Belize PM Insists Dollar Will Not Be Devalued

Hardbeatnews, NEW YORK, N.Y., Fri. Aug. 18, 2006: Belize Prime Minister, Said Musa, is insisting that country’s dollar will not be devalued in spite of nearly US$1 billion debt that’s owed to external creditors.

Musa, in an interview with Belize’s Love FM’s morning show, said a devaluation “does not make sense(and) it will not assist Belize in any way(but) it will put our debt burden in a an even worst position …”
The PM, whose country is also part of the CARICOM grouping, added, “Devaluation will just increase the cost of living which will make the situation worst because we are spending more on what we import than what we export.”

“So how will it help the situation?” he questioned. Musa also insisted that the country will meet its debt obligations despite being practically bankrupt. “We have never defaulted and we will continue to pay our debt so long as the cash flow allows us to,” he told the radio hosts.

The PM, facing a general election in 2008, however, agreed that his administration has to work harder in order to restore credibility. But he insists that despite all the adversity, that the People’s United Party still offers the best hope for moving the country forward.

Musa’s comments come as the international credit bureau, S&P, cut the country’s credit rating to CC, or just above default status. And as the Belize dollar stood at about 50 US cents and 39 cents on the Euro.

Exactly why you devalue....makes imports more expensive and exports cheaper....

The flip side of that is...Devaluation could stimulate the economy. Tourism/investment would increase when the word goes out that you can get more BANG for your BUCK in good ole' Belize.

Not so, BelTex, the Bze $$ is pegged at a fixed rate to the U.S. $$....all that would happen is BZE $$ prices on EVERYTHING would go "up" by exactly the percentage rate that the U.S. $$ went up with the devaluation. In U.S. dollar terms nothing would change for visitors.

Devaluation would achieve nothing except perhaps to destroy the savings of Belizeans who have their holdings in Bze $$'s.

The reason why prices will go up proportionally in case of devaluation is that most goods in Belize are imported, and paid for in foreign currency.

Also:

Belize debts are in US$. Taxes to pay back those debts are raised in BZ$.
When you devaluate the BZ$, you will increase your debt in the short term, and make the situation worse.

The problem is short term versus long term.

Need to stimulate/change the economic climate...need more exports.

Best solution personally is to plan on a devaluation, even if it doesn't happen. You'll be sorry if you hadn't when there is a devaluation.

Been there, done that.

GBZ39, not so. It would take businesses, merchants, importers and exporters in Belize about 30 minutes after the announcement of devaluation to adjust their prices accordingly. There would be NO stimulous to the economy because all that would happen is exports would cost the same in U.S. dollars (which is the effective currency of Belize due the pegged rate).

In fact, devaluation would cause a downturn in the economy...Belizeans with savings in Belize dollars would find their net worth severely dented and would "tighten their belts" in order to survive.

Although I do agree, plan for it, get your holdings in U.S. dollars, real estate etc....don't hold huge sums of Belize dollars.

The bright side of this is when the economic crisis happens, and it will happen, is the country will be forced to go to a currency that is accepted internationally. Yes, this will be a huge hardship on the people of Belize who have savings in Belize dollars. But, once the country has a currency that is actually worth something to people outside of Belize, it will stimulate foreign investment. Investment that will generate additional exports thru the products that Belize produces. Dollars brought in from tourism will have the incentive to remain in Belize as opposed to being used only to purchase items for import or be stashed in foreign banks
The only thing that would prevent the collapse of the Belize economy would have been fiscal reforms that were needed long ago. Now the corrupt and inefficient government has drained the country of assets needed to accomplish this. Now they are attempting a last resort effort to gain additional revenues thru added taxes. That is only going to make matters worse and depress the incentive for investment, trade and increase the costs to vacation in Belize thus bringing in less money thru tourism.
The bottom line is that the Belize people will have to suffer substantially before the needed reforms can become effective. If the needed fiscal policies were initiated that would have prevented a crisis, the Belize people would have had to suffer thru those. A “tightening of the belt” would have effected everyone. Unfortunately it is too late for that. A total collapse, or in other words, the country going bankrupt is inevitable.
The real important question is, Will the people be able to find and elect competent people to run the country and lead it to prosperity after the collapse?

If a devaluation...there will be price controls and a restriction on buying foreign currency to pay for imports.

Short term will be very hard on the local economy during conversion to an export mode.

International monetary stuff is over my head. But,if the $1BZE is at .50USD, Why wouldn't I pay the bank charges to purchase BZE before I come down? Beats the hell out of using a cc, then paying a conversion surcharge. Yeah, I know I'm limited to what, $5000 in BZE on entry? But didn't I just save $2500 on my vacation?

