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Would a devaluation be good for Belize?

Posted: Tuesday, November 15, 2016. 9:39 am CST.

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By Richard Harrison: It would seem that the Government of Belize is convinced that a devaluation and/or revaluation of the Belize currency would be good for Belize….as they have done everything they possibly can to increase the risk of losing the Belize dollar peg at BZ$2 : US$1. The underlying assumption here is that the Government of Belize does what, in its heart of hearts, is good for the people of Belize.

A devaluation could mean keeping the Belize dollar pegged to the US dollar, but at a new exchange value, for example BZ$4 : US$1.

A revaluation could mean moving Belize away from a fixed exchange peg to a single currency, to an exchange peg with a basket of currencies of the principal trading partners. It could also mean a “crawling peg”, “pegged within a band”, “currency board” or “currency substitution”.

Historically, devaluation of currencies are associated with periods of major contraction in an economy…..where it becomes necessary to make major adjustments in competitiveness and productivity to boost exports, while at the same time reducing demand for imports….essentially to raise the foreign reserves level necessary to maintain the peg of the currency exchange rate.

The basic assumption is that a devaluation would make a country’s export seem “less expensive” to foreign consumers, thus increasing their demand for the country’s goods and services. Theoretically, exports should rise and the country earns more foreign currency.

At the same time, goods and services from foreign sources appear more expensive to domestic consumers, and thus there should be a decrease in demand for foreign goods and services….improving the balance of payments….by slowing the growth of outflow of foreign dollars to pay for imported goods and services.

The expectation is that domestic labor costs and prices of goods and services would not immediately be increased by the same rate of devaluation….that they would increase slowly over time. This “relative lower” cost of labor, goods and services would make the economy appear to be more competitive….allowing exporters to produce more goods and services at “relative lower” cost….thus being able to sell more volume at “relative lower” prices to foreign consumers….and/or to make increase profits to use in expansion investments.

This expectation can be realistic when a country has a substantial exporting sector that would likely see major increase of exports from a devaluation….and assumes that the exporting sector repatriates the foreign currency so earned to invest deeper and faster in the domestic economy.

A devaluation for Belize would certainly mean a lot of hardship for Belizeans….because every worker and those dependent on the domestic market would take an immediate pay cut in real terms….forcing everyone to be more austere, as lower real incomes can purchase only less of the now more expensive imported goods and services. It would also mean a major loss of jobs and increased unemployment in the short-to-medium term.

Yet, a devaluation would not be a guarantee of more influx of foreign currency from increased exports….because Belize does not have a substantial export sector with capacity and capability to scale up rapidly….and the existing export sector, mostly agricultural commodities and tourism….are financially structured in ways that do not guarantee that increased export earnings will translate into increase repatriation of the increased foreign currency earned….unless these structures are unwound and laws that govern exporters and exportation are drastically improved.

Besides….there are other things that make the economy uncompetitive and underproductive….the large and increasing amount of foreign debt service obligations, high fuel tax, the high rate of non-fuel taxes ( unbalanced on few and weaker shoulders), the high cost of utilities, the high interest rates, low rate of technology adoption and adaptation, low level value-adding, etc…..not only the relatively high cost of labor.

The Government of Belize should have moved a long time ago to make corrections in all these areas….so that the pains of devaluation, being the option of last resort to make corrections, is avoided….but the egotistic nature of Belize’s financial managers have allowed them to ignore many years of advice from people they have pushed under the bus….satisfied with their self-fulfilling, utterly false prophecy that these people are failures and that their advice is of no value and should not even be considered.

Devaluation can still be avoided…..but the status quo would have to agree to major overhaul of the tax system over a relatively short period, which would see them paying their more fair share of the national tax burden…..with a new system based on lower rates, more balanced on the shoulders of all economic actors…with significantly improved system of management to increase compliance across the board.

However, the entrenched status quo seems to prefer for the workers of Belize to pay for most of the correction necessary. This would mean no major RESTRUCTURING of the tax regime along the lines suggested above, but rather increases in rates of existing taxes….which would mean that the same people paying taxes today would see increases in their tax bill….and the status quo establishment, which is largely sheltered from taxes, would continue riding free. The workers will pay for a devaluation.

Some may want to point to the positive effects of devaluation on the Iceland and Ireland economies….and the relatively rapid rebound of their economies after devaluation of their currencies….but those countries have significant export capacity and capability compared to Belize, and in a much higher technology environment…such that comparisons of this kind would not be doing justice to the Belize reality.

A devaluation, especially given Belize’s low, unsophisticated financial management and market capabilities, could mean a rolling thunder of darkness that just gets worse with every passing year.

The people of Belize are mostly like sheep….they bow their heads and stretch out their neck to make it easier for the butcher’s knife to do its job. The political leaders, who are guardians of the status quo, will move like water in the path of least resistance. If the people of Belize would rise up and fill the streets with boots…the political leaders would move in the other direction….and prevent the rapid rise in the flow of blood on these beautiful cement streets that can be expected if devaluation is the chosen exit route.

All things remaining equal…..as the clock ticks….Belize continues to move confidently towards a devaluation.

The views expressed in this article are those of the writer and not necessarily those of Breaking Belize News.

This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University


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