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Momodou
Denmark
11634 Posts |
 Posted - 16 Oct 2007 : 22:37:20
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Economics Is A Science; Lets Look Before We Leap
By Suwaibou Touray
First and foremost, the Dalasi was pegged to the British Pound since independence and it had been re-valued sometime in the late 1970’s because of the strength of the British Pound.
The pound sterling is always strong because a huge deposit of gold that Britain had accumulated has been backing it since from her imperial days. The gold is historically used as a medium of exchange in trade and this is why it is used as a valuable commodity to back or serve as guarantor of currencies because the value of the gold hardly depreciates.
This is precisely why many currencies are being backed by gold. The problem with our currency is that it is not backed by gold anymore, since it has been detached from the pound sterling in 1985.
The development of economic science had made it easy so that now the Central Banks in developing countries do not have to hold actual gold for Dollars worth. All that was required is confidence in the currency .So if a country cannot buy Gold to back its currency, it can achieve confidence by utilizing its currency to buy the currency of strong economies such as Britain (the Sterling) which is backed by Gold or the US Dollar which is popular in International reserves because of the domination of the US over the World economy and ofcourse the fairly stable history of its currency. Their currency is also strenghtened by the buying of US Treasury Bills that can easily be converted to Dollar denominated Assets.
According to the Secretary of State for Finance, the Gambia is paying its debts from the Central Bank reserves. In most cases, developing countries have only three to four months import cover just in case there is an emergency problem such as a disaster etc. Reserves help countries to manage the risks they face, and it builds up confidence in both the country and its currency.
In economic terms reserves form a buffer against un- expected changes in the cost of debt by an increase in interest rates. Reserves can also be used to manage the exchange rate. Without Reserves the exchange rate can fall, often quite dramatically, as speculators seeking profit or what they called currency manipulators sell a country’s currency.
According to researchers, instability in exchange rates can lead to enormous economic instability. It has also been discovered that if a country engages in what they called countervailing; i.e. buying the country’s currency when others are selling the country’s currency when others are buying –Government can stabilize the exchange rate and thereby stabilize the economy.
Mark you, this can only be done by selling dollars to buy the local currency if they indeed have adequate reserves to sell .The danger in this is that if you use your limited reserves in Dollars to buy your own currency and should there be an emergency it can have a serious negative effect leading to economic crisis.
So as you know by 1986 it was felt by the government at the time that the Dalasi was over valued and therefore found necessary to effect what they called a fundamental reform of the foreign exchange system in order to induce efficient allocation of resources. As a result, the Dalasi was floated through the introduction of a flexible inter-bank system.
According to the government, one immediate result of this measure was the curtailment of a thriving “Black market” in foreign currency, so that the margin in exchange rates between the “Black market” and Commercial Bank rate could be narrowed.
Since the Dalasi is not backed by gold, it can be made strong only by one of three ways. 1. The Gambia must make effort to produce raw materials as such as groundnut in good quality and in large quantity. This can also be transformed into value added products leading to the production of more commodities for export.
The Gambia also produces cotton, this can be ginned and subsequently transformed into cotton wool, clothing etc, which can be exported to other countries to generate the much needed foreign exchange.
The country is also blessed with the ocean. If we are serious about the development of our economy, the ocean can be utilized as a springboard to generate immense resources by investing in this sector. Fish and fish products are required everywhere in the world. So if we adequately invest in this sector, it can employ quite a large percentage of the citizenry as well as generate foreign exchange. It is these wealth and resources, which go to back the Dalasi and thereby make the economy not only stable but to grow as well.
It is the resources and wealth of the European countries, which are terribly needed by the world that we have to buy the Euro to buy those merchandise. Similarly it is the merchandise produced in the Gambia that must attract outsiders to buy the Dalasi in order to get those goods. The interesting thing is that despite the fact that the Dalasi is not guaranteed by gold, despite the fact that the main foreign exchange earner groundnuts and cotton have not fared well in 2007 and the impression given to was that there is too much foreign currency in stock which is not needed by anyone since there is no scramble over the Euro or dollar. Therefore their rates have depreciated against the Dalasi. The other interesting thing is that the Dalasi is appreciating against not only one but all the other international currencies. This is what baffles many people.
Well, the Dalasi can have periodic appreciation against other currencies if other currencies fluctuate. For example, the Dollar has fluctuated recently because the interest rates in America had gone down, reducing the scramble for the Dollar. Other countries can also reduce the power of their currencies so as to encourage business between them and other countries as it was done with the Euro sometime ago. Right now the Euro countries are contemplating as to whether to reduce the strength of the Euro for the second time to facilitate trade between them and other countries. When that happens, smaller currencies can appreciate against it.
Secondly, Central Banks or governments can re-value a currency and peg it upwards just like they can devalue it. If they revalue it, it means the value has gone up. For example, the value of D5 would be equivalent to D4 and what D5 used to purchase, D4 would be able to acquire that, and so on. Revaluation however should not be done without the proper assessment of the economy, just like the sort of assessment done to devalue the Dalasi in 1986. Law should back this type of revaluation or devaluation.
It is however highly unlikely as some opinions suggest that commercial banks may have a lot of foreign currency in stock that is the reason why they are not willing to buy foreign currency. The lack of foreign currency was what led to the high price of the Dollar and the Euro. How will the banks be stocked with foreign currency when the export volume of the country is at an all time low? However, we cannot discount it because of the International Bank secrecy laws. They may do so just to avoid bankruptcy So as you can see the only two possible methods to stabilize the exchange rate in the absence of exports is for the Central Bank to utilize its reserves in Dollars to buy the Dalasi when people are selling it or to sell it when people are buying it. The other method, which is unconventional, is for speculators to bring in huge amounts of foreign exchange and buy the Dalasi when people are selling it or sell it when people are buying it just for the sake of profit making. It however remains to be seen how there can be a strong macro-economic stability without exporting our cash crops and investing in the productive sectors of the economy so as it stands it is very important that our economists undertake to study our economy, which appears to be volatile, so as not to venture into non- conventional methods, which may not be sustainable in the long run by resulting to things such as capital flights or reduced investor confidence.
Mark you; Gambia has to pay debts due for repayment and that too must be paid in foreign currency not in Dalasi. We are a Highly Indebted Poor Country (HIPC) which has taken loans from left, right and center .As a result of the IMF conditions we will not be able to meet the basic needs of the citizenry and will not be able to make the necessary investments which we must do if we are to grow out of this poverty trap. So let us look before we leap or else we will falter.
According to Stiglitz, the debt relief sought by HIPC countries is done in ways that detract a country from acquiring other sources of assistance. According to him debt relief was a powerful tool for the IMF to compel such countries like The Gambia to go along with almost anything it demanded. According to him some type of debts are incurred by Governments that are either not democratically chosen or are civilian dictatorships, and the borrowed money may even have helped a brutal regime to stay in power.
Researchers also noticed that some lenders do give loans to countries either for political reasons, such as to buy economic favour to gain access to rich mineral resources or to gain support in the UN general Assembly, etc.
So as Stiglitz asserted, it is even immoral to force the people of those debtor countries to pay such debts.
Source: Foroyaa Newspaper Burning Issue
Issue No. 120/2007, 12 - 14 October, 2007
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A clear conscience fears no accusation - proverb from Sierra Leone |
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