Mark Ricketts | What is happening with our dollar?
Everyone seems confused as to what’s going on with our dollar. It’s up, it’s down; it slips, it slides; it strengthens, it retreats.
The head of the Private Sector Organisation of Jamaica (PSOJ) is outraged at the management of the foreign exchange system and the dollar’s volatility, while our finance minister and the International Monetary Fund (IMF) argue that the gains achieved in the economy warrant continued use of current policy options.
Earlier this year, businessmen were on a high. The Bank of Jamaica (BOJ) intervened once again, using our foreign exchange reserves over a three-week period to strengthen our dollar, which was careening towards $137 for US$1.
The Minister of Finance, Dr Nigel Clarke, calmed jittery nerves by assuring business, that reserves were adequate. He reaffirmed there would be movement in either direction, but unlike times past, the country’s net international reserves is more than US$3 billion and the banking system has over $3.4 billion in foreign exchange deposits.
If there is no extraordinary intervention (flash sales) by the BOJ, and the dollar devalues, then the country, having much of its debt denominated in foreign currency, is likely to end up increasing its overall national debt in 2019 as occurred in 2018. The Government doesn’t want devaluation.
Not surprising, in May 2017, there was a US$240 million BOJ intervention. This allowed the dollar to strengthen for the remainder of that year. The BOJ intervened again between August and November 2018 with a series of flash sales, amounting to US$155 million. The dollar responded, gaining value.
The Central Bank repeated its intervention in January and February this year, with more flash sales, totalling US$130 million. the dollar revalued. Only J$125, as against $137, was needed to purchase US$1. Sadly, the boost to the dollar’s value was short-lived.
By April, the dollar slipped again. The BOJ responded with two flash sales amounting to US$40 million; the dollar was indifferent. On Wednesday, May 8, the BOJ pumped another US$30 million, hoping to revive the dollar in the weeks ahead.
COUNTER TO B-FXITT
This frequent extraordinary intervention by the BOJ runs counter to what was contemplated when B-FXITT was implemented in 2017. B-FXITT was designed to allow market forces, namely the laws of supply and demand, to determine exchange rate pricing, and there would be limited footprint (not too much involvement) by the BOJ.
Essentially, B-FXITT was a foreign exchange tool that would facilitate the proper pricing of the dollar, with the government only interfering occasionally. With the volatility of exchange rate pricing, B-FXITT performance as an efficient foreign exchange management system has led some to question its effectiveness, including PSOJ president Howard Mitchell. Insisting that things can’t continue this way, Mitchell committed heresy by calling for a fixed exchange rate to stabilise the dollar.
He was livid as he bemoaned what was happening to businesses as pricing of goods was becoming impossible. Captured on television and 1spot Media, he articulated all the themes worrying Jamaicans, especially when the dollar devalues. As far as he was concerned, “We should peg the dollar to ensure stability as BOJ seems clueless as to how to manage a foreign exchange system, and ever since our pound decoupled from the British pound in the sixties, it has been unmitigated disaster for us.”
Elaborating, Mitchell pointed out that the current system is wreaking havoc on local business. “Companies are crumbling under pressures from the sliding dollar. I am calling for the Jamaican dollar (JMD) to be pegged to the US currency,” he said.
“We are tired of devaluation. We are tired of a volatile dollar. We do not have confidence in the management of this exchange rate, and our businesses and our poor people have had enough of the unnecessary erosion of their finances.”
Mitchell argued that things took a nosedive from the 60s and we have never recovered. “Can anybody offer one rational explanation why we continue to pretend we can successively operate a foreign exchange rate management programme in an economy as open to externalities as ours?” the PSOJ president asked rhetorically.
Continuing, he said, “From 1969, when we abandoned the Jamaican pound, which was pegged to the British pound, we have been visiting hellfire and damnation on our poor people. Pegging the JMD to the US currency would not be challenging since most businesses already conduct their transactions in that currency.”
FLOATING EXCHANGE RATE REGIME
The dollar, despite the BOJ’s recent intervention, continued to slide, dipping to $137.19 as of May 8. Mitchell asked, “Which small person do you know can plan to pay back a debt on a particular day and the dollar moves more than six per cent in a matter of weeks?”
Finance Minister Clarke emphasises that the economic and financial reforms and the unprecedented results that the country is experiencing have taken place in the context of a floating exchange rate regime. Clarke is opposed to policy volatility, especially in the area of any contemplated abandonment of Jamaica’s floating rate regime. He is convinced that such a move would introduce uncertainty and instability, and it would reverse Jamaica’s economic gains.
However, Clarke’s expansionary monetary policy and recent fiscal easing in foregoing billions in stamp duties and taxes on real estate transactions without corresponding increases in property taxes is likely to inflate asset pricing as against real growth.
Coming at a time of a decrease in the primary surplus and against a backdrop of supply constraints, the net effect is continued widening of our annual trade deficit, which now exceeds US$4 billion.
While the country struggles with production and productivity and appropriate capital output ratios, cars are being financed at more than 100 per cent of value, so car imports jumped 177 per cent, from 15,000 in 2014 to 42,000 in 2018.
The pressure on our dollar and its volatility is a function of a market awash with credit and low-cost funds, but lacking good public-sector governance, technology breakthroughs, and sufficient local private sector entrepreneurs, professionals, and human resource skill sets to elevate domestic value added and production.