Mark Ricketts | Bank of Jamaica is eclipsing the exchange rate
On back-to-back Thursdays, June 6 and June 13, the Bank of Jamaica (BOJ) staged a two-part Economics Seminar series, ‘Demystifying Inflation’. Interestingly, the stellar panellists for the first seminar were men and the second were women.
Based on audience interest and participation where BOJ was eclipsing, if not eliminating, the exchange rate from rattling Jamaicans, especially when it devalues, success was evident.
Obviously anticipating such strong engagement from the audience, BOJ’s governor, Brian Wynter, in his welcome address, pointed out that this series is part of a communication outreach which aims to sensitise the wider public on the direction of fiscal and monetary policies, as well as the importance of inflation targeting to ensure a low, stable, predictable inflation rate, thereby minimising the effect of the exchange rate.
The theme of convincing Jamaicans to sidestep the exchange rate started around a year ago when International Monetary Fund (IMF) Country Manager Dr Uma Ramakrishnan, Finance Minister Dr Nigel Clarke, and Brian Wynter went public with a full-throttled attack on the exchange rate.
Dr Ramakrishnan was the most adamant, defiant, and non-apologetic in her non-negotiable stance of literally banishing the exchange rate, while exhorting the primacy of price stability, namely low inflation, as measured by the Consumer Price Index (CPI).
In unison, they all signalled emphatically that the inflation rate, not the exchange rate, would be the new guidepost for determining, measuring, and influencing price activity in the Jamaican economy.
All three, together with Keith Duncan, co-chairman of Economic Programme Oversight Committee (EPOC), and Dr Constant Lonkeng Ngouana, IMF economist, were steadfast in their conviction on several grounds.
- First, ever since economic reforms were introduced six years ago, inflation has been trending down and has remained low and stable across both administrations.
- Second, the strength of our Net International Reserves and the introduction of B-FXITT have ensured improved stability in our exchange rate and has allowed movement to be two-way, as against the protracted devaluations in years past.
- Third, the exchange rate is embedded in the inflation rate and therefore should not be singled out when the CPI already captures its impact.
- Fourth, there is a global trend in assigning central banks the role of inflation targeting, and, so far, BOJ in adopting this role has done a good job ensuring price stability, low inflation, and predictability.
Since last year, the drumbeat has been maintained and it reached a crescendo last week in this impressive marketing, audiovisual, and highly intellectual, display of messaging, which had the audience in the Bank of Jamaica’s auditorium so engaged that several questions were asked, as well as suggestions made, and commendations given for the timely and well-thought-out presentations.
The conference, a brainchild of Bank of Jamaica’s executive communications director, Tony Morrison, had as its keynote speaker for the first seminar, Peter Blair Henry – born in Jamaica, a Rhodes Scholar who studied at MIT and Oxford University and is now a Professor of Economics, New York University.
He presented graphs to reinforce his points, kept using the word ‘discipline’ if the society is to move forward, and attributed much of Jamaica’s past inflation problems prior to 2013 to the absence of proper fiscal management.
He made a strong case that the country has to have growth with discipline to make inflation targeting work. “There must be a sense of sustained commitment, executed with a pragmatic strategy, vigilance, and flexibility, to be assured of low, stable, predictable rates, within the four per cent to six per cent range BOJ has targeted,” the keynote speaker stressed.
Other speakers, including Courtney Allen, BOJ’s research chief economist, IMF’s Lonkeng Ngouana, and JMMB Group Research Manager Jermaine Burrell, proclaimed that predictable inflation can do wonders in sidestepping the population’s preoccupation with changes in the exchange rate, especially if the changes are two-way. It stimulates spending, giving real increases in purchasing power, salary, and demand for goods beneficial to the consumer, and now more people can borrow and produce. Since inflation affects everyone directly, the tracking of this variable should be of real significance in any country that is serious about growing its economy.
I should point out that Jamaica’s emphasis on monetary easing to stoke the economy, while leaving an independent central bank to focus on price stability, is consistent with what is occurring globally.
With the global economy slowing, and inflation falling below the targets set, many central banks, including our own, are lowering interest rates. Since April, for example, Australia, New Zealand, India, Malaysia, and the Philippines have all lowered rates, and even the Federal Reserve in the US, despite that country’s strong three per cent annualised growth rate in the first quarter, is mulling the idea of reducing rates.
In trying to stimulate growth, Jamaica, like China’s central bank, has lowered the reserve requirement for banks, hoping the increased liquidity will encourage more banks lending to businesses, especially more credit to small and medium-size companies.
SILENCE IS GOLDEN
Observing global trends, taking stock of the seminar’s impressive lineup, watching the attentiveness of the audience, tapping my feet to the delightful jingle of low, stable, and predictable inflation, and recalling the passion of a year ago with Ramakrishnan, Clarke, Wynter, Duncan, and Lonkeng Ngouana, I came to the conclusion that sometimes you can’t fight City Hall, and it is better to remain silent.
Yes, I still have my reservations about the degree to which income inequality leaves many hard-working Jamaicans behind who can’t catch up unless issues in the real sector are addressed. I still believe too many groups, without status and positioning, have their earnings repressed by government fiat, essentially leaving them subsidising and restraining government’s inflation target, and everyone knows I am not happy with the extent to which BOJ’s footprint is selectively utilised when the dollar is depreciating. It even has a secondary effect of weakening the emergence of a viable forward market.
Worrying me as well is that agriculture lacks technology, relevant capital goods, inadequate drought-mitigating infrastructure, and is plagued with the scourge of praedial larceny.
With food imports being a large portion of our bloated visible trade deficit, how do we remain competitive? Surely not by assuming the exchange rate can be disregarded because it is embedded in the CPI?
But the heavyweights have spoken, and it is better to give them every opportunity to shore up market sentiment, give hope to our investors, and offer confidence to consumers.
As such, I must accept silence is golden, having been advised that low inflation has eclipsed the exchange rate and hearing the catchy jingle sang at the seminar.
Inflation is not the enemy if we control it…(stable, predictable),
If it is too high, the people going to cry
If it is too low, the country can’t grow
School fee can sort out, Granny savings nah get naught out
Is the BOJ inflation targeting strategy that!
LOW, STABLE, PREDICTABLE…Yeah