How a stronger US dollar and lower oil prices affects the Caribbean
By Ronald Sanders From Caribbean360
BRIDGETOWN, Barbados, Friday December 12, 2014 – Caribbean countries whose value is fixed to the US dollar should benefit, at least in the short term, from the fall in oil prices and the strengthening of the American currency. Oil prices fell to below US$65 a barrel for the first time in 5 years, while the US dollar strengthened against every major currency, including China’s Yuan.
In a general sense, the reduction in the oil price will benefit all countries, particularly the developed nations whose working population will have more disposable income and will spend more on goods and services such as tourism. In turn, this will help to rejuvenate economies worldwide for as long as the oil price remains low.
The further and specific benefits to countries whose currencies are linked to the US dollars should come in three important ways.
First, the cost of energy has been among the biggest and most variable costs bedevilling every business in the Caribbean, especially manufacturing and tourism. Lower prices for oil – if governments and oil importing companies pass on the price reduction – should reduce the cost of energy to businesses improving their financial performance. On that basis, businesses should rally their profitability and either pay more taxes to the government or expand their operations, including by employing more people. Consequently, domestic economies should improve to some extent.
Second, since less US dollars will be needed to pay for oil imports than over the last 5 years or so, the foreign exchange reserves of these governments should increase bettering their capacity to pay for all their imports.
Third, the debt of most Caribbean countries is denominated in US dollars. The major exception is the debt to China that is linked to the Yuan. When, in recent years, the value of the Yuan was increasing against the US dollar, this was a worry. Now that the Yuan has weakened against the dollar, servicing the Chinese debt should be easier though it might not be a long term prospect.
Taking the second and third points above the foreign currency exposure of the countries, whose money is pegged at a fixed exchange rate to the US dollar, will be considerably improved at least for now.
In the Caribbean, the countries with fixed exchange rates to the US dollar are: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, St Kitts-Nevis, St Lucia and St Vincent and the Grenadines. They are members of the Caribbean Community (CARICOM) along with Haiti, Guyana, Jamaica, Trinidad and Tobago and Suriname. The currencies of the latter named countries float against the US dollar, so they are unlikely to be affected in the same way from the strengthened US dollar.
If the governments and business sectors in the countries with fixed exchange rates take advantage of the lower price for oil and the strengthened US dollar by taking measure to boost their exports and their tourism, they will not only improve their foreign exchange situation, they could hedge against any future crisis in the global economy and in their own economies.
Of course, tourists from the European Union (EU) countries, particularly Britain, will find that the cost of their holidays to the Caribbean will rise since almost every hotel in the region quotes prices in US dollars. In this circumstance, hoteliers would be sensible to take advantage of cheaper energy prices to adjust their prices so as to continue to enjoy a significant share of the EU market while consolidating their place in the US. This calls for joint planning and implementation by the Hotels and Tourism authorities of all these countries both individually and collectively.
In other words, to benefit both from lower oil prices and the currency peg to the US dollar, there must be greater investment by governments and the private sector in productivity so as to raise their competitiveness.
For those countries whose currencies are not pegged to the US dollar, their options are different. But, they too benefit from lower oil prices. Therefore, the productive sectors of their economies should enjoy a fillip to improve exports, uplift their private sector and reduce the cost of living to the general population. They could use the gains of lower oil prices to improve their foreign exchange reserves both to service existing debt and to hedge against any future challenges to their economies. However, the strengthened US dollar will increase the price of imports from the US and the cost of tourism from Europe. The balance is that their exports to the US and their tourism from the US will profit.
In the Caribbean, there has always been a debate over whether or not exchange rates of currencies should be fixed. So, two further issues arise about currencies in the 15-nation CARICOM community group which, in addition to the countries already named in this article, include Montserrat – a British Overseas territory.
The first issue is one of devaluing their currencies. In a sense, for those countries whose currencies are not linked to the US dollar, a devaluation has actually occurred – at least with the US. An actual devaluation generally, while making their exports and tourism cheaper and more competitive, would place a greater burden on local currency liabilities and also raise the cost of all imports. This is something that Central Bank Governors and Ministries of Finance will undoubtedly continue to consider carefully.
The second issue is the creation of a single currency for the CARICOM countries. This would not be an easy objective to achieve, though seven of them (in the Eastern Caribbean Currency Union) already have it. It has been on the agenda of CARICOM since 1990, although a few years ago work toward its realisation was “paused”. However, if anything, the financial crisis of the last few years and the present situation suggests that constructive work on a single currency, or some alternative that would allow for greater currency co-operation, would better inform how the CARICOM countries could work together – as they must – to address the financial challenges of now and the future.
The opinions expressed in this commentary are solely those of Sir Ronald Sanders. Sir Ronald Sanders is a Consultant and former Caribbean diplomat.
For more on this story go to: http://www.caribbean360.com/opinion/ronald-sanders-stronger-us-dollar-lower-oil-prices-affects-caribbean
Related story:
Ron Sanders has withdrawn as a Caricom candidate for Commonwealth SG
Dear Editor, (Stabroek News)
It is more than four decades since Carifta, the forerunner of the Caribbean Community (Caricom) was established, but despite the length of time it seems that the regional body cannot get their act together in many areas. First there are varying views about the freedom of movement and employment of Caribbean nationals in states other than their country of birth. Some governments ignore the Treaty of Chaguaramas – a Jamaican woman who was harrassed and denied entry to Barbados moved to the Caribbean Court of Justice which ruled in her favour and awarded substantial damages.
Now Caricom has failed to identify a single candidate as its nominee for the post of Commonwealth Secretary General. Guyana-born diplomat/academic/journalist, Sir Ronald Sanders, who is currently Antigua’s High Commissioner to the United Kingdom has been nominated by the government of Antigua and Barbuda, and his candidature has been approved by most heads of government, but it is reported that Caricom is contemplating naming more than one person for that high and distinguished position.
Sir Ron who has had a distinguished career as a diplomat since 1982, is now serving his third term as Antigua and Barbuda High Commissioner to the United Kingdom. He was invited by US President Jimmy Carter to be a member of the Friends of Democratic Charter, and in 2010 was named as one of the ten members of the Eminent Persons Group (EPG) which was requested by the Commonwealth Heads of Government to recommend options for reform that would sharpen the impact of the 53 nation grouping. Sir Ron was rapporteur and the report was submitted to the Commonwealth Heads of Government meeting in Perth, Australia in 2011. He is also a member of the Board of The Round Table of the Commonwealth Journal of International Affairs.
His vast experience would make him an excellent Commonwealth Secretary General, following in the footsteps of his father-in-law, Sir Shridath Ramphal, who served two consecutive terms in that distinguished office.
Since Caricom is unable to identify a single person Sanders has written to the Gaston Browne administration to withdraw his name as a candidate. In his letter Sir Ron said, “There is nothing I hold more strongly than the desire to advance the interests of the Caricom region and those of the Commonwealth… [my] working life in several Caribbean and Commonwealth capacities and my published writings bear testimony of that.” Sanders added that to be successful, “the region must have a single candidate and should not delay any longer its entry into a campaign which has already started by others. He concluded by saying, “I have no wish to be a part of a fragmented process in the Commonwealth Caribbean at a time when our need for unity is so urgent…”
It is regrettable that Sir Ron was not the region’s lone candidate because he is known in the Commonwealth for his outstanding work and had an excellent chance of being chosen for that prestigious office.
Yours faithfully,
Oscar Ramjeet
END
IMAGE: dominicanewsonline.com
