Dear Editor,
I refer to Mr Van Beek’s column in Business Page in Sunday Stabroek (07.11.18) “Is the Guyana dollar overvalued?”
At no time did the report mention imports, exports, capital flight, remittances, foreign debt, reserves of foreign exchange in the banking system all of which would impact on the exchange rate mechanism.
It seems to take the price of goods and services in Guyana and compare it with goods and services in America and produce an exchange rate of G$230: US$1 and it all depends on if in 1992 the exchange rate was correct.
What the columnist should have done was to compare the price of goods and of services in Guyana to “the price of goods and services in America plus the cost of getting them to Guyana”.
So, if rice cost US$1 in America and cost G$230 in Guyana, you do not simply set the exchange rate at G$230: US$1 or you’re going to get into trouble.
What you do is add the cost of getting goods in America to Guyana plus the actual cost which would be about US$1.25 (as an example, and not US$1) compared to the price in Guyana, let’s say G$230 for argument’s sake. So, the exchange rate would work out at G$230: US$1.25 or G$184: US$1.
Then you adjust it for all the things that I said were missed out.
So, if imports are US$760m , exports are US$630m, Capital flight is US$70m, remittances are US$450m the exchange rate would work out at (760m+70m)/(630m+450m) times 184.
Or, G$141: US$1.
So the answer to the question of “Is the Guyana Dollar overvalued?” is no it is not. The market forces can withstand an exchange rate of G$172:US$1 (which is the average of (141[best rate] + 204[current rate])/2.
So the rate above, G$172: US$1 compared to G$230: US$1 is a bit different.
If businesses follow the columnist’s argument in deciding if to import goods from America or not, they would end up importing goods, then finding that they need to push up prices once the goods get to Guyana.
When businesses follow my way, you will know what the goods cost so you would know immediately if it is profitable to import goods from America to Guyana.
Yours faithfully,
Sean Brignandan
Editor’s note
We sent this letter to Mr Patrick Van Beek for his comments and received the following response:
“Thank you for giving me the opportunity to respond to the points raised by Mr Brignandan. He is correct in pointing out that the analysis is based on the assumption that in 1992 the exchange rate was correct (in the sense the currency was not over or undervalued at the time). Two key items of data support this supposition: 1) the Guyana dollar suffered a catastrophic devaluation two years previously, hence it would be expected to be clearing at close to fair value at that time and 2) the linearity of the relationship between the US price index in G$ and Guyana price index over the period analysed (for the statistically minded the correlation coefficient is 97%). Mr Brignandan’s argument that imports, exports, capital flight, remittances, foreign debt and reserves of foreign exchange in the banking system impact on the exchange rate are all valid.
However I believe his argument that the exchange rate should be adjusted to take into account these factors is fallacious: since the exchange rate is free to float it adjusts as and when these factors change, thus their impact is already reflected in the current rate of exchange. Finally in response to the criticism I should have compared “the price of goods and of services in Guyana to ‘the price of goods and services in America plus the cost of getting them to Guyana'” I would like to point out that the analysis was carried out on the basis of a comparison of real exchange rates. The example given of buying goods and services in the United States was used as an illustration of how the process of arbitrage brings the nominal and real exchange rates into line when they move too far apart. In the next paragraph I stated “Care is needed when interpreting real exchange rates: there are transaction costs involved in bringing goods from one country to another and there may be different fiscal policies in place between the countries distorting the relative value of goods and services.””
