Since the introduction of value-added tax (VAT) in The Bahamas in January 2015, there has been some turbulence. This is as expected for a new initiative, one that places an additional cost on goods and services. One can only hope that, with this additional cost to Bahamians, there would be additional revenue and spending reforms placed on the government. The information or proof of movement towards greater fiscal responsibility has been a little dodgy, to say the very least. But, let's trust and verify that these reforms will be delivered as promised.

What came as a result of VAT's implementation was something very extraordinary, something that I did not expect to be brought into the debate post-implementation. Persons began making statements pertaining to the valuation of the Bahamian dollar, claiming that the Bahamian dollar is worth 7.5 percent (or cents) less after VAT implementation. Of course that's not how it works. That's not how any of that works. It didn't stop people from saying it, and most likely won't stop people from thinking or feeling that it may be the case. But, let's try to discuss the importance of the valuation of the Bahamian dollar and by extension, the fixed exchange rate's usefulness at this time.

Just coincidentally, over the last week or so, discussions about the exchange rate and its usefulness was brought up in a very heated debate in the House of Assembly during the mid-term budget debate by two back-bench parliamentarians from the governing party. On one side, pro-fixed exchange rate, was Ryan Pinder, MP for Elizabeth and former minister for financial services; and on the other side, Dr Andre Rollins, MP for the Fort Charlotte constituency.

Through this I began to think, and harkened back to the notion that the Bahamian dollar would be devalued by the VAT, and at what risk would it be devalued, whether on purpose or not, and how this almost means that a discussion on the fixed exchange rate system needs to be undertaken, and undertaken in the proper way.

I'm more than receptive to the idea of removing the fixed exchange control. It's something that should be in serious consideration at this time in our country's development. How we go about doing this and to what extent it happens is up for debate.

For the most part, persons in favor of keeping the fixed exchange rate hinge their rationale on two main tenets:

1. Removing the fixed exchange rate would lead to a direct devaluation of the dollar; and

2. There really is no need to remove the fixed exchange rate.

Let's examine the first point. Removing such a peg will in fact devalue the local currency against the currency it is pegged to, for example the Bahamian dollar versus the U.S. dollar.

How does this happen? It's quite simple. The U.S. dollar is the universal currency that is used to settle payments worldwide. Despite some competition from the Euro and to some extent the British pound, the USD is the new "gold standard".

Countries try to make payments and use the U.S. dollar in international trade and exchange because the U.S. dollar is strong, universally accepted and in frequent supply and demand. However, this automatically means that all other smaller nations’ currencies are of lesser importance and to a significant extent of lesser value than the U.S. dollar to begin with. So, before we speak about the merits of valuation and devaluation, we need to begin from that premise and understanding.

How is a nation's currency valued? Well, there are two main factors. The first is that a currency is valued is based on the macroeconomic perspective of trade and exports minus imports, or in other words the balance of trade and the differences in the current account.

When exports are higher than imports, this affects the value of a currency through the exchange rate by signaling that a country's goods and services are worth more than what they import. In The Bahamas, this is the exact opposite, or so it seems.

From the information that trading economics has compiled from reports from the Central Bank of The Bahamas, The Bahamas recorded a current account deficit of US$533 million in the third quarter of 2014. The current account in The Bahamas averaged US$309.34 million from 2005 until 2014, reaching an all time high of US$49.20 million in the first quarter of 2010 and a record low of US$533 million in the third quarter of 2014.

The methodology of balance of payments; i.e., current account balance, is slightly outdated. Glaringly, the balance of payments neglects the impact of tourism receipts on exports. Tourism is now and should be defined as an export, as per the World Centre of Excellence for Destinations (CED) in conjunction with the United Nations World Tourism Organization.

With tourism accounting for 60 percent of GDP in The Bahamas, which at any given year hovers around $5 billion worth of value annually, with an average of $2.5 billion in actual tourism receipts since 2012, considering all of new information, The Bahamas is accounting for a balance of payment surpluses year-on-year.

