Since 1976 Belize has maintained a fixed exchange rate of Bel $2 per US $1. So, I pose the question, how much longer can Belize maintain a fixed exchange rate given the government's mismanagement of the country's macroeconomic situation? Briefly, to sustain a fixed exchange rate a country must be willing to buy or sell its own currency with foreign reserves (in this case the US dollar). This is feasible if the costs of traded goods and services in Belize increase at about the same rate as those in the US, in which case the current account would generally be in balance over time so that only small purchases or sales of Belize dollars would be necessary to avoid pressure on the exchange rate. Official figures suggest that the rate of inflation has been very modest in Belize. As I explain below, there are reasons to be skeptical of the official inflation figures. Note: According to the CIA World Factbook, the US is Belize's most important trading partner, accounting for over 30% of exports and imports in 2009.
But, according to the Central Bank of Belize Statistical Digest 2009, Belize has had annual current account deficits, often large ones, since 1996. Before 1996, the current account was usually in deficit although in a few years there were small surpluses. Essentially, this means there are lots of Belize dollars floating around in the foreign exchange market. It seems unlikely that Belize is such an attractive place for private investors that these Belize dollars are reinvested in the country, at least for such an extended period. Of course the US has been able to maintain large current account deficits precisely because foreign investors have been, and apparently still are, willing to invest in US assets; hence the huge holdings of US government securities by the Chinese government. As Belize is a former colony of Great Britain, perhaps the British government is buying the Belize government's debt thus helping to support the fixed exchange rate?
The price level data reported by the Central Bank of Belize seem to be at odds with the relatively rapid rate of money growth in the country. Briefly, there is a strong correlation between inflation and the rate of money growth so that rapid money growth generally leads to rapid price level growth, i.e. inflation, which the official figures do not reflect. Belize has certainly been creating money; between December 1989 and December 2009 the money supply (M1) has increased at an annual rate of 10.38%. For comparison, the rate of growth of the US M1 money supply has been 3.88% annually over the same period. Consequently, one would expect a higher rate of inflation in Belize than in the U.S., but this is not shown in the official inflation data. How can this be?
It could happen if price increases are kept artificially low by government decree, that is, there are price controls in the economy. Of course it could also happen if the Belize economy were growing very rapidly (comparable to the Chinese economy in recent years), but this is clearly not the case. If price controls (a bad policy in itself) are not maintaining an officially low rate of inflation, then I suspect the price level data in Belize are understated. Governments such as Argentina and Greece have clearly manipulated (putting it charitably) the economic data they report, it is certainly within the realm of possibility that Belize has done so as well.
Anecdotal evidence also suggests that the price level in Belize is relatively high. Every weekend, many residents of Belize visit the supermarkets of Chetumal to make their purchases. This phenomenon began well before the depreciation of the Mexican peso (fall of 2008) made goods and services bought in Mexico even more of a bargain for Belize shoppers. The CIA World Factbook indicates that Mexico was the source of more than 14% of Belize's imports, second only to the US in terms of imports.
So, what does all this mean. Simply that, if it continues along the path of the last 20 years or so (rapid money growth, fixed exchange rate), prices in Belize will continue to rise more rapidly than those of its major trading partners and competitors (in terms of exports) in world markets. Current account deficits will continue increasing. At some point, speculators will start attacking the Belize dollar. So, I conclude the blog with a partial answer to the question I posed at the beginning of the blog. I don't know how much longer the Belize government can sustain a fixed exchange rate, but the fixed rate regime is clearly unsustainable. If current policies continue (a likely prospect, I think), then a devaluation of the Belize dollar is coming along with all the problems associated with a sudden, large change in the exchange rate.
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