The weakening of the US dollar over the last two years and its recent dramatic plunge against major currencies offer the Caribbean tourism industry and Caribbean governments a window of opportunity to prepare for tougher times that lie ahead.

Sir Ronald Sanders

Because many of the currencies of Caribbean tourist countries are pegged to the US dollar at a fixed rate of exchange, the decline in the exchange rate between the US dollar and other major currencies, particularly the British pound and the euro, has made tourism to the Caribbean from Europe more attractive.

Both the pound and the euro can stretch much further than they did before. At the same time, the fixed rate of exchange with the US dollar neutralises the effect on tourism to the Caribbean from the US.

With the exchange rate reaching US$1.94 to the British pound, and expected to slip closer to a rate of US$2, and the Euro (though not quite as strong as the pound) less than three per cent away from the record high that it hit at the end of 2004, tourists from Britain and other European Union (EU) countries can look favourably at Caribbean holidays.

In this context, Caribbean governments should consider putting the windfall foreign exchange earnings from a weak US dollar into a stabilisation fund to be drawn in needy times.
The tourism industry, especially the hotels, also ought to set aside part of the earnings that will accrue from a weak dollar for financing expansion or rehabilitation in the event of a destructive hurricane, or to carry them over difficult periods in the future.

Both governments and hotel resorts should have established such funding mechanisms at least three years ago when Caribbean tourism was the beneficiary of calamities in other parts of the world starting with 9/11, the SARS scare that drove tourists away from the Far East and Canada, the terrorist bombings of hotels in Kenya and Bali, and then the Asian Tsunami in December 2004.

Provided that Caribbean tourist boards are moving immediately to spread the word throughout European countries that their money is now worth much more in the region, European tourism to the region should surge far beyond the months in which the World Cup Cricket competition is being played in several Caribbean countries.

There will be other benefits for tourism and the wider economy. Since the value of the US dollar will not change in the majority of Caribbean tourist countries such as the Bahamas, Antigua and Barbuda, and the British Virgin Islands, there is unlikely to be any drop in the number of US tourists to the region. Equally, since most of the hotel needs, including food, are imported from the US, Caribbean resorts will feel no adverse effect from the importation of US materials.

Most of the Caribbean's visible imports come from the US. Thus, the region's import bill will be largely unaffected.
Exports to the EU, especially sugar and rum, will do even better as the prices are in euros, but the factor costs are in US dollars, so profits will be up.

Capital investment in residential real estate, which is dominated by the European market, has boomed in several Caribbean countries, particularly Barbados, and profits have grown even faster. The increased value of the pound and the euro should also witness a further increase by Europeans in the Caribbean property market, bringing in greater profits for the private sector and bigger tax revenues for governments.

On oil imports, OPEC countries have announced that they will cut back on oil production to try to recoup the decline in their revenues after the US dollar hit a 20-month low against both the euro and the pound. But while the price of oil will rise as a result of the reduction in production, the Caribbean will not face the additional exchange rate costs since oil prices are set in US dollars.

One of the glaring realities of Caribbean tourism that has been exposed by the effect of the weak US dollar is that the Caribbean tourism product is overpriced.
Caribbean tourism became competitive when the US dollar fell in value by some 20 per cent against the British pound in early 2005. This suggests that current prices for tourism into the region cannot be sustained once measures are taken to strengthen the US dollar.

Another reality is that the boost that Caribbean economies are enjoying is not due to any structural changes or to any strategies for diversification. The boost has come from the good fortune of fixing the rate of exchange with the US dollar.
This suggests that a weak US dollar is in the Caribbean's interest, as it may be, for a time, in the interest of the US, giving that country a chance to improve its huge balance of trade deficit.

But the dollar will not remain weak forever. The US current balance of payments deficit is running at some seven per cent of gross domestic product, a figure that the International Monetary Fund would frown on severely in other countries. But the US is the world's biggest, strongest economy, and the dollar is welcomed all over the world.

The dollar will strengthen, and when it does, Caribbean currencies will once again rise against the pound and the euro, causing tourism to the Caribbean and Caribbean exports to Europe and elsewhere to become uncompetitive.

Also, the people who least want a weak US dollar are the manufacturers and other exporters in Europe, Japan, Canada and China. The prices of their exports in the US market have become too high, and US imports to their market too cheap. We can bet that they will be doing their best to ensure that their governments, central banks and others do everything possible to bolster the dollar.

The window of opportunity is therefore very small for Caribbean governments and the hotel industry to create stabilisation funds from the windfall they are earning from a weak US dollar.

Such funds will become an important source of financing projects as more difficult economic times arise.
Sir Ronald Sanders is a business executive and former Caribbean diplomat.

ronaldsanders29@hotmail.com

Trousers in Denim

Cream of the 'Crop'

Cheeky's World