buildings and areas of natural beauty is not part of the intellectual make up of the local political class or administrators. When these people travel overseas they are primarily interested in concrete shopping malls and restaurants; hardly visiting buildings and places of historic importance, bookstores, museums or centres for the Arts.

    Their philistinism is manifested in their preference for ugly high rise concrete buildings (ovens) that are not in keeping aesthetically with the natural tropical environment and climatic conditions. This aping of the concrete jungle is seen as evidence of progress and economic development to which the tourist will be attracted. On the contrary’ the visitors want conveniences alright, and also friendly service and value for money spent- but more importantly the want to experience a different type of vacation in a relaxing hassle-free tropical setting with natural beauty and some cultural quaintness around them. Not a horrible imitation of the built environment and social rat race as a reminder of what the might be escaping from.

    But there are more bribes and kickbacks in the award of contracts for “new concrete mausoleums” than for the refurbishing and up-keeping of those treasures of architectural and historical significance.

  16. Facts

    Stop this talk about devaluation. Are you sane? Please tell me the prosperous countries that devalued,

    Facts and more facts

  17. watcher

    @facts.

    I agree that devaluation is not the answer, but having a unpegged currency that trades in normal markets is something to be considered. If this were the case, perhaps the economic fundamentals would make the Barbados dollar rise in value, or perhaps they would make it decrease. Printing money that has no external market to trade in, while at the same time importing vast amounts from external markets that take foreign exchange to pay for will only work so long as foreign exchange in-flows are a greater than the out-flows.

    I think the question you may want to ask is “who are the prosperous countries with fixed exchange rates who are net importers of foreign goods.”

  18. Beefcake

    Watcher, if the Barbados dollar is unpegged, then that is in effect going to result in devaluation, and a potential downward spiral with no safety net. Barbados does not have a strong, independent economy. It is basically an extension of another market, and the US is that logical peg based on current trading arrangements.

    Barbados would fall prey to currency speculators, and the Central Bank would be powerless to avert an international slide, and by then it would be too late.

    The weakness of the US Dollar has benefited the European and Canadian visitor to Barbados, but as the Central Bank statistics are showing, the arrivals might be up, but the spending isn’t.

  19. Reverse the Independence order.

    The government is borrowing money to build houses for the poor right now. Will those homes earn foreign exchange when done? I’m not saying the poor shouldn’t be housed, but the pace could be slower so that it came from budget surpluses.

    If anything, the government should ONLY borrow if what they are borrowing for is going to lead directly to a boost of foreign exchange. Anyone remember the game Sim City?
    That game had simple economics. It was easy to end up with a bankrupt city. But you learn certain things. For example: don’t borrow money to build a stadium. However, if your power plant goes off-line, then by all means you should borrow to fix that so your city doesn’t continue to have a population drop and tax revenue slide as a consequence… A painful action and certainly one that would be a shot to Bajan pride could be reversing Barbados’ Order for independence and becoming a self governing colony of Britain again. That would instantly free up millions since Britain would be responsible for paying all national defence for Barbados. i.e. the Airport and Port terminal might be taken off the Barbados government’s book and Britain would possibly have to cover that.

  20. Luc

    The USD has probably hit a medium-term bottom in value relative to its trade partners. Since BBD is tied to USD, we’re quite likely also at or near a bottom. We should probably diversify our target markets to include more that are now at a big advantage relative to our dollar. eg. Japanese and Northern-european trade and tourism.

