Persistent depreciation builds up debt stock
Perhaps the greatest measurable impact of the Jamaican dollar's persistent exchange rate depreciation against the United States dollar has been an increase in the public debt, according to the World Bank.
Jamaica's debt stock was impacted by depreciation because of the large share of external and domestic United States dollar denominated debt which, at the end of 2014 accounted for about 47 per cent of the total debt stock, the Bank said.
A debt decomposition exercise undertaken by staff of the International Monetary Fund (IMF) indicates that currency depreciation was the largest contributor to the buildup of the debt stock in 2013 and 2014, the World Bank said in its Spring 2015 economic update on Jamaica, titled Sustained Adjustment, Fragile Recovery.
The stock of public debt as at April 2015 stood at $2.044 trillion, according to the Debt Management Unit in the Ministry of Finance and Planning.
On a related note, the World Bank said, the depreciation contributed to continuation of the freezing domestic bond market.
As a consequence of the Jamaican dollar's speedy depreciation, risk-adjusted returns of domestic assets were drastically reduced.
As a result, the World Bank said, financial institutions have maintained their long US dollars positions, which have led to limited available liquidity for domestic assets.
However, it said that "as the exchange rate stabilizes the risk-adjusted differential will shift towards domestic assets." When combined with the increase in business confidence, it will cause liquidity to be channeled towards domestic assets, possibly helping unlock the currently frozen domestic bond market, the Bank said.
At the same time, it said there is very little evidence of the impact of depreciation on corporate and financial sector profitability.
A few export products, such as alcoholic beverages and processed food saw a rise in profitability in 2013, the Bank said, adding that in the banking sector the level of foreign currency deposits and loans is fairly high.
The average ratio from 2000 to 2013 of dollar deposit to total deposit, and dollar loan to total loan were 36.7 and 38.8 per cent respectively. The World Bank said this suggests that banking sector assets could have been impacted by the depreciation.
"Despite the impact on the debt stock, on balance it appears that the Bank of Jamaica's policy of increased exchange rate flexibility is paying off in terms of supporting macroeconomic stability and facilitating adjustment," said the report.
The average selling price of the US dollar reached a high of J$116.99 to US$1 on Monday.
The World Bank report said the sharp depreciation of the Jamaican dollar since 2012 has impacted the Jamaican economy in a significant manner.
The Jamaican dollar has depreciated sharply since the onset of the economic crisis in late 2012, the report said, noting that the depreciation was partly a result of a conscious policy stance by the Bank of Jamaica to transition to a more flexible exchange rate regime.
The Jamaican dollar depreciated by 23.8 per cent in nominal terms and 11 per cent in real effective terms between January 2013 and February 2015, it said.
"This episode of currency depreciation follows a number of previous episodes, which had significant impacts on the balance of payments, inflation, debt stock and financial sector stability," the report said.
The World Bank said the current account deficit is projected to continue to decline in 2015-16, supported by lower oil prices and increased exports.
The export sector is showing early signs of recovery as they gain competitiveness and this in turn is generating a buildup of buffers such as foreign exchange reserves.
This, accompanied by the structural reforms being undertaken by the Jamaican government under the four year economic support programme with the IMF, is helping to slowly build confidence, giving Jamaica a step forward towards sustainable equitable growth, the World Bank report said.