To anyone on this thread........if you had $20,000 USD in the Belize Bank right now, would you be inclined to pull it out and take it home (US)with you. I'm getting nervous with all this talk.

If you're resident outside of Belize you could open a US$ offshore account at Belize Bank

Krehfish bring down as many $US as you can.

The best exchange rate is for actual monies.

The ATMs limit you to US$250 and there is a charge at both banks.

Most credit cards have a foreign exchange fee. Bank One doesn't.

Hmmm, bywarren, I always thought getting rid of the Belize dollar and replacing it by the US dollar would be the best for the Belize economy, until I was looking at this May 2000 article from the Belize Development Trust; the figures don't look too different. After reading this I am convinced there won’t be devaluation, nor will Belize get rid of its national currency.

http://ambergriscaye.com/BzLibrary/trust287.html

REPORT #288 May 2000
BELIZE DOLLAR IS WORTH .03 CENTS USA? PLAYING WITH THE NUMBERS AND TRYING TO FIGURE THE STATE OF THE BELIZEAN ECONOMY!

Produced by the Belize Development Trust

If the Belize Dollar is worth only .03 USA cents by some calculations, in May, 2000, and the official exchange rate is $2 Belize dollars for $1 USA dollar, or a Belize dollar is officially exchanged for .50 cents USA. How does the government do this magic illusion? Is there sleight of hand, some magic trick to guaranteeing .50 cents USA for a Belize Dollar, when the economic figures say it is only worth about .03 cents USA?

Don't you always wonder what the government is really saying, when they announce those complicated balance sheets and fiscal reports? Can you figure things out more simply? We know it is only human nature for politicians to lie and put the best face on things and bureaucrats are no stranger to this phenomena either. What really is the state of the economy of Belize?

One of the ways of guaranteeing an official exchange rate, is like one of those one armed bandit gambling machines. They work on percentages. They only permit a certain amount of people to get their money exchanged. In Belize, this is done by foreign exchange permits, bank commissions and a host of rationing and control regulations by Central Bank that control the flow of foreign exchange. Sort of like the machine that will only pay out a certain number of times when you gamble.

In reality, a dollar currency, in which the exchange rate is guaranteed usually also has what they call a dollar standard. A dollar standard in Argentina currency has to have as much USA dollars in foreign reserves, equal to the amount of Argentine currency in circulation. This is not the case in Belize. In Belize, the official exchange rate is done on FAITH, like your local religion. You have to believe in the exchange rate.

If the Belize dollar official exchange rate, done on religious FAITH, were backed by a dollar standard. What really would we have economically? We know the annual government revenue runs between $280 million to $380 million Belize currency. We also know that the Foreign National Debt is somewhere between $900 million and $1200 million Belize dollars. If you take an average of $330 annual revenue and an average of foreign debt of $1050 million and add them together, we get a figure of $1380 Belizean million currency. This should then be the amount of Belizean currency in circulation. We don't know actually how much money is printed in Belize and is in circulation. But that number of $1350 million Belizean sounds fairly accurate. We also know from a recent government press release of last week, that they only have $28 million USA in reserves.

At the official rate of exchange, the actual foreign reserves should be $675 USA millions. But we only have $28 million USA, so we are not using a DOLLAR STANDARD like Argentina. Even allowing for some juggling with the figures, it is still going to come out with more Belizean money being printed and in circulation than we have backed by a Dollar Standard with foreign reserves.

Normally, we would call this inflationary. That the Belize currency is severly inflated. The only real solidity in this economic picture, is that the Belizean public believe in the Government official rate and have religious FAITH in the PUP to make good on the inflated official rate. Unfortunately, foreign lenders to the government of Belize do not have the same FAITH. They insist on being paid in foreign exchange, not in Belizean currency.

What this tells us about the economy, is that the government needs to save more foreign exchange in the reserves. Belize needs another $647 USA millions in our foreign reserves.

