Sudden Obsession
The issue of the value of the Guyana dollar versus other currencies keeps popping up lately in conversations at socials and on the street. Even among some learned individuals, there is this consternation about the exchange rate. It is not clear what the apparent sudden obsession with the exchange rate is about. But the most prevalent observation is that the Guyana economy has reportedly grown consistently from 2006 to 2011, but yet the exchange rate, usually meant as the relationship between the US and Guyana dollars, is not coming down. Some others put forward the argument that the international reserves held by the Bank of Guyana were at record levels at the end of 2011 and should also be making a difference in the exchange rate. It is obvious that they realize that there is a link between international transactions and the behaviour of the Guyana economy on the one hand and the exchange rate on the other. These factors are important determinants, but as can be seen from the stubbornness of the Guyana/US exchange rate displayed on the web site of the Bank of Guyana (BOG), these factors are hardly enough to bring about a substantial change in the exchange rate. Once past some technical hurdles, it will be seen that the exchange rate is about economic policy, efficiency, taste and attitudes.
Exchange Rate
As most people know, the exchange rate is the amount of local currency given up to receive one unit of foreign currency. The BOG publishes four exchange rates in its Statistical Bulletin. These are the market rate, the transaction rate, the mid-rate and the cross rate. The market rate is the rate that Guyanese confront at the Cambios or at the commercial banks. That is the rate that determines how much goes into or leaves their pockets. The other rates are variants of the market rate, and perhaps of greater interest to the business community and public officials than the ordinary man or woman. The transaction rate, for example, is based on the telegraphic transfers of the three largest commercial banks in Guy-ana. In other words, it is the rate used by the banks to transfer and receive money on behalf of customers, usually business customers. Since the foreign currency trade of the commercial banks is part of the Cambio system, the transaction rate is calculated from a portion of the market rate. It is weighted by the volume of transactions involved in the trade at a given rate. The mid-rate is the average between the combined buying and selling rates in the foreign currency market. It is used by the BOG to conduct official business. This rate makes it easy to calculate the size of change in the exchange rate. The cross rate is calculated using the market rate and facilitates comparison between the exchange rates of different currencies, other than the Guyana dollar.
Attention is placed in this article on the exchange rate between the US and Guyana dollars since 90 percent of the foreign currency trade in Guyana involves the US dollar. The trade in foreign currency has two sides to it, the one at which Guyanese sell foreign currency and the one at which Guyanese buy foreign currency. In the case of Guyana, the exchange rate refers to the amount of Guy-ana dollars given up to obtain one US dollar. According to figures displayed on the web site of the BOG on Thursday March 15, 2012, Guyanese could get nearly G$204.24 by selling one US dollar. When one follows the conversations, Guyanese do not mind if that rate keeps going higher. The more local currency that they receive for the US dollar, the richer they are. The rate that is catching their attention is the one at which they have to buy foreign currency. On March 15, Guyanese had to give up G$206.67 in order to receive one US dollar. The more Guyana dollars that they give up, the poorer they feel.
Raw Numbers
One thing that is evident from the data is that the exchange rate has been relatively stable over the last six years. Based on a calculation using the mid-rate, the ex-change rate has moved up less than one percent since 2006. Put another way, the Guyana dollar was devalued on average by less than one percent vis-à-vis the US dollar. What this means is that Guyanese did not have to sacrifice too much money between buying and selling foreign currency over the period in reference. Yet, it is the raw numbers that are getting to them, particularly when they buy. In their minds, a better economy should mean better prices for foreign currency. Many cling to the view that the exchange rate was tied to the buoyancy of the economy, and therefore something was wrong.
Economic Niceties
Some economists would advise against discussing the effects of exchange-rate movements between two currencies in isolation of a discussion of the exchange rate systems whose currencies are the subject of attention or concern. The principal reason is that the drivers of exchange rate risk, productivity shocks, also affect the macroeconomic risks faced by households and businesses. It is often hard to separate the two without much examination of the underlying causes. The average discussant of this exchange rate quandary is not too interested in the economic niceties or rationale behind the exchange rate system. They simply want to understand how it is that positive changes in the economy are not showing up as improvements in the rate of exchange between the Guyana dollar and other currencies. In other words, how come when they want to buy US dollars, they have to dig deeper into their pockets than they anticipate.
Taste
There are several reasons for this phenomenon. It has to be kept in mind that a currency tends to become more valuable whenever demand for it is greater than the available supply. That is the case between the Guyana and US dollars. The purchase of equipment like excavators, forklifts, combines, motor vehicles, building materials, fuel, clothes and so on increases the value of the foreign currency used to purchase the items. The more the economy expands, the more goods and services are being imported to satisfy production needs, changing tastes and life styles as typified by the purchase of Blackberries and vacation travel. The US dollar is used in most trade transactions even if the purchase is not always from the US. That makes the US dollar extremely valuable and keeps demand for it high. Despite export revenues and high remittances that lead to high international reserves, there are not enough US dollars to satisfy total demand since the desire for foreign goods and services keep climbing. The taste of the public is very important in this issue.
Economic Policies
and Attitudes
For the Guyana dollar to become valuable, the country has to export more than it imports so that demand for the Guyana currency could go up. From that perspective, the economic policies of the country are important. A policy that emphasizes consumption will cause the high demand for foreign currency to continue. A policy that emphasizes production and export should lead to an increase in demand for the Guyana dollar by foreign buyers. The markets for Guyana’s exports are diverse and not enough exports go to the US to make a difference between the value of the Guyana and US currencies. To get people to buy more of what the country produces, the products have to be well made and reasonably priced so that they could compete successfully against similar products from other countries. Efficiency of production is important as well and much of this is determined by the skills of the workers and their disposition to work. The nonchalant attitude towards clearing items from the wharf, the bureaucratic inconveniences to get inputs for production and output for export through Customs and inappropriate work ethics add to the high cost of exports. In other words, the attitudes of Guyanese are keeping the exchange rate high.
Change
In addition to trade in goods and services, demand for a currency is driven by tourism. With the filthy condition of the country and the high crime rate, it is unlikely that there will be high demand for the Guyana currency from tourism any time soon. There are reasons associated with our behavior and attitude that will keep the exchange rate high. Unless attitudes change for the better, it is unlikely that demand for the Guyana dollar will rise. Guyanese must therefore hold each other accountable if they want to see positive changes in the exchange rate.
