TANA-NOMICS: Devaluation vs Depreciation

TANA-NOMICS: Devaluation vs Depreciation


So budget day is October 5, 2020. Some people have been referring to it as “judgement day” or saying that we should brace for a budget from the four horsemen of the apocalypse. Well…maybe it was just me saying those things. I mean when you have a TT$15 billion budgetary hole there is only so much barbecue and cake sale you could have.

Anyway, I decided to write about the topic of currency devaluation since all the experts and economists (not that economists aren’t experts) seem to be concerned about it. There are basically two schools of thought (virtual not physical of course…Covid nah). The first is that our currency is overvalued thus making our exports more expensive relative to other countries and making imports cheaper. Like any other price, the price of foreign exchange or the exchange rate is determined (loosely in our case) by demand and supply. So spending more of our dollars to buy US$ to import foreign Zaboca and green peppers should force our money down and the US$ up right?

WRONG! That’s because our Central Bank intervenes to keep the currency trading within a certain band. That’s why we have what’s called a “managed float”. So anyway the pro-devaluation camp’s argument is that devaluation would fix the current imbalance between demand and supply and stop using up our foreign exchange reserves to defend the value of our dollar. People would demand less forex to buy more expensive imports and thus the imbalances would be fixed. The anti-devaluation camp’s argument is that it would cause the prices of all goods and services to increase (aka inflation) because we all know, that other than “comess”, we make nothing in this country. Our manufacturers use foreign inputs to make…sorry repackage their products. Also, anti-devaluers (copyright pending) say that there will be an increase in our interest payments on all that foreign debt we’ve incurred (from China, Latin America, anybody with a US$5 willing to lend…the only thing we didn’t do is join a Sou Sou for a “Blessing”). As I’ve always said nobody accepting our monopoly money for payment of debts in hard currency, not hard like WASA water but that’s a different story.

What is the difference between a devaluation and depreciation of a country’s currency though? Well I’m glad you asked. A devaluation is when a country makes a conscious decision to lower its exchange rate while depreciation is when there is a fall in the value of a currency in a floating exchange rate.

I know my audience are keen thinkers, otherwise they wouldn’t be here, so you must be thinking we don’t have a fixed exchange rate so why all this talk about devaluation? BUT if we have a floating exchange rate then why is the currency so overvalued? Well, that’s because of the bastardized managed float system I mentioned earlier. In a small, energy dependent, developing economy like ours, we can’t afford to let market forces completely dictate our pace.

Finally, here’s my personal view on the issue. Yes, our currency is overvalued, it’s more overvalued than this year’s CPL competition. However, it has been so for quite some time. The IMF and other institutions of that ilk have frequently said so in every review of your economy. I believe that the time for devaluation was in the past when things were good. The economy is too fragile right now to take on another shock like this. Going forward, over time we should strive to do a managed depreciation to more accurately reflect the true value of the currency but that time isn’t now.

Anyway, there are far greater minds with access to way more data than me working on this. I am just a bush economist/financial analyst with a tenuous grasp of how things work. I’m still trying to figure out how to get a refund on the $0 I paid to watch this season’s CPL.

TANA

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