For sometime now the world is seeing a decline in the value of the Dollar. Even rap stars are making videos where they are 'ditching' the Dollar for the stronger Euro. 
I've seen the Indian economy in some ways flourish because of a strong Rupee against the Dollar. Now the number of billionnaires in India has exponentially grown within a few months. Mr. Gates has even lost his 'world's richest man' status to an Indian. My Question is, what sets the exchange rate between two countries? How can one country - Guyana, fail to maximise on the decline of the Dollar while most other countries profit? Six months ago the exchange rate of the Guyana Dollar to the US Dollar was 200 to 1. Today despite the slump of the value of the Greenback, Guyana's currency fails to improve its worth. It is now matched about 205 to 1. Even airlines and tour organisers are telling persons desireous of visiting the US from Europe to travel light and buy their commodities in the US because it is now so much cheaper. Can Guyanese feel the same about visiting the States!!
It would be interesting to know exactly what is responsible for the stagnant or almost non growth of the Guyanese Currency which invariably reflects the growth the economy.
Saturday, November 24, 2007
How is the exchange rate set between countries?
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I believe that there are many factors responsible for the somewhat stagnant Guyanese currency. Our history of indebtedness still resonates and will continue since we have taken may loans from World Bank etc. Further, many of our domestic policies are not conducive to economic development for example VAT and its perpetual effect.
Presently, Guyana's inflation is very high; so while the economy of many nations have remained constant and some even experienced increased growth, we have suffered inflation and as such the devaluation of the US dollar is not really refelctive against our currency.
It does not alleviate our situation that we have not attracted much foreign investment and have not done much to diversify our economic dependence on mainly primary agro-products. In other words, industrialization is very crucial especially when the dynamics of the WTO are considered.
Many are hopeful at the prospects of oil but it is highly unlikely all things considered that this would be Guyana's salvation.Thus, the exchange rate between countries are based on economical factors, Guyana has not done much to alleviate its high inflation rate etc., therefore the devaluation of the US dollar has a minuscule reflection when the two dollars are exchanged.
This is all true as to what may be responsible for the value of our currency being almost at a stagnant rate to the US Dollar or in many instances even loosing its value.
But let's thing contructively and without prejudice, what is needed to resusitate growth and development in this nation?
Time and time again the hope of a prosper Guyana seems to be a distant and sometimes unrealistic dream. But it's the desire of almost all Guyanese including those abroad to see their nation become a great economic dynasty.
History has done its part, and so have our politicians and the foriegn policies of the government of the day formulates, but all hopes are not gone, right!! I sure hope so.
Then what do u think are the best ingredients to rebuild our shattered image from an impoverish nation to one which will be on everyone's town when they speak about economic revival, tourist destination, democracy, diplomacy, admirable standard of living, etc?
Very informative comment (senorita). I agree with all that you have said. Furthermore, the stagnant (non-growth) of the Guyana Dollar has to viewed within the context of the foreign exchange reserves, which can serve as a peg against fluctuating exchange rates. Example, China has the largest foreign exchange which is to the tune of US$2.138 trillion which is highly due to the surge in foreign investments.Hence in the first instance, it is perpetuated by a favorable investment climate. In Guyana this is not the case, the high interest rates, coupled by a relatively low infrastructure and reduced skilled labor do not render to the stimulation of FDI. Secondly, a high inflow of capital will augment the prices in real estate and stocks etc, thus bolstering the weakened dollar.So its a gamut of factors that are responsible for the economic situation of Guyana. One should never forget it s politically unstable environment which is perilous to any positive economic gains.
Exchange rates are arbitrarily set.
Zimbabwe simply printed a higher value note and said it was 2:1 US. China simply holds its Yuan to keep the cost of its exports down. Brazil did the same as Zimbabwe then backed it up with hard work.
The rate is a measure of the value of goods and services within a country. For example, to manufacture a bottle of jam might be 20 Units. But in the US, it is $20. To enter the US market, therefore, simply set your currency to 1 Unit = $0.25 and hey presto, with transportation included and duties not taken into consideration, your Jam sells. Its cheaper at $5+ per bottle.
That of course, has ripple effects in your economy. Imported items go up 4 times as much. If you import a lot, the people suffer, especially if you are not prepared to pay them 4 times as much. They might panic, buy up lots of jam and induce inflation into the system if demand outstrips supply.
The way to 'strengthen' your currency therefore is to create more value-added products, increase trade within your own economy and export the surplus goods.
The easiest good to export by surplus is knowledge. Use technology to provide expertise on a global scale like India. Imitate products at cheaper costs like China until you can master the art and create unique items yourself. Give your researches and manufacturers top priority like Brazil.
All it takes is for somebody to make a local pot that has some value locally, and before long Guyana becomes the pot capital of the world! You can charge a premium on your pots, they are in demand.
Money pours into the economy, foreign pots are out. To make their pots competitive, they lower their currency and keep salaries down which in effect, increases the exchange rate in your favour.
The secret is in having something they WANT, preferably really, really NEED to which you can SERIOUSLY peg your note.
Don't do like Zimbabwe and say this is 2:1 and the whole world laughs out loud!
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