Be that as it may, the fundamental point for one side of a country valuing its currency is based on the balance of trade. The second fundamental determining factor for valuing a currency is with regard to capital inflows.

Capital inflows, quite directly in the Bahamian experience, almost solely means foreign direct investment (FDI) for major projects that require land and human resources for construction and development, in addition to other receipts from sovereign bond issuances. Countries that have balance of payment deficits, but not exclusively, follow a capital inflow or a "FDI" based growth model for development, for obvious reasons.

Because of the current prevailing notion on the balance of payment deficits and as that relates to capital inflows/FDI, policy makers, most likely, feel there is no need to tinker with things if removing the exchange control carries with it the psychological damage of currency devaluation and thus the self enforcing notion of the second point with regard to persons seeing no need to tinker with exchange rate in the first place.

To further bolster the position on at least thinking along the lines of considering models and methods in which to relax exchange control, we must take into consideration several things now:

1. The balance of payment methodology used by the economic establishment is outdated;

2. Rejecting a change, off the top, for psychological reasons associated with currency devaluation, is meaningless considering the fact that when compared to the U.S. dollar, almost all other currencies are meaningless because settlements are almost always denominated in U.S. currency;

3. Not having a concerted effort with regard to bolstering foreign reserves has not worked well in the past and targeting a foreign reserve quota per quarter would be more helpful;

4. International payments and trade is denominated in U.S. dollars, and even the Euro-Zone and the ASEAN and APEC zones, even with the prevalence of the Euro, British pound and the Chinese Yuan, still use U.S. dollars predominantly and especially when they are doing business with North American, Latin American and some European countries;

5. The current thinking and rationale on keeping the exchange control, based on the outdated balance of payment methodology, and also based on the fact that now devaluing the currency would make production for export cheaper if we take into consideration that tourism is an export, only if in services; and

6. While imports would be more expensive, it also means exports – including tourism – would be cheaper to produce relatively speaking and that would mean more U.S. dollars to spend with local shops and venues.

The value as determined of what we pay for imports is inconsequential because our major exports are service related and not manufacturing based and also because The Bahamas imports “inflation" from the U.S., primarily.

Even with regard to inflation, as The Bahamas is a “price taker”, increasing the Bahamian dollar supply would not necessarily indicate a decrease in value once U.S. dollars are still being brought into the country via tourism, primarily, and also by capital inflows once brought in as U.S. dollars or another convertible currency that can be held in foreign reserves as already is the norm. An additional best case scenario would be to allow simultaneous U.S. dollar accounts with Bahamian dollar accounts.

The operative term is "value", and not in a dollar for dollar or monetary sense, but value in terms of the quality and value of life and living in The Bahamas.

For example, while the U.S. dollar is trading at $1 for every 0.88 in Euros, can we with certainty say that every country in Europe has a better quality of life than America?

The UN's Human Development Index (HDI) states that the United States has the fifth highest HDI with Norway at #1, Australia #2, Switzerland #3 and the Netherlands #4. Conversely, for the Australian dollar, you would need $1.28 for every US dollar. Are we to say that Australia is doing more poorly qualitatively speaking because of their lack of equal parity with the U.S. dollar?

As it stands now, with the latter issue of imports requiring U.S. dollars in any event, if we move away from exchange control and it results in currency devaluation based on the old methodology for balance of payments, a devaluation that really would be normal under any circumstance when faced with the obvious fact that the U.S. is the dominant economy in the world would not make much difference when the quality of life is the ultimate goal and not necessarily keeping exchange controls for superficial reasons.

The considerable reliance on customs duties that has now started along the process of being replaced by VAT would still make thinking on the possible benefits of moving away from exchange controls fruitful even at this stage.

• Youri Kemp is president and CEO of Kemp Global, a management consultancy firm based in The Bahamas. This article was published with the permission of Caribbean News Now.