Norman Marsh | Unnecessary poverty and hardship …Who is devaluing the Jamaican dollar?
The unending devaluation of the Jamaican currency against the United States dollar is caused by one simple fact – Jamaica is managing two official currencies. The Jamaican dollar, by force and authority of the Government, without regard for the wishes or desire of the people, continues to be an official currency, despite the fact that as a store of value, it loses value almost daily and is not preferred as a medium of exchange.
Our other official currency, the United States dollar, is the currency of choice, both as a store of value and a medium of exchange in transactions. Jamaicans will only exchange their coveted US dollar for the Jamaican dollar in a case of need.
No one will miss the Jamaican dollar; the 50th anniversary of its introduction came and went on September 8, 2019, without any official celebration or recognition of the anniversary, publicly or privately. It is clear that the population is not proud of our currency. As a store of value, the Jamaican dollar is shunned, and only used as a medium of exchange for small to medium transactions. All large real estate sales, and big-ticket transactions, almost always occur in US dollars these days.
FLAWED OFFICIAL POLICIES
The Jamaican dollar became the official currency of Jamaica on September 8, 1969, after 140 years of using the very stable Jamaican pound/pound sterling.
Below is the Jamaican monetary experience in numbers context:
1. During 1840 to 1969, there was no devaluation of Jamaican pound of any significance. £1 = US$2.38 in September 1969.
2. Fast-forward to today, if we kept the Jamaican pound/pound sterling, £1 = US$1.29, a 46 per cent devaluation.
3. In 1969, US$1 = J$1.20 (average rate as per Bank of Jamaica historical website). Fast-forward to today, US$1 = J$141.90, a devaluation of 11,725 per cent.
4. Now, had we converted from Jamaican pound/pound sterling to US dollar in 1969, Fast forward to today, US$1 = US$1, 0 per cent devaluation. We would have sustained no devaluation, and since 1969, the US dollar has lost very little value against the other major reserve currencies.
Jamaica never had a currency problem in 1969. We did not properly identify the problem and solution when we gave up the Jamaican pound/pound sterling, and we continue to preserve the self-created problem.
An examination of inflation targets in developed countries around the world will reveal that most are concentrated at two per cent per annum or in close proximity. Some economists even suggest targeting zero annual inflation rates.
PROMOTING HIGH INFLATION
While making a determination as to what figure constitutes the optimal rate of inflation for most countries is not an exact science, the optimal consensus target worldwide has settled around two per cent. Why then is the inflation target for Jamaica currently set within a band of 4-6 per cent per annum? Jamaica is clearly promoting high inflation, something that can only hurt our people and make them poorer.
While modest amounts of inflation are relatively harmless, frequent and uncontrolled devaluation, as has been occurring in Jamaica, can dramatically erode the purchasing power of consumers. If inflation reaches the upper limit of the targeted six per cent annually, each individual’s savings, assuming it doesn’t accrue substantial interest, is worth six per cent less than it was the previous year. Naturally, it becomes harder to maintain the same standard of living, and gives rise to increased poverty and hardships.
For the above reason, central banks in developed countries usually try to keep inflation under control by indirectly taking money out of circulation when the currency loses too much value. However, what the Bank of Jamaica has done was just the opposite. The Bank of Jamaica reduced the cash reserve requirement by two percentage points to seven per cent, effective June 3, 2019. The reduction in the cash reserve requirement was the second for 2019.
What the unintended consequence of the reduction in the cash reserve requirement does is to increase liquidity in the financial system and thereby expand credit to businesses and individuals, which increased the demand for US dollars, leading to further devaluation of the Jamaican dollar to the current level of approximately J$141.90 to US$1.
NO GROWTH WITHOUT END OF DEVALUATION
Many people in Jamaica continue to perpetuate the myth that currency devaluation will not end until the economy grows. Actually, quite the opposite is true. The economy will not show growth significantly until we end devaluations.
Devaluations will never end, however, by continuing the dual-currency system. Immediately upon dollarisation, that is, using the US dollar as our only official currency, devaluation ceases and all stakeholders can set about growing the economy.
As stated in my previous articles, by once again dollarising our currency, Jamaica would gain an immediate benefit by eliminating the risk of devaluation. We would also reduce the country risk premium on foreign borrowing and obtaining lower interest rates for the Government and private investors.
Lower interest rates and more stability in international capital movements should cut the cost of servicing the public debt, and encourage higher investment and economic growth, something we have struggled with for a long period of time.
Consider, also, what dollarisation would do for our farmers, manufacturers, exporters, traders, and, more important, our average citizen, from lower transaction costs and an assured stability of prices in dollar terms.
The dollarisation option worked for Jamaica for 140 years, it will do so again. A stable currency devoid of frequent devaluations is the main prerequisite before any country can have sustained economic growth. Jamaica’s history of negative and low economic growth is directly correlated to our history of creeping, and sometimes galloping currency devaluations.
For Jamaica, dollarisation is not an option, it is an absolute must if we are to reverse the rise of poverty. There will, no doubt, be strong resistance to rejoining a currency union by special-interest groups.
However, the Government of Jamaica must ensure that a vibrant economy for Jamaica goes beyond financial returns for a few and take into account the well-being of society and everybody’s ability to thrive, but especially the poor.