Sun | Aug 20, 2017

Letter of the Day | Currency stability crucial

Published:Saturday | February 18, 2017 | 2:00 AM

Basic economics dictates, all things being equal, that prices are a function of supply and demand.

In my opinion, this is the underlying factor explaining the continuous devaluation of the Jamaican dollar since Independence.

We all know Jamaica has suffered from an inadequate supply of foreign exchange over the years and has had to borrow from overseas to bridge the gap.

Last year's figures show a trade deficit of some US$2.5 billion. In fact, Jamaica's overall exports fell by some 21 per cent in 2016, according to the Inter-American Development Bank. The import bill of the country declined at a faster rate than exports principally because of oil prices allowing for a reduction of the trade deficit.

Our import bill is likely to increase going forward, as we cannot expect any further reprieve from oil prices. Brent benchmark prices cleared at US$54.92 on December 20, 2016, while future contract Brent benchmark closed December 2017 at US$57.85.

Looking on these figures, we would expect the adverse trade balance to continue with the demand for foreign exchange exceeding supply.

In addition, the new standby agreement with the IMF has as one of its conditionalities for the net international reserves (NIR) to be increased to US$3 billion by the end of the agreement. The NIR currently stands at approximately US$2.4 billion. In addition, the International Monetary Fund (IMF) requires that the reserves should not be represented by

borrowed funds. Currently, approximately 60 per cent of the US$2.4 billion is represented by borrowed funds.

The Bank of Jamaica (BOJ) will, therefore, have to secure from the market more than US$2 billion needed for the NIR during the period of the current IMF agreement.

It is my understanding that based on the proposed auction system, the BOJ will be competing in the open market to purchase these funds.

Since April 2016, BOJ has sold well over US$800 million into the foreign-exchange market. This has temporarily allowed the supply of hard currency to exceed the demand, resulting in the revaluation of the Jamaican dollar from 129.69 to 127.96 for US$1.

However, this level of intervention is not sustainable, even over the medium term. Declining exports, with the possible increase in imports because of a rise in oil prices, along with the need to build the NIR in accordance with the IMF agreement, will not allow for this level of selling into the market.

 

focus on improving Productivity

 

A level of currency stability is undoubtedly needed if we are to produce ourselves out of this quagmire. Focus must be placed on improving productivity. We need to stem the tide of declining productivity we have been experiencing over the past three decades. By improving productivity, we reduce our costs of production, our goods become more competitive, allowing our exports to expand.

It is also the opinion of experts that a transparent process of currency adjustment is needed, not one that is manipulated in private. Unexplained swings, whether up or down in currency values, erode confidence and have a negative impact on business.

However, to build our exports and earn more foreign exchange, we must have a currency that is competitively priced. This will require ongoing adjustments based on inflation at home, compared with our principal trading partners.

Currency stability must be viewed against a background of our current balance-of-payment situation, and the overriding need to generate more foreign exchange going forward.

Warren McDonald

Immediate Past President

Jamaica Chamber of Commerce