Thu | Oct 18, 2018

Briefing | No correlation between exports and the real exchange rate

Published:Wednesday | October 4, 2017 | 12:00 AM
The bauxite-alumina refinery, Alpart.

Why is the current account important?

Jamaica's high foreign currency debt build-up is deeply rooted in the dynamics of the country's current account. The current account is a part of the balance of payments that records a country's foreign currency transactions with the rest of the world. Chapter 4 in my book Developing Sustainable Balance of Payments in Small Countries; Lessons From Macroeconomic Deadlock in Jamaica sought to explore if there is any correlation between the real exchange rate (RER) and the various components of the current account, including goods balance, service balance, income balance, current transfers and exports.

Is there correlation between real exchange rate and traditional exports?

Traditionally, Jamaican sugar was mainly exported to Europe on preferential trade agreements. The results indicate no correlation between the export of sugar and the real exchange rate. The export of sugar has been unaffected by the changes in the prices accounted for in the real exchange rate. A value of 0.02 for the correlation analysis was generated, which depicts that the variables are very weakly correlated. Also, the results show that there is no significant relationship between banana exports and real exchange rate either. A correlation value of 0.03 shows that both variables are weakly positively correlated. Banana has recorded little exports relative to previous periods, since 2008. This hiatus was caused by the disruption in the production of bananas after Hurricane Gustav in 2007. The production of coffee and its by-products started to increase with the decline in banana production in the early 2000s. Bauxite, sugar, banana and coffee have earned Jamaica less than $200 million per annum each in foreign currency earnings from sales to the rest of the world over the last 25 years.

What about bauxite and alumina?

The results from our analysis show that bauxite exports and RER have a weak positive correlation; approximately 0.2, while there appears to be no correlating relationship between alumina exports and the real exchange rate. The correlation analysis generated a value of 0.001369, which has a value close to zero, which means that variables are not correlated. Why Rochester (2013) also highlighted that Jamaica's main exports since 1998 have been from the mining sector. Our results show that Jamaica's foreign currency revenue earned from the exportation of alumina increased steadily from 2002 to 2008.

What is the history?

In 1974, Jamaica became the world's second-largest producer of bauxite and alumina. Although much has changed since then and Jamaica's share of world bauxite output has fallen drastically since the 1970s, alumina is consistently the largest foreign exchange earner for the island. Over the last 25 years, alumina has netted more than US$600 million per annum on average. Even after the decline in bauxite and alumina production, and the closing down of a few bauxite companies in Jamaica after the global financial crisis of 2008, foreign currency revenues from bauxite and alumina remained above the revenues from the other primary products, including agricultural exports. Despite a fall in commodity prices, alumina remains the country's highest foreign currency revenue earner. The export of alumina has been relatively large when compared to the exports of bauxite, sugar and banana.

What about the main balances?

The analysis suggests that adjustments in the real exchange rate have no significant or direct correlation with the goods and income sub-accounts of the current account. This implies that Jamaica's purchase and sale of goods as well as income earned from or paid to the rest of the world are governed by underlying factors other than the real exchange rate. The goods deficit, influenced by a faster growth in imports relative to exports, has been the major driver of Jamaica's current account deficit over the period and is the least responsive to fluctuations in the real exchange rate.

Is there correlation between the real exchange rate and services?

Although there appears to be no correlation between the real exchange rate and the goods and income balance, there appears to be some form of correlation between the real exchange rate and the services that Jamaica receives and offers to the rest of the world, including tourism and business process outsourcing that seem to be weakly correlated with the real exchange rate.