Lettersto the Editor
To Revalueor Not: The Cayman Dollar Debate continues to draw comment
Dear Sir,
Please allow me some space in your Newspaperto reply to your headline of Friday, June 28th, 2002, and yourheadlines and editorials of Friday, July 5th and July 12th, allrelating to "devaluation or revaluation" of the Caymandollar.
While the currency of a country is not sacrosanct,and many economists think of it as a commodity to be bought andsold like any other commodity we buy and sell on a daily basis,a country's currency, for example the Cayman dollar, is also usedto carry on trade with other countries.
In other words, it has both a domestic andinternational function. The Cayman dollar presently, and for sometime now, trades at a premium of US $1.00= CI $0.80.
While the editorials and headlines do notsuggest what that new value premium should be, they do call intoquestion the present exchange rate and suggest that the Caymandollar should be revalued, vis-à-vis the American dollar.
Now, such a state of affairs would be wonderfulif that was all to it. But there are others who think that "asugly as it may seem, devaluation is the only way we can have achance of recovery in the tourism industry". So that basedon these newspaper commentaries there are two schools of thought.One is that we give up our premium advantage and settle for par,(devalue); while the other is that we increase our premium advantage,(revalue).
However, before we discuss the pros andcons of the devaluation/ revaluation debate, you and the publicneed to know that (despite implicit representation otherwise)only Her Majesty's Representative at the Caymans (the BritishGovernor) has the authority to decree an alteration in the valueof the Cayman dollar. He can use his reserve powers to mandatea currency exchange rate with or without the consent of the ExecutiveCouncil and to the implicit detriment to the people of these Islands.
Changing the value of the Cayman dollarhas nothing to do with the picture of the Financial Secretaryon the front page of a local newspaper saying that he prefersthe use of the word "realignment" to the word "devalue",or statements by the domestic political leadership for that matter.
As a matter of fact, the reserve powershave been used by the British Governors of former colonies todevalue their currencies, (causing the untold suffering of thepeople,) over the unanimous objections of their local politicalleaders in their legislative councils, and promises by the Governorsthemselves that such actions are inimical to the interest of thecountry and its people would not take place. (Belize in 1949 isan example).
Altering the value of a currency in mostcases has profound influence on the economy because it representsa system change.
For example, if you buy a loaf of breadat the local supermarket the price of your purchase will not change,up or down, the price of anything else in the shop. However, ifyou alter the exchange rate between Cayman dollar and the US dollar,the impact of that alteration is felt throughout the system, changingnot only the price of bread but with every price with which ithas to interact. (A classic example would be the impact of exerciseon overall body function.)
Because this article is written for everyday consumption, I have no intention of introducing any mathematiccalculation to prove a point, except that we understand at thevery outset that the success of devaluation/revaluation policydepends not only on the calculus phrase "by how much,"but also by other factors, as was explained earlier over whichdomestic policy makers either do not have any or little say.
From the window of economic history, wecan conclude that a major objective of devaluation is to increasethe export of, and decrease the imports of that country's goods,at the same time. Countries with high exchange rate relative totheir competitors would find it difficult to sell their goodsabroad.
For example, Great Britain. At the sametime high exchange rate countries benefited from income flowsfrom portfolio and direct investment made possible because ofthe high relative value of its currency.
Again the British fits this example becauseits merchandise trade deficit was always evened out by surpluson its capital account.
Ninety eight percent or perhaps more oftotal international merchandise trade of the Cayman Islands isimport-oriented, a significant portion of which is comprised ofinelastic or essential items.
Devaluation of the Cayman dollar will notbring about any of the expenditure switching or expenditure reductionnecessary to correct problems of its balance of payments on currentaccount.
However, it would generate mark up and cost-pushinflation. For non-industrialized developing countries especially,and Cayman fits that model, currency devaluation is an extremelydifficult decision; because the consequences are so lethal. Developedcountries have, since the nineteen seventies when America completelyabandoned the gold standard, settled for floating their currencies.
I do not know of any non-industrializedcountry where devaluation of its currency improved its economicsituation. Even some developing countries have allowed their currenciesto float because of external intrigue or desperation of its leaders.Ask the Guyanese, or better yet Jamaicans who for over a periodof ten years, from 1973 through 1983 experimented with six typesof exchange rate regimes, ending up with a floating exchange rate,which it was perhaps connived into by the International MonetaryFund, (IMF), with disastrous consequences.
The argument that devaluation is the onlyway for the tourist industry to recover, loses sight of the factthat an exchange rate change is a system change. And while someelements in the system may vary directly, others will vary inversely,while still in other circumstances a third element may be requiredto act as a link through which two otherwise independent elementscan interact.
