Editorial | Get a move on Fiscal Council
It’s a settled policy. Jamaica operates a floating exchange rate.
The logic is simple. Not only does this currency regime provide policymakers with greater flexibility in the management of the macroeconomy, the clear evidence is that it has worked better than the fixed exchange rate and the raft of hybrids tried in the two decades before the currency market was liberalised a quarter century ago. Anyone who lived through those turbulent times will recall the black market in currency, including ones facilitated by the central bank, as well as the rationing of foreign exchange and restrictions on capital flows.
So, we are not surprised that despite the recent call by some private sector leaders, led by Howard Mitchell, president of the Private Sector Organisation of Jamaica, for a return to the old arrangements, that they have since been assuaged as the greater efficacy of a market-determined currency, but with additional arrangements for that market to work more efficiently.
“It is also important that we create a framework that allows businesses to adjust to this new environment through the availability of hedging instruments, appropriate training and the availability of real-time information,” Mr Mitchell said after he and other private sector leaders met with the finance minister, Nigel Clarke.
The private sector was spooked by the recent, and periodic, volatility of the Jamaican dollar, which declined by nine per cent in little over a month, creating an environment in which, Mr Mitchell said, it is difficult to plan. No clear-cut or specific cause has been offered for the downward spiral of the local dollar, but it’s hardly likely to be weak economic fundamentals.
After all, business and consumer confidence is high, unemployment, at eight per cent, is the lowest in decades, the national debt, at 96 per cent of gross domestic product, is falling faster than projected, and the economy, doubling the average rate for the last four decades, is growing at around two per cent, albeit slower than the Government’s projection, or required to be really transformative in the medium term. The major reason for this turnaround is the sustained economic reforms – including, since 2013, formal agreements with the International Monetary Fund (IMF) – of the past seven years.
NEW AND EFFECTIVE POLICY WATCHDOG
The maintenance of a floating exchange rate has been integral in this project. Twenty-five years ago, Jamaica’s reserves were negative more than US$800 million. The central bank now has more than US$3 billion on hand to meet its obligations, but that would be far from sufficient to support a fixed or pegged currency from any significant or sustained pressure, whether generated domestically or abroad.
Over the broad sweep of time and events, the possibility of increased volatility of a floating exchange rate, when buttressed by a central bank that has the capacity to sensibly intervene on the currency market, and supported by fiscal prudence, is not an injudicious price to pay for the policy flexibility it affords. Indeed, this volatility is often a signal of markets working efficiently, or moving thereto.
This newspaper, however, doesn’t hold that markets are always perfect, that they should be allowed to work without oversight, or that players will inherently do the right thing. Dr Clarke correctly recently highlighted the continuity in macroeconomy policy, across administrations, over the last seven years; a fact noted, too, by the IMF.
However, the current US$1.7 billion IMF Stand-By Arrangement with Jamaica expires in half a year’s time, after which our fiscal policies and programmes will no longer be subject to the Fund’s oversight. In the circumstance, a government, without independent oversight, might trade prudence for opportunism. This suspicion, in part, is what we discerned in the private sector’s laments over exchange rate volatility.
In the event, the Government needs a new and effective policy watchdog. Dr Clarke, a year ago, promised an independent Fiscal Council, whose right to access Government information and to operate with transparency will be founded in legislation. But little has been heard about its design, the law to support it, and when it will be launched. It is unlikely to be ready by November. Minister Clarke must say.