Is it time to consider changing the country's monetary policy?
"PEGGING a nation’s currency to that of a trading partner has some advantages. It allows businesses to plan; exporters and importers can agree on prices without worrying about sudden foreign-exchange fluctuations. Until the early 1970s, most global currencies were pegged to the dollar under the Bretton Woods system. Since then, pegs have been adopted for three main reasons by varying groups of countries." Read more here…
Dr. Alvin Rabushka, in a speech here in 1997, explained reasons and pitfalls for the Bahamas pegging the currency to the US Dollar rather than maintaining a Currency Board. Read it all here…
He noted:
"When The Bahamas proclaimed its independence in 1973, the country was virtually free from public debt.
"Second, the monetary system. Currency boards were the monetary arrangement of choice in most British colonies, and The Bahamas was no exception. A currency board is a monetary system that maintains a fixed exchange rate and full convertibility between domestic notes and coins and some reserve currency. A currency board achieves its purpose by holding 100 percent external reserves against the domestic note issue.
"A currency board does not have discretionary control over the domestic money supply. Under the currency board monetary system, surpluses or deficits in the balance of payments, in the current and capital accounts, translate into increases or decreases in the domestic money supply. This arrangement is similar to the classical gold standard, balance-of-payments monetary system.
"It is important to understand what a currency board cannot do. It cannot create inflation because it does not control the ultimate reserves of the monetary system. It may transmit inflation from the reserve country, but cannot create inflation because it cannot independently increase its monetary base.
"A currency board cannot finance spending by the domestic government or domestic state enterprises because it is not allowed to lend to them. A typical currency board is not a lender of last resort. It does not lend to commercial banks or to other enterprises to help them avoid bankruptcy."
He went on:
"To summarize at this point, without getting into an analysis of the merits of what budget deficits were used to finance during the past fifteen years, the conversion of the Bahamas currency board into a central bank was a major contributing factor to the government's accumulation of public debt and the practice of annual deficits on a consolidated budget basis."
It's obvious pegging the currency to the US$ and having a Central Bank has lead to more debt for The Bahamas, that is now becoming unsustainable. So what can we do?
Well it's becoming more and more obvious we need a sound currency.
That's easier said than done at this point of course, but here's a couple links that will shed some light on the subject and what the country might consider doing if the political class is serious about reform.
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What are your thoughts?
