Dear Editor,
Christopher Ram’s analysis entitled ‘Mid-year report and the Debt party…’ in Sunday Stabroek of October 24, where he examined Guyana’s half year economic performance is flawed. Time and space do not allow me to go into detail in this letter, which I will try to keep short and focused mainly on the exchange rate issue in Ram’s analysis.
Mr Ram in casting doubt on the stability of the Guyana dollar argued, “that the US dollar itself has been depreciating against some major currencies, so the comparison of the Guyana dollar to the US dollar is not an accurate measure.” This self-serving statement by Mr Ram is not only far from convincing, but far from the truth. He even harped on a slight depreciation of the Guyana dollar for first half of this year.
The nominal exchange rate in Guyana has enjoyed stability relative to the US dollar for the longest period. This point was also brought out by the Chief Economist at the IDB, Edwards Lora in a presentation on the Economic Outlook for Latin America and the Caribbean (LAC) in his 2010 mid-year review. Utilizing the trend analysis by Bloomberg on the LAC countries he showed that Guyana enjoyed the most stable exchange rate in the hemisphere.
The realignment of the Guyana dollar to the US in October of 1975 away from the pound sterling had led to a fixed exchange rate regime being in place until 1991. Since then the official rate was determined by the free movement of the rate in the cambio market. The methodology used in the calculation of the official exchange rate is based on the sum of turnover of the three largest cambios, namely, the commercial banks since they account for over ninety per cent of foreign exchange transactions. The price of notes, bank drafts, telegraphic and electronic transfers, etc, at weighted rates are included in the calculation of the official rate and rounded to the nearest 0.25 dollar. This method that is home grown has been subject to rigorous analysis by the international financial institutions. Therefore, because of the different instruments and banks involved, readers should understand the official rate will not remain at one level. However, only when movement in the rate is over and below a five per cent level is there cause for any concern, and not a 0.25 per cent depreciation, or roughly 50 Guyana cents.
In answer to Mr Ram’s concern about the depreciation of the US dollar and its impact on the Guyana dollar, it should be noted that this is captured in the calculation of the Real Effective Exchange Rate (REER). The REER has been more than stable in the last few years. The IMF utilizing the External Sustainability (ES) and the Macroeconomic Balance (MB) approach in calculating the REER found little evidence in misalignment in the nominal exchange rate in Guyana. The Real Exchange Rate reflects the competitiveness in the exchange rate relative to that of Guyana’s major trading parties, and the US is one player in the game.
Mr Ram’s own firm conducted a Business Survey some time ago that identified exchange rate stability as a hallmark of the economy’s performance. Further, I will not even delve into the Gross International Reserves of the Bank of Guyana that hover around the US$750 million that has been most unprecedented in the history of this country.
Finally, the exchange rate issue has been the subject of great empirical and theoretical analysis in the past, and it is a disservice to readers when conclusions are based on superficial feelings and political spin in total disregard for fundamentals.
Yours faithfully,
Rajendra Rampersaud
