Devaluation Talk and Thoughtful Leadership

First Published: 2002-07-13

The Bahamas is facing a fiscal crisis that is the subject of Parliamentary debate but whose exact dimensions may only known by a few. Hints of what can and should be done often appear in the press.

The U. S. Dollar slump.

For instance, in the Tribune of June 6th Mr. Raymond Winder, the President of the Chamber of Commerce, commented on the fall of the U.S. Dollar against other currencies. He said that the slump, a market induced devaluation, would diminish the wealth of U.S. citizens and ultimately their tourist expenditures in the Bahamas.

Fortunately, this is not the whole story. A drop in the value of the U.S. dollar will also reduce the cost of both U.S. and Bahamian vacations to all tourists from non-dollar countries. The U.S. dollar slump creates an “opportunity” for increased tourist earnings.

That Bahamian vacations become more attractive to Europeans may help in some small measure to allay some of the concerns over the competitive position of the Bahamas in the Caribbean. This concern is evidence in the Press often directly based on the IMF August 2001 Consultative Report. That Report stated that “hotel operating costs in the Bahamas…are high by regional standards” and competitiveness needs to be enhanced.

The Cuban peso slump.

One competitive development appeared in an Associated Press report in the Tribune of June 14th. The Cuban Government raised the prices in its “dollar stores” within Cuba that sell a wide range of goods that include everything from beef and eggs to imported food, clothing, TV sets and other household goods. This action, in fact, represents a devaluation of the peso.

The AP story states that Cuba needs “to shore up its dwindling finances before the summer energy crunch, when Cubans turn on their fans and air conditioners”. The situation is worse than usual because “tourism, the biggest currency earner, was down 14 per cent in the first quarter, oil prices are up and income from sugar, Cuba’s biggest export, is down. Sugar will bring in $120 million less than its annual average of $500 million.”

Cuba just devalued one of its peso/dollar exchange rates because it is in real financial trouble. This hurts every Cuban dependent on a peso income and may even increase Bahamian tourist expenditures there.

Opportunities.

The U.S. dollar slump and the Bahamian fiscal crisis are nowhere near as severe as that faced by Cuba. However, Mr. Winder does the country a service when he highlights the costs and opportunities inherent in changing exchange rates.

Importantly there are other opportunities that can improve the country’s competitive position against all countries.

As a start the country could end the electricity monopoly. At present all consumers connected to the national power grid must purchase their electricity from BEC. Consumers can only use their stand-by power generators when BEC has a power failure even though they can generate power themselves below the rates charged by BEC. This is so even though the economies of scale suggest that a large generator like BEC should operate at lower costs. This means that big users of electrical power, such as the hotels, could reduce their utility bills immediately.

This would make the Bahamas more competitive against everyone else including Orlando and Las Vegas. It would also put market pressure on BEC to become more efficient. But this is possible only with public support that groups like the Chamber could help mobilize.

Of course, even greater efficiencies could be achieved by selling BEC and getting politics completely out of power generation. Once again the public must be aware of the benefits. It must be viewed by politicians and citizens alike as an opportunity and not as an assault on Bahamian pride.

There are many more examples of things that can be done to increase Bahamian competitiveness and foster job creation without a change in the exchange rate. This is a time for thoughtful leadership.

The Nassau Institute

June 19, 2002

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