  21. Skinin ma teet

    One of the major problems I see is that the people who look at the problems rarely see the problems .Mostly they have a preconceived idea or an instant solution.
    The problems in Barbados are Manifold and deeprooted.
    Politicians in the main are seekers of Instant fame.
    But there is not an instant solution to the problems Barbados faces.
    I remember someone saying that it is wrong to concentrate on the symptoms and ignore the desease .
    Also it is very unwise in Barbados to speak the truth.! Agreed!
    But as this page in the main is annonymous, a degree of protection is available to those who do wish to expose the fact that “the King has No Clothes ”
    So lets “get down to Brass tacks” ignore the symptoms and concentrate on the desease..
    Firstly Barbados has to cease to be a “Private bank” for each political party and each politician. (you feel theres a chance of that?)
    Politicians are self Motivated theives who will sell their soul to the Devil and ours too .The price being right of course.
    Politicians are the exception that Prove(tests) the rule.They are the barrel of rotten apples with one good one(maybe).
    They are in it for the money or the Glory or both.But sure as HELL they are NOT IN IT FOR YOU.
    Always beware of the man who tells you how HONEST he is.
    Secondly.The Law of Barbados.
    There is none.
    Oh yes there is say the Politicians.Well they would wouldnt they.They will cite instances of prosecution of lets say of Mini bus drivers or youth useing some “weed”
    If there is Law;how does a Prime Minister take ten millions $ from the public purse(you and me that is)and give to a freind and then receive millions of $ as a “FEE”.Some years later.
    How does a crooked Lawyer/Politician expropriate funds of a hard working citizen and NEVER yet we see one of these expropriators, punished.
    AT the very least apprehended and the money returned .
    How is that those in power are able to be ABOVE the law.?
    I an given to understand ,informed by this very page I write on,that a Minister of the Goverment is a purveyor of Pornography.
    That the DPP (that stand for Director of Personal Profit) of Barbados .Has Condos in the USA and had his house bulit by the China State Construction Company ” as a favour”. Has considerable property holding in Barbados .In the pursuit of the late payment of a rent “had a female tenant “finger raped” by the police.
    Does Barbados REALLY pay its DPPP that BIG a salary that AFTER TAX he could accomplish such a large “paid for” property holding?(In such a small amount of time employed) Also to use his position to further his own private wealth by useing the Police (The LAW) as the debt collectors.
    Then you have use of LEGAL theft by those who can.
    I think I did see it reported that,the Current PM used tens of thousands of $ for he and his entourage to fly to the Commonwealth PM’s conference in Australia.(Which does what anyway?)
    At a time of Austerity Glabally, do you consider that a good example?

    So we could go on and on endlessly.THe KING DEFINATELY does NOT HAVE any clothes. .
    THIRDLY.
    The use of Legal Government entities to be used as “getaway vehicles” for the theft of money from the workers of this country.
    Small example.
    The organisation that controls the import of onions and ,chicken wings and turkey etc.ADD from 100% to 300% (sometimes MORE) to the actual cost of these imports BEFORE they are sold to the Hawkers traders or supermarkets.Well they can cant they(Who said “like it or lump it”)
    Where does the money go??
    Mr Kellman says about local production and how important it is to export.
    Which I totally agree with(maybe an example of the ONE good apple here)
    HOW,when a small bajun export seasoning producer; that of course needs onions in the product he/she makes, has to pay over 100% above the world price for their Onions. can they make a product that is competative ??So Bajun hard work and initiative cancelled out by Political greed.
    There are a hundred other examples.

    No I am not a politician,tho you would think so the way I run my “mout”
    But if you just take a mild interest in what I have written you can say I beleive ,the the “Cure” aint EVER going to happen.
    A dog dont Crow and a pig aint gonna fly.
    This all being said,Politicians being Thieves and Theives being Cowards,our little rock in for some “Deep Shit!!”
    FReindly Fruendel our cheerfull neighborhood PM, will assure us they aint gonna devalue.(You EVER EVER KNOWN a POLITICIAN speak the truth yet???) Truth and politics like Oil and water.
    But they will. and pretty soon now.That will be FUN.Lets see how the B’s deal with that one,Like the shit they left for the D’s to deal with. Cos we all know that D stand for DEADDUCKS in this election.
    One last word!.Remember!
    The FAT get THIN and the THIN get DEAD.
    Cos this dear Lil ole Rock in for some Bleak times.
    Last one out switch of de light.
    Politicians in de dark bout everyting, dey ent nah de light on or off.

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