Hence, when the Education Department is planning a 10 year program of investing, a minor trickle of money in new schools and classroom building per year at the rate of $8 million Belize dollars annually, we don't have the money ourselves. So they borrow it from the World Bank to the tune of $80 million Bz. Why would the World Bank lend money to Belize to build schools if the money is so inflated? Well, they are going to insist that the money be paid back with interest in FOREIGN EXCHANGE. They are not interested in your Belizean currency. To make sure inflation doesn't get any worse, they are putting all kinds of strings on the loans and spending. What the World Bank does and IMF does, is figure what the GROWTH RATE is for Belize. This is why Musa and Fonseca are trumpeting in international forums that Belize has a 6% GROWTH RATE and project a 10% GROWTH RATE. If you use the GROWTH RATE as an indicator, it means the total annual government revenues are going to increase each year for the foreseeable future by that same amount. So, there will theoretically be some money to meet the interest payments, if not the principal on the loans. Of course, the kicker in all this, is you keep your fingers crossed behind your back when you sign those loan agreements. You wish and pray for no hurricanes hitting Belize during the next ten years. You pray and wish for sugar prices to go up. You pray and wish for some new industry to come into Belize to provide revenue and diversificiation. Praying is a bit like working with those one armed bandit slot machines. It's a gamble!

One interesting rough calculation is that at the current average government annual revenue, just paying back the loan money now outstanding from tax revenues as they stand right now this date of late May, 2000; it will take around 24 years and more, to pay back what we currently owe as a people, the loans the government has taken in your name.

There is also the fact, that theoretically the U.K. Will write off some loans if they fit poverty program investing. Now that our famous Peer of the Realm has fled Belize for Turks and Caicos and English politics and citizenship, the U.K. Just might give some debt forgiveness this year for fighting poverty programs. I suppose the house building can be called poverty programs, since the Belizean middle class are a lot lower than those in the U.K., for services and gadgets and comforts of an industrialized temperate zoned climate country. Anyway, poverty is what they are selling in Belmopan. Of course the U.K., poverty write offs last year on the loans we owe, were cancelled by the U.K. Supposedly, because of our fancy bi-national local bigwig investor, playing in the politics in England. So again, a little praying and keep your fingers crossed.

It is not clear if Taiwan will write off any loans, but you never know? Something could happen! Theoretically, once the mortgage scheme goes into action in a year or so, the Taiwanese loans will get met by mortgage sales to Barbados, whoever buys the secondary mortgages. So, the PUP are probably on the right track here with some of the Taiwanese loan money. The catch if any, is going to be changing Belizean currency mortgage payments into U.S. Dollars. Without adequate foreign reserves that is a nitty gritty point. It is hoped increased tourism will bring in more US dollar exchange and maybe, just maybe ,somebody in the government will actually put the money in foreign reserves and not spend it on something else. We are after all fighting inflation here. Trying to make the real value of the Belizean dollar now around .03 cents USA, actually be worth the official rate of .50 USA cents.

You will know when we have arrived as a country of stability and economic strength in the world, when the foreign reserves are more than the actual Belizean currency in circulation. When the Belizean dollar is not only actually worth the .50 USA cents, but may actually be worth more than the US dollar. Like in the Bahama's, Cayman Islands and Switzerland as examples. Then Belize will have really arrived!

Good article BUT written before or while PUP looted the country.

Suggest you continue having FAITH but plan as if a devaluation might occur.

Short, they valued the Belize dollar by one accepted economic formula. The problem with that is, it is in theory only. The only true valuation of a currency is what it is traded for on the international market and the Belize dollar is not. Belize will have to go to a currency that is accepted on the international market when the reality sets in that the country is bankrupt and it's currency is basically worthless. Again, this will be vary painful for Belizeans who's assets are Belize dollars, but will benefical in the long run for those who survive.

PS: the article mentions Argentina. I won't go into all the details, but for those interested if you look at what happened in Argentina you will see parallels to Belize and what will eventually happen. Argentina had a corrupt, inefficient goverment with a large national debt in relation to its gross national product and ability to pay. It pegged it's currency to the US dollar as a stop gap measure, but the crisis happened and now they are in the recovery with a currency that is traded and backed with US dollars reserves.

So that's what you do while in Argentina, you study economics?

Actually what I do in Argentina has contributed to their economic recovery.

Very true, very true indeed.

Bywarren.....you know the POSSIBLE value of US$ denominated bank accounts in a devaluation...didn't want to mention this before.

Not sure I understand your question.

Hey By, You don't understand that comment?

Bywarren, we have discussed this subject before, and you know we have similar ideas; but ever since I have been searching for a reason why things are the way they are in Belize. When foreigners come to Belize they always think they know everything better than Belizeans. Only after years, those who remain have to admit that Belizeans outsmart them, and lessons can be learnt here. What works anywhere else in the world doesn't always work in Belize.

We agree that the value of the Belize dollar is make believe; don't look at the economic formula, but at the story behind it. As long the Belize people have faith in the Belize dollar, it will be used on the local market in Belize, no matter what the value. The Author wrote: "The only real solidity in this economic picture, is that the Belizean public believe in the Government official rate".

