Editorial | As Mr Byles faces a test …
Three months into the job, Richard Byles is facing his first big test, not only of his technical skills, but of his nerves as a central banker. He is having to balance the social and political pressures that come with a sharp depreciation of the Jamaican dollar against the presumably settled policy of operating in a liberalised currency market in the context of the inflation targeting being the Bank of Jamaica’s (BOJ) primary policy driver.
As Mr Byles is, no doubt, becoming increasingly aware, the tensions that sometimes arise between meeting inflation targets and ensuring exchange rate stability are, often, not easily resolved, especially in small, open, import-dependent economies such as Jamaica’s. One of Mr Byles’ responses has been to tap into his reserves.
But an important lesson in this for the BOJ governor, we suggest, is the need to accelerate efforts to widen the offerings of the foreign exchange market and to bring greater transparency to that process, as well as the central bank’s operations, more broadly. Further, transparency has to be inclusive, not merely for the sophisticates, who already may be in the know.
The situation also suggests the need for a broader conversation on tweaks to macroeconomic policy to encourage faster, export-led growth, and, where possible, import substitution.
Although it clawed back a few percentage points this week, in approximately six weeks from the start of October to November 12, the Jamaican dollar depreciated by around five and a half per cent against its US counterpart to reach J$142.23 to US$1. It is not the first time that such a downward spiral has taken place, but not unexpectedly, the decline in the value of the dollar triggered concerns among business and consumers, prodded along a bit by the political opposition. That has been the case for years.
However, while the situation may have been exploited by the politicos, the apprehension, for the most part, was genuine, and on the face of it, not irrational. In 2018, Jamaica had an import bill of US$6 billion, nearly 11 per cent higher than the previous year, leaving a trade deficit of US$4.4 billion. More significant, exports declined.
The situation is likely to be worse this year, and likely into 2020. According to official data, in the eight months up to August, imports reached US$4.35 billion, or 8.7 per cent more than the corresponding period in 2018. Exports, at US$1.39 billion, represented a drop of seven per cent. In other words, between January and August, Jamaica imported nearly US$3 billion more than it exported.
Some of that foreign exchange gap would have been closed by earnings from tourism and services, as well as capital flows, but these have clearly not been sufficient to completely smooth the recent humps, which, according to the central bank, were exacerbated by “extraordinary demand (of foreign exchange) for purposes”. Put another way, Jamaicans wanted hard currency to pay for assets acquired outside the country.
Those are the kinds of things that happen in dynamic markets. So Mr Byles and his technocrats might have ridden out these humps, if, as the BOJ says, the rate decline posed no immediate threat to the bank’s inflation target of four to six per cent. Except that with the high import content of the economy, many people, especially the poor, could be quickly hit by rising prices, which could lead to a self-fulfilling psychology that weakens confidence and undermines growth.
REMOVE LINGERING PERCEPTIONS
The central bank’s response, in part, has been to pump, over the last month, US$150 million into the foreign exchange market, 58 per cent this week. That has the effect of halting the run on the exchange rate. Until the next one. What the central bank has not done enough of, though, is explain to ordinary Jamaicans the efficacy of a market-determined exchange rate as a policy tool and why inflation-targeting is good, beyond declaring it so to be in dancehall jingles.
At another level, the BOJ has to move faster to bring a broader suite of transactions under its B-FXITT foreign exchange auction system to lessen the tendency towards just-in-time purchases, enhance its transparency, and remove lingering perceptions of its manipulation by the BOJ. Additionally, the BOJ should provide greater insights into policymaking process, starting, perhaps, by publishing detailed minutes of its next rate-setting meeting on November 19.
At the level of the macroeconomy, the Government has maintained stability, but growth remains unexpectedly slow. The next segment of the national conversation must be about how to lift things a notch – or two.