Dr. Honohan: Devaluation never works

INTERNATIONAL Economist, Dr. Patrick Honohan, has dismissed the notion that devaluation of our country’s currency will lead to economic improvement. He also said that dollarisation is not a remedy either.

Speaking during the Caribbean Economic Forum at the Grande Salle of the Tom Adams Financial Centre, Central Bank of Barbados (CBB), Dr. Honohan noted that devaluation as a policy tool never works, and very often results in a country losing its competitiveness.

Dr. Honohan said that once the policy has not worked, overspending again by a government tends to resurface. Therefore, he contends that every country must assess what public policies need to be addressed.

He is the Fourth Distinguished Visiting Fellow at the CBB. He is also a former Governor of the Central Bank of Ireland and was in office when Ireland went through one of its worst economic crises as a consequence of the global meltdown.

He said it seemed to him that whenever a country has a problem, the idea of a currency devaluation comes to the fore with persons suggesting that it would be an ideal policy to assist the country in dealing with its economic challenges.

The Economist maintained that the pattern of a devaluation is not constructive. He argued that devaluation seemed never to get it right and that just one devaluation leads to another and another.

The idea of Barbados devaluating its existing currency peg with the United States dollar has been spoken about for some time and with some commentators suggesting that Barbados go that route to deal with problems in the economy.

On dollarisation, which occurs when a country adopts the US dollar, Dr. Honohan said that dollarisation does not work forever. He drew reference to Argentina, which had an experience with dollarisation through a currency board arrangement, and concluded that it did not work.