Tandara: Depreciation, Debt and the Adjustment Programme

The Marshall-Lerner condition. A depreciation improves the current account only if the sum of the price elasticity of demand for imports and foreign demand for exports exceeds 1. Here the sum is 0.7 in the short run and 1.6 over three years, so the effect changes sign over time.

Short run. With a sum below 1, export volumes rise proportionally less than the foreign-currency price of exports falls, so export earnings may decline; import volumes fall little while import prices in domestic currency rise, so the import bill rises. The current account therefore deteriorates - the downward phase of the J-curve. Contracts, habits and long delivery lags explain the low elasticities.

Three years. With a sum of 1.6, volume effects dominate: export volumes and import substitution rise enough to improve the trade balance, and the current account improves, provided the depreciation is not reversed by domestic inflation.

Tandara-specific complications. Copper and coffee are commodity price-takers, so exporters may accept lower dollar prices rather than expand volumes much, weakening the export channel; most of the gain may come from import substitution, which requires spare domestic capacity. Inflation of 11%, driven by imported fuel and fertiliser, erodes the real depreciation: if domestic costs rise faster than trading partners', competitiveness is lost and a nominal depreciation buys little. Because 80% of external debt is dollar-denominated, the 18% depreciation raises the domestic-currency value of debt service and the debt/GDP ratio, worsening the fiscal position and potentially forcing a contraction that offsets the trade gain.

Conclusion. Expect a short-run deterioration, a medium-term improvement only if inflation is contained and elasticities materialise, and a simultaneous deterioration in the debt and fiscal position - which is why depreciation alone is not a sufficient adjustment strategy.

Case for the cut. It is expenditure-reducing as well as expenditure-switching: it lowers import demand directly, reduces the fiscal and current account deficits, and helps rebuild reserves from a thin 2.8 months of imports. Creditors are likely to require it as a condition for new financing or rescheduling, and a credible programme lowers the risk premium and hence debt service. It also reduces demand-pull inflation. With a simple multiplier near 1, cutting 3% of GDP reduces output by roughly 3%, which is a predictable consequence rather than a surprise.

Case against. The cut is pro-cyclical and hits an economy already weakened by falling copper prices and rising inflation: unemployment and poverty rise, and spending on health and education falls, damaging long-run growth and human capital. Public sector wages have already fallen in real terms for three years, so further compression risks unrest, strikes and emigration of skilled workers - a permanent loss of potential output. A uniform 3% cut also treats productive and wasteful spending alike.

Composition matters more than the total. Removing untargeted fuel subsidies, which benefit richer households most, raises revenue with less harm to the poor than cutting primary health care or school funding. Protecting capital spending preserves future growth, though it reduces the short-run multiplier least.

Alternatives and sequencing. Revenue measures - copper royalties that rise with prices, broadening the VAT base while protecting essentials - a negotiated rescheduling or debt relief to cut dollar debt service, and phased consolidation of perhaps 1.5% of GDP a year over three years, are preferable to a single 3% shock. Targeted cash transfers can protect the poorest during adjustment.

Judgement. Some fiscal consolidation is unavoidable given the reserve position and the need for creditor support, but the timing, size and composition determine whether it works. A front-loaded 3% cut risks a downward spiral in which lower output reduces revenue and worsens the debt ratio; a phased, well-composed programme backed by external financing is the better recommendation, with the sequencing stated explicitly.

The problem the plan addresses. With copper at 68% and coffee at 19% of export earnings, Tandara's income, fiscal revenue and exchange rate are hostage to two volatile prices. Export concentration also means the Marshall-Lerner condition is slow to hold, because there is little non-traditional export capacity to expand when the currency weakens.

Benefits. Processing coffee raises value added per kilogram, creates higher-skilled jobs, and reduces exposure to raw-commodity price swings; tourism earns foreign currency, is labour-intensive and has a high income elasticity of demand, so it grows with world income. Both broaden the export base, improving the economy's ability to adjust to shocks and reducing the long-run tendency for a commodity boom to appreciate the real exchange rate and squeeze other tradables.

Costs and risks. The plan needs capital, skills, reliable power and transport, and institutional quality that a low-income country may lack. Five years is a long horizon compared with an immediate balance of payments crisis, so it cannot substitute for short-run stabilisation. Tourism is itself shock-prone (security, pandemics, travel costs), often creates seasonal low-wage work, and can impose environmental and cultural costs. Processed coffee may face tariff escalation in destination markets. If the projects are foreign-owned enclaves with imported inputs, the balance of payments gain is much smaller than the gross export figure suggests, and the economy may simply swap one dependence for two narrower ones.

Conditions for success. Macroeconomic stability (single-digit inflation), credit for small firms, education and vocational training, trade agreements giving preferential access, and anti-corruption safeguards. Funding should come from concessional external finance rather than from cuts to current health and education spending.

Judgement. The direction is right - the underlying problem is structural, and no combination of depreciation and spending cuts creates new export sectors - but the plan should be reframed as a staged diversification strategy with measurable milestones, a protected social safety net, and explicit sequencing behind the stabilisation programme. It complements, rather than replaces, short-run adjustment.