Introduction
As a travel agency, 4D Travel (Dalal’s Deliciously Delirious Departures) plays a crucial role in the tourism industry by providing tailored travel packages to meet clients’ diverse needs and preferences. These packages streamline the travel planning process and offer significant cost savings by bundling essential components such as transportation and accommodation activities. Several exchange rate determinants and long-term factors affect businesses in the economy.
Exchange Rate Determinants
According to the statistics, a 200-euro-per-night hotel room in 2008 would have cost Bahraini dinars (BD)118,040. Currently, these rooms are valued at 200 euros per night, which would cost BD80.140. This denotes that from 2008 until now, the value of the Bahraini Dinar has increased compared to the Euro. Alternatively, today, it takes fewer Bahraini dinars to buy the same quantity of euros as in 2008.
Nevertheless, the exchange rates between two currencies, such as the US Dollar and Euro, are determined by the four determinants of floating exchange rates: political stability, market psychology, interest rates, and inflation rates (Thampanya, 2020). If any of these factors change significantly over time, it could cause swings in the exchange rate, which would affect the 4D Travel business if locked in a price for the client months in advance.
Interest rates refer to the cost central banks charge for loans to commercial banks. When interest rates increase in one economy over another, it can strengthen its currency compared with other currencies; thus, swings in the dollar/euro (and dinar/euro) exchange rate would occur. Similarly, when one nation increases its inflation relative to another, this could create an appreciation of its currency against other currencies, resulting in swings in its value relative to others.
Moreover, market psychology is difficult to measure, but it involves traders’ expectations about the future direction of exchanges. This direction can influence short-term currency movements if investors become risk averse or speculate wildly, buying and selling large amounts of foreign currencies at different periods. This led to changes being locked into contracts with external clients.
The same applies to political stability, which often affects investor confidence, impacting prices (Thampanya, 2020). When more consideration is placed on potential risks than rewards, then a shift will be seen in the cross-border values between the two countries’ currencies. This will lead to, again, potentially huge variations across different timescales, such as exist between day-to-day spot trading and long-term contracts signed months prior that lock into specific quotes at that time period only.
The Euro’s strength depends on how it is priced in relation to the Dinar at the time of the price lock. For example, if 4D Travel locked in a price for a trip at BD 1 to 0.8 Euros, the Euro got much stronger against the Dinar. For instance, say 2 Euros for BD 1, this would mean that 4D Travel is now getting twice as many Dinars per Euro as before. This could be beneficial for 4D Travel’s financial health since it means that travelers purchasing trips from the agency would need to pay fewer Euros than before. On the other hand, if instead, the Euro got significantly weaker – to be 0.6 Euros per BD 1. This Euro weakness could hurt 4D Travel’s financial health because travelers would need to pay more Euros than before in order to purchase trips from the agency.
Therefore, careful consideration must be made when setting prices and locking them in with regard to foreign exchange rates so as not to put 4D Travel at a disadvantage or advantage financially during travelers’ payments. Similarly, in both instances, fluctuations in the exchange rate might have a substantial influence on the financial health of 4D Travel. Suppose the agency does not use financial derivatives such as futures contracts or currency options to hedge against exchange rate risk. In that case, it may incur financial losses or lose out on possible rewards.
Long Run Economic Factors
The core of macroeconomics centers around four primary factors that drive economic growth in the long run: productivity, savings and investment, and government policies. Productivity is a measure of output per amount of input; when businesses and individuals alike become more productive by utilizing their resources to the fullest, it increases economic efficiency and growth potential. Savings and investment are crucial for allocating capital towards higher-yielding assets like stocks or bonds to increase overall wealth. Lastly, government policies can encourage or discourage certain activities within an economy that affect overall growth; these include taxation levels, subsidies, and grants.
In terms of productivity, Bahrain has consistently implemented progressive reforms that have enabled businesses to become more productive. For example, the country adopted a new tax regime that reduces administrative costs for businesses and encourages foreign direct investment into the country. Mogielnicki (2019) supports that “…Bahrain launched the tax at the outset of 2019… economic policymakers have faced pressure to alleviate the burden of the VAT on local citizens” (4).
When it comes to savings and investments, Bahrain’s banking industry is both robust and reliable –many organizations offer innovative products such as mobile banking or online payment systems. Rabbani (2022) mentions that “…in Bahrain alone, 28% of the population use Benefit Pay app and its use has ascended by a 1000%” (582). These systems efficiently streamline finance processing, often at lower costs than traditional services found elsewhere in the region.
In addition, different government bodies created regulatory protections that allow secure data exchange without compromising user privacy rights. These bodies include the Information and eGovernment Authority (iGA)and the Central Bank of Bahrain (CBB) (Al Shehab & Hamdan, 2021). Privacy increases trustworthiness within consumers who know their data remains safe no matter their service provider.
Besides, organizations like Tamkeen focus on supporting SMEs by providing funding programs so they can contribute towards raising business efficiency levels via adopting newer technologies. Thabet(2021) explains that the Chamber of Commerce, Tamkeen, and BDB are the most prominent institutions involved in the Bahraini government’s system of legislation and assistance for SMEs. The purpose of these support systems is to give monetary assistance and training.
One of the most effective policies to improve Bahrain’s productivity and thus elevate its economy’s long-run potential is to invest considerably in training and education. By enhancing the workforce’s skills and competencies, Bahrain can foster a more adaptive and innovative environment for business growth. For instance, investing in vocational training programs, which focus on specific industries like manufacturing, technology, or hospitality, would prepare individuals to be proficient in their respective sectors. Alternatively, nurturing partnerships between academic institutions and local businesses can create a mutually beneficial relationship where resources and expertise are exchanged.
Conclusion
In conclusion, the fluctuations in the countries’ exchange rates can be attributed to a complex interplay of key determinants such as inflation rates, political stability, interest rates, and market psychology. Conversely, government policies, productivity, and savings and investment are some of the long-term factors in the nation’s long-term economic development, which Bahrain has focused on to stabilize its economy. Productivity growth between the countries can lead to currency appreciation or depreciation, while higher savings rates in one region may induce capital inflows, affecting the local currency’s value. Furthermore, government policies can directly influence market expectations, interest rates, and inflation.
References
Al Shehab, N., & Hamdan, A. (2021). Artificial intelligence and women empowerment in Bahrain. Applications of Artificial Intelligence in Business, Education and Healthcare, 101-104. Web.
Mogielnicki, R. (2019). Value-added tax in Gulf Arab states: Balancing domestic, regional, and international interests. The Arab Gulf States Institute in Washington, 1-15. Web.
Rabbani, M. R. (2022). Fintech innovations, scope, challenges, and implications in Islamic Finance: A systematic analysis. International Journal of Computing and Digital Systems, 11(1), 582-590. Web.
Thabet, M. H. A. (2021). The impact of current fiscal policy on small and medium enterprises In the Kingdom of Bahrain. Turkish Journal of Computer and Mathematics Education, 12(9), 3296-3304. Web.
Thampanya, N., Wu, J., Nasir, M. A., & Liu, J. (2020). Fundamental and behavioural determinants of stock return volatility in ASEAN-5 countries. Journal of International Financial Markets, Institutions and Money, 65, 1-28. Web.