Don't we already have a currency that is accepted on the international market; the US dollar? There are no foreign transactions in Belize dollars. Real estate, construction, hotel rates and most services here on the Island are already priced in US dollars. That what isn't priced in US, will, as Chris said be adjusted accordingly in about 30 minutes after the announcement of devaluation, so is there really a Belize Dollar?

Devaluating the Belize dollar or abandoning it is committing political suicide; everybody knows that. The day after December 31, 1949 when Governor Sir Roland Garvey passed the devaluation, on New Years Day, the PUP was born; it took the Belizeans a few more decades to become independent, but the devaluation was never forgiven.

The Belize Dollar really has nothing to do with the national debt; it is not collateral; and it is not the reason of this debt. In free currency exchange, the automatic adjustment of the rate will speed or slow the economy, but not here, as we have a government controlled rate, and not a free one; and more it is based on the US dollar, so it will go up and down with the US dollar.

Argentina is an entirely different country than Belize; it has got almost 40 million people, Belize has less than 300,000 - need I say more? All Belize inhabitants and the whole economy fit in an average sized city in Argentina - there is no comparison. I am not too sure that the US dollar will work out too good for them on the long run either.

Supposing that tomorrow morning the GOB announced a program to take all BZ$ out of circulation and replace them with US$ at a 2 to 1 rate. What would be the end result? Would anything change?

Bywarren......
A few years ago...beginning of this century..the Argentian government reneged on its promise to pay the holders of US (foreign) denominated bank accounts. They froze them for a while...months...and eventually let the owners take the monies out at a much reduced exchange value in local currency.

The country is still recovering from that mess. I don't remember the exact details...just the concept.

You are correct. All funds in the banks were frozen. A good friend of mine was kidnapped because they thought he had money outside of the banks and they demmanded ransom. He eventually convinced them otherwise and was let go.

Short, my comments concerning Argentina are that there are very similar circumstances. The size of the country is not relevent. The amount of the debt and ability to repay is the problem. Argentina's debt was much greater than Belize's. It is just my opinion that Belize will follow a similar course as Argentina to recover.

Gringostarr......for a conversion to a US$ based foreign exchage system...there would have to be a definition of how much US$ would be kept by Belize as a reserve to support the new currency. It would have to be a hefty percentage.

That seems to be the problem in that they don't have the reserves to cover their current shortfall and pay their US$ denominated debt.

Bywarren.....I agree that there should be a devaluation.

Gone thru devaluations in Brazil, Mexico and Venezuela. Also was caught when US devaluated the US$ under Nixon while in Spain. The conditions are right....especially when the govt says it won't happen.

As I said in previous messages....the smart money has already left Belize or is on its way out.

GBZ39, "Gone thru devaluations in Brazil, Mexico and Venezuela. Also was caught when US devaluated the US$ under Nixon while in Spain".....just unlucky or are you a jinx?

Bywarren, what do you do in Argentina?

I just enjoy the country. Great steaks and wine. Do some bird hunting and sight seeing. Checking out Antartica in Feb.

PS: GBZ39, you can also add to your comment "As I said in previous messages....the smart money has already left Belize or is on its way out". That the money stollen by the politicians has left.

Jinx.....when you're in international business and employed by a large firm you go where you are told or where the action is.

In my youth the action was where there happened to be devaluations. One of the deals in finance was to try and minimize the effect.

That is what I'm trying to convey here.....

Isn't there talk of having all CARICOM countries using a common $$ like the Euro system in Europe? How will that affect things? Or is it too far in the future to make a difference to Belize now?

there is certainly talk along those lines, how that would change things is beyond my pay grade.

It sure wouldn't do anything towards bailing Belize out of the huge hole its in.

didn't a lot of the smaller countries in europe suffer a little (or a lot) b/c of the change in currency??? so if it did it would prob affect belize in a similar manner!

Read the latest IMF report....IMF Concludes Annual Article IV Mission to Belize ....in this forum.

Traditionally, the more strongly politicians deny what it is suspected they may do, the more likely it is that they will in fact do it. Not that it'll do any good - I'm with Chris on this one.

I'm also with GPZ39 on his analysis of why Belize is in this mess. The fact is that the GNP of a country with such a basic economy is going to be very low, and the total wealth produced by a population of only about 1/4 million isn't going to be a lot. Yet reports suggest large amounts of US$ have been stolen from who knows where by certain politicians and their wives, in quantities that amount to a great deal per Belizean. How come this isn't a criminal offence, or is it that it is and the judiciary has been too corrupted?