As a perpetual student of economics, I am often utterly disheartened when economists and/or economic scholars of sorts—fail to utilize applied economics—to economic and public policy issues in Guyana’s context. Instead, as I observed, they opt to regurgitate textbook/conventional theories in their attempts to explain real life, pragmatic issues. It is a very unscholarly behavior, hence, emphasis on my expression of disappointment. In this regard, reference is made to Terrence Yhip’s letter in the Stabroek News edition of April 16, 2025, titled “look into the root causes of US$ shortage”.

Therein, Yhip dedicated the aforesaid essay in response to my contribution on the subject published in the April 15, 2025, edition of the Stabroek News titled “Nothing unusual about Bank of Guyana’s US$135M injection into forex market”. Yhip postulates:

“Joel Bhagwandin’s “Nothing unusual about Bank of Guyana’s US$135M injection into forex market”, a thesis of 1,172 words, 1 large table with 56 data points, 2 diagrams, concludes with a rather trite conclusion (which is not even the key issue)”.

Dr. Yhip is certainly correct about my “trite” conclusion because I was not making a new theoretical or empirical argument. I was simply, in response to both him and another economist of sorts, Thomas Singh, two elderly economists’ contention that the Bank of Guyana’s foreign exchange intervention is not unusual, and that it is a normal practice in the conduct of its monetary policy function, as a gentle reminder. Accordingly, to substantiate my argument, I have demonstrated this fact with irrefutable empirical evidence.

Furthermore, it is noteworthy to mention that the learned and respected economist, Dr. Terrence Yhip, did not offer an alternative applied empirical analysis, he did not refute or reject my analysis and the findings thereof, and most of all, he did not refute, challenge or disagree with my conclusion, although he rejected it. Save and except if his rejection therewith is to be deemed an implied disagreement. If so, he would have nonetheless offered a vacuously incredible basis.

Yhip’s proposition that: “it is the real exchange rate (RER) index that matters over the long haul…”, does not add any value based scholastically solution-oriented contribution on the matter. In fact, he forgot to state the rest of the theory, the limitations thereof and the mechanics of the real exchange rate equation. I would have liked to see his own calculations of the real exchange rate index for Guyana, especially coming from an economist of his caliber.

What is the real exchange rate?

The RER is an economic metric that compares the purchasing power of two currencies, adjusted for differences in price levels between countries. Unlike the nominal exchange rate, which shows the direct market value of one currency against another, the RER accounts for inflation and the relative costs of goods and services, making it a more accurate indicator of competitiveness and trade balance.

How is RER calculated?

“The RER of two currencies is the product of the nominal exchange rate (the dollar cost of the nominal exchange Euro, for example) and the ratio of prices between the two countries. The core equation is RER = eP*/P, where, in the following example, e is the nominal dollar-euro exchange rate, P* is the average price of a good in the Euro area, and P is the average price for a good in the United States. In the Big Mac example, e = 1.36. If the German price is 2.5 euros and the

U.S. price is $3.40, then (1.36) x (2.5) ÷ 3.40 yields an RER of 1. But if the German price were 3 euros and the U.S. price $3.40, then the RER would be 1.36 x 3 ÷ 3.40 = 1.2”. (IMF, 2007).

What are the limitations of the RER?

While the RER is a valuable tool, it does have limitations that can affect its practical application. Here are some key challenges (AI generated):

• Data Accuracy: Calculating the RER requires accurate and up-to-date data on price levels and nominal exchange rates. Inconsistent or outdated data can lead to misleading results.
• Simplistic Assumptions: The RER assumes that price indices (like CPI) accurately reflect the cost of goods and services, but these indices may not fully capture variations in quality or the composition of goods across countries.
• Short-Term Volatility: The RER can be highly volatile in the short term due to fluctuations in nominal exchange rates, making it less reliable for immediate policy decisions.
• Limited Scope: The RER focuses on tradable goods and services, often overlooking non-tradeable sectors, which can also influence a country’s economic competitiveness.
• Policy Constraints: While the RER provides insights into competitiveness, it doesn’t account for structural issues like labor market inefficiencies or infrastructure deficits, which also impact trade performance.
• External Factors: Global economic conditions, such as commodity price shocks or geopolitical events, can distort the RER, making it harder to interpret.

Examples of how the limitations of the RER impacted specific countries and policies (AI generated):

• Argentina’s Currency Crisis (1990s-2000s): Argentina’s fixed exchange rate regime pegged the peso to the U.S. dollar, which initially stabilized inflation. However, the RER became overvalued due to domestic inflation outpacing that of the U.S. This reduced export competitiveness and led to a severe economic crisis. The inability to adjust the RER highlighted the risks of rigid exchange rate policies.
  
• Eurozone’s Structural Imbalances: Within the Eurozone, countries like Greece and Spain have struggled with RER misalignments. Without independent monetary policies, these nations couldn’t adjust their RER to restore competitiveness, leading to prolonged economic challenges.

In order to effectively adopt the RER as a monetary policy tool for price stability, certain prerequisites must be met. These include, chiefly in Guyana’s case:

• Flexible exchange rate regime: the theory states “a floating or managed float exchange rate system is essential to allow the nominal exchange rate to adjust freely, enabling the RER to reflect economic fundamentals”. As I have already established in my previous essay on the subject, the empirical analysis presented shows that the exchange rate regime has evolved into a flexible regime, such that the exchange rate is fluctuating within a band range of ±4%. Note that any fluctuation above 1% is deemed flexible.

1. Structural reforms: the theory states that “a competitive and efficient domestic economy is necessary to ensure that changes in the RER translate into real economic adjustments, such as improved export performance”. In this respect, the Guyanese economy is on an unprecedented path of structural economic reforms, geared towards economic diversification and enhanced international competitiveness, with heavy focus on the non-oil economy. Effectively, a transformation that would thereby characterize the economy’s evolvement from a predominantly primary sector producing economy to a services sector driven, value based, tertiary sector economy.

The other prerequisites include: (i) reliable price data for both domestic and foreign prices, (ii) credible monetary policy framework, (iii) an open economy and (iv) coordination with fiscal policy.

With this background in mind, the question arises, as Dr. Yhip posited, what then is the root cause of the problem? If according to the empirical evidence I have presented, we do not have a fundamental problem with respect to macroeconomic imbalances, then what is the issue? That is not to say that we do not have macroeconomic imbalances risks; we do, but those risks, given the strong indicators, are low.

The answer to this key question, however, lies in the ‘efficient market hypothesis,’ which highlights that our financial market is highly inefficient. This is partly the root cause of the problem; a topic I can delve into in greater detail another time, as I have already reached the word limit herein.