Mark Ricketts | Dollar devaluation is serious business
Minister of Finance and Planning Dr Nigel Clarke seems to be doing everything to play down the continued decline of the Jamaican dollar and the devastating impact of reaching a record low. Last Thursday, it closed at $137.35.
In a column in last Sunday's Gleaner, and under a banner July 25 Gleaner front-page headline, 'Don't worry', he emphasised that "in a floating-rate regime, the exchange rate will move up and down, and it is only one price in the economy". He then asserted: "It is the movement of average prices as measured by inflation - which already incorporates the exchange rate - that matters and influences quality of life."
Dr Clarke further declared: "The Bank of Jamaica has more than US$3 billion in reserves, which provides the foundation for stability, and our balance of payments is healthy. There is no need for anxiety to set in based on the movements in the exchange rate. Government policy is focused on low, predictable, and stable inflation."
In Clarke's world, any undue emphasis on the exchange rate means that we are politicising it. Using various euphemisms, I suppose that means we are blowing things out of proportion, making much ado about nothing, making a mountain out of a molehill. By so doing, we are missing, according to Dr Clarke, the significance of the Consumer Price Index (CPI), which makes provision for the exchange rate.
The justification for Clarke's position is that during the last five years, both administrations have made concerted efforts to rein in runaway debt as a percentage of GDP. They have also undertaken orthodox fiscal and monetary policies, resulting in a decline in inflation rates, more buoyant net international reserves, and a better credit rating, which improves access to international markets.
But Jamaicans make much ado about the exchange rate, or what the minister calls the politicisation of the exchange rate, because they understand the immediacy of the impact of exchange-rate movements. They know the history and cruelty that changes in the exchange rate - even if it is to ensure the country's currency competitiveness - have had on their lives through successive governments pursing bad policies.
When an exchange rate has moved from J$1.78= US$1, to J$137= US$1 in 50 years, preoccupation and failure have characterised much of that period, even when there were political assurances, fixed exchange rates, regulations and more regulations, usurious interest rates, and floating exchange rates.
Every time the currency slid, then retreated modestly, there was hope for stability, and so it was when administrations changed, or even when new finance ministers replaced old finance ministers. But, year over year, decade after decade, those hopes were short-lived. With this new administration assuming the reins of power in February 2016, hopes were high, yet the dollar has declined 15.1 per cent in two and a half years, and when Clarke became finance minister in April, the dollar was 126, and now it is 137.
Every time there are dislocations in currency markets, as is occurring currently, there are ripple effects in other markets. It occurred with the carnage of the peso in the 1980s, producing shock waves through emerging markets, the Asian crisis in the 1990s, and occurred again in 2014 when other currencies were rattled by weaknesses in Brazil and Russia currency markets.
Today, with sanctions, tariffs, and collateral damage arising as a result of trade conflicts, several at- risk currencies, including Turkey's lira, Argentina's peso, India's rupee, Russia's rouble, are declining against the US dollar as investors take cover in the strength of the US economy, a factor partly responsible for our currency's decline.
Jamaicans are understandably worried about the recent downward drift of their dollar, but they are equally worried because of the difficulty of coping, given certain realities of the economy.
First, our country is a small, extremely open, highly-indebted, oil-dependent economy, in which trade represents a disproportionately high percentage of GDP, and unless our fundamentals are very strong and our economic and management policies very sound, we are exposed to periodic downward pressures on our dollar.
While our fundamentals are improving, our visible trade and GDP growth performances leave us too exposed in currency markets.
Second, people are unsure whether the $10-million intervention in the auction that BOJ publicly undertook in transitioning to the current floating exchange rate regime accounted for a retreat of the dollar earlier this year. Without that level of intervention, can our dollar cope against countries with equally low inflation rates but stronger growth expectations and likely increases in interest rates?
Third, many of Jamaica's major companies are owned by overseas interests - banks, insurance companies, cement producers, Red Stripe, Appleton, you name it - which means that there have to be significant high levels of direct foreign investment on an ongoing basis as profits are repatriated and possible diversification of capital out of Jamaica is undertaken. This occurs when companies have very mature assets and high levels of risk exposure.
Jamaica's dollar depreciation is worrisome because this is what people have lived with and endured, and many of these people have suffered grave income inequality. This makes it hard for them to cope with the disproportionate burden and immediate impact of devaluation.
Moreover, in Jamaica, prices are suppressed in so many areas, smothering the full effect of price inflation, and non-price factors take over. That's a mouthful, so let me give an example. Oil prices have moved up dramatically, and the dollar has declined, but transportation cost (taxis, robots, JUTC) has not increased, deflected by more outrageous subsidies to the JUTC, and taxi fares suppressed by the transport minister, despite long-outstanding claims for fare increases.
The result: Taxi drivers are increasingly cutting short established routes, forcing consumers to pay more without this being factored into the official fares, and that behaviour is replicated in so many areas of the economy. While legitimate prices are suppressed and are not factored into the higher costs of social dysfunction, for many, devaluation is serious business as prices are adjusted immediately while wages lag and are too low.
Dr Clarke, the CPI, when contained, is used quite a lot in determining wage increases, especially with the more vulnerable income groups, but downward movement of the dollar worries many Jamaicans because they have been there before and they know the immediacy of the consequences on their purse and pocketbooks.