For example, a devaluation of the Caymandollar by 20%, which would bring it on par value with the Americandollar, would also lead to a series of domestic inflationary priceincreases that could well cause an inflation-devaluation spiral.In other words, while devaluation to the new exchange rate shouldspur increased tourist spending, there are also negative factorsat work here, in that the now devalued Cayman dollar increasesthe cost of imports, real wages in the tourism and other localindustry would decline, and the domestic price level would risesignificantly. And moreso because a sizable portion of the country'simport bill goes for the purchase of necessities, expenditurereduction would be almost impossible.
In addition, the problem escalates if theremedial policy runs counter to the political philosophy of thegoverning party; assuming the need for devaluation of the Caymandollar, also assume price control as an essential element of remedialpolicy.
The question is, how do you get a governingparty with a free enterprise philosophy, and the narrowest ofrevenue base, to impose price control as a tool of economic policyand a cut back on taxes on imports so as to put more money inthe hands of the consumer by increasing the purchasing power ofthe Cayman dollar.
The situation is critical because the implementationof such policies (minus devaluation) is needed right now. Again,the government is facing a problem of balancing the budget, acause, in part of which is the escalating nature of the inflationaryregime import taxes on essential items has generated.
On July 12th, Cayman Net News also carriedan editorial entitled "Dollar or Pride." This editorialargues for the revaluation of the Cayman dollar, saying that "nowis the climate in which the Cayman Islands Monetary Authority(CIMA) needs to revalue the CI Dollar."
There are no stated facts presented by theeditorial on which to build a theory for revaluation. If it isnot devaluation then it must be revaluation, appears to be theposition of the editorial, when it says, "the same couldbe said, however, for the Cayman Government's failure to increasethe value of the Cayman dollar."
It seems simply to be a reaction to Mrs.Dilbert's comments in her article, Tax News.Com in London, thata devaluation policy would "present a negative image of themonetary regime of the Cayman Islands."
Three paragraphs from the end of the editorial,the writer says that, "if the CI dollar is increased in value,more foreigners would prefer to spend their hard earned moneyhere, where they get more for less."
Perhaps the Editor could on some other dayexplain this editorial more fully, because I fail to see how increasingthe value of the CI dollar would enhance the overall nature ofthe Cayman economy.
But let us analyze a hypothetical situation.
Sometime over the weekend, when businessis closed, the Governor announces a revaluation of the CI dollar,at an increased rate fixed at say, US$1.00= CI$0.66. This revaluationincreases the value of the Cayman dollar, not only against theUS dollar and currencies the world over, but seriously underminesthe value of the Cayman dollar one hundred percent backing thereserves of CIMA, and which could be interpreted as a weaknessin the domestic economy. This would lead to the sale of Caymandollars for foreign currency and bring severe pressure on thereserve assets of the Monetary Authority (again you have a systemchange).
Prices of goods and services purchased fromabroad should cost less because the CI dollar should at the revaluedprice buy more.
However, the quantity of local demand forboth elastic imports and necessities could manifest itself inlarger volume of imports, which could lead to demand-pull inflation,because purchasing power is now available through the increasedvalue of the Cayman dollar.
Meanwhile, the additional increase in purchasingpower of the Cayman dollar will further weaken what is alreadya weak tourist demand for the Cayman Islands as a tourist destination,as more tourists turn to cheaper destinations.
The way forward for the Cayman economy clearlyis not devaluation or revaluation of the Cayman dollar. That wouldonly ensure the dismantling of the economy. What is needed areeconomic policies and tools and the will to maneuver the economyinto an orbit of deflationary prices, where it needs to be.
Cayman, whose major trading partner is theUnited States, seems not to have benefited at all from continuousprice deflation in the United States.
The economies from our exchange rate premium,and quantity discounts, have all been devoured by high governmenttaxes and high business mark-ups, which have continued to chipaway at the domestic value of the Cayman dollar, and the purchasingpower of the tourist dollar.
The government must find new ways of earningrevenue that are both sustainable and less inflationary. Strategically,in the quest for sustainable economic growth and development,political leaders of Cayman must learn how to embrace uncertaintyand use it as a tool of public policy.
The Kuwaitis did that and were able to survivethe gulf war with their economy intact. They have oil. Caymanhas the offshore industry. A long-term strategy, to deal withuncertainty, from a Cayman perspective, is the need to establisha stabilization fund, or some mechanism designed precisely todeal with domestic economic problems that are sure to arise asa consequence of interaction between nation-states, or their clientsat a global level.
This type of economic insulation shouldhave been part of the package that came with the birth of thefinancial industry in the Cayman Islands.
Planning for uncertainty should thereforebe the single most important goal of overall public policy makingin the Cayman Islands.
Leroy Johnson