Briefing | Jamaica open for business
Where are we now with the IMF?
The Bank of Jamaica (BOJ) has announced that at the beginning of November, the executive board of the International Monetary Fund approved a new precautionary Stand-By Arrangement (SBA) for Jamaica. This new standby agreement immediately replaces the Extended Fund Facility (EFF) arrangement that had been in place since 2013. This new agreement, according to the BOJ, provides the needed assurance to prospective investors that Jamaica has a very substantial amount of foreign currency available to it with the support of the IMF in the event that it is needed. These funds an amount up to US$411.9 million are available right away at the discretion of the BOJ.
What about the other macroeconomic indicators?
According to the BOJ, annual inflation as of September 2016 was roughly 1.9 per cent, falling from two per cent in June. Aggregate inflation also fell for the eighth consecutive quarter. Annual inflation is expected to remain low this year amid low oil prices. Gross domestic product appears to be improving as well based on improvement key industries.
The BOJ believes that foreign direct investment (FDI) should play a role in improving economic activity in the short run. The research has however, shown that for a small island, Jamaica has received substantial amounts of direct investment (DI) each year, but has failed to find itself on a positive growth trajectory. Jamaica's current account deficit as of June 2016 was approximately US$13 million compared to a deficit of US$118 million as of June 2015.
What about the loanable funds and exchange rate market?
The BOJ has also indicated the commercial banks, credit to the private-sector has increased by more than 14 per cent this year. The increase has improved the private-sector credit-to-GDP ratio from 22 per cent in 2015 to 24 per cent in 2016. For the fiscal year up to the end of October, the exchange rate depreciated by 5.9 per cent, 1.7 per cent more than it did this time last year. The Jamaican dollar ended closing day on Tuesday evening at $129 to US$1. Many are still frantic about the depreciating nature of the local currency and wonder what can be done to halt the rate of depreciation. The depreciation mainly occurred in April and May of this year due to increase in the demand for foreign currency financial instruments the BOJ outlined. The rate of depreciation since then has however slowed, but is still a cause for concern, especially since Jamaican businessmen have been complaining about pressure on the value of the currency being placed by demands by companies from our Caribbean neighbours Trinidad and Tobago.
How credible is this claim?
The Jamaica authorities have dispelled any such claim and reiterated that Jamaica is open for business. In the meantime, the Bank of Guyana last week announced that it will temporarily stop collecting Trinidadian and Barbadian currency from cambios in an attempt to preserve the stability of their currency. They have decided to only do transactions with businesses from these countries in US currency. The report is that Guyana is under the impression that businesses from Barbados and Trinidad are putting additional pressure on the Guyanese reserves. While Guyana has seized trading these currencies with cambios, individuals doing legitimate business can walk into the central bank and conduct legitimate transactions in these currencies. They outline however, that there is no shortage of US dollars in the country, but measures have to be put in place to make sure Trinidadian and Barbadian dollars does not flood Guyana.
What implications will this have for the region?
Intra-regional trade (trade within CARICOM between its members) is one of the lowest among all economic unions around the world.
Guyana's temporary decision to reduce widespread acceptance of the Trinidadian and Barbadian currencies will definitely have implications for intra-regional trade between these countries. It will reduce the amount of goods and services Guyana sells to these countries, while at the same time reduce the value of what these countries try to sell to Guyana. The Guyanese government have decided to exercise proactive policy while other countries including Jamaica, are very reactive to policy either through capacity constraints or technical ability constraints. We have become accustomed to this laid-back approach to monetary policy because the IMF will always be available to lend Jamaica US dollars to supply the entire Caribbean network of businesses. Given the access to the high reserve cushion that Jamaica has been receiving from the IMF, it doesn't matter which businesses or who places additional demand on local stock of US dollars, more will always be available.
- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona Campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org.