Andrew Green, Staff ReporterTHE APPRECIATION in value of the Jamaican dollar is only a passing phenomenon, says economist Omri Evans.
"The increase in value is primarily the result of a Bank of Jamaica (BoJ) special five-month instrument giving an interest of 30 per cent per annum introduced on Monday," Dr. Evans said.
On Friday it was announced that the BoJ had withdrawn the 30 per cent repo rate instrument.
According to Dr. Evans, that special instrument was a short-term measure, intended to deal with an immediate problem.
"The Bank of Jamaica is buying U.S. dollars," Dr. Evans said. "So are Petrojam and the oil marketing companies."
There is a problem in the foreign exchange market with a reduced supply and increased demand, he said.
"The country has a large foreign currency loan repayment that falls due at the end of February," the economist said. The rise in the price of petroleum has also increased the foreign exchange requirements of its importers such as Petrojam, the local state-owned petroleum refinery.
"Tourist arrivals may be recovering, but heavy price discounting also means that revenue inflows are below normal for this time of year, Dr. Evans said. And attempts by the Government to borrow funds on the international market have not met with sufficient success.
"Introducing the five-month instrument was thus a drastic measure intended to relieve pressure on the foreign exchange market to allow for critical needs to be met, he said. The Bank of Jamaica has promised that the instrument will be removed as soon as it is no longer needed. The question was it needed for just five days?
"Under these circumstances, its impact will be temporary however, as the underlying supply constraint cannot be addressed by a hike in interest rates, Dr. Evans said.
IMPACT THE EXCHANGE RATE
"To bring order to the foreign exchange market, the authorities already tried introducing bonds indexed to the value of U.S. dollar, said Cambio Dealers Association President, Earle Harriott.
Neither this nor the hedging of Government of Jamaica treasury bill rates above 18 per cent had succeeded.
"The exchange rate was J$53.79 to US$1 last week Friday," Mr. Harriott said.
On Monday, when the instrument was introduced the exchange rate was J$53.19 to US$1. By Tuesday, the Jamaican dollar had strengthened to the point where the exchange rate was J$51.42 to US$1, an increase of J$2.37 in the value of the local currency.
"The BOJ wanted to dramatically impact the exchange rate," Mr. Harriott said. "It did."
"At times when there is pressure on the local currency, the BOJ adjusts rates, offering instruments about four or five per cent above regular market rates," said Henry Pratt, vice president for corporate banking and investment services at Manufacturers Sigma Merchant Bank. "We are all operating under the assumption that the Government had been committed to ensuring that interest rates remained low."
"The five-month instrument is the first at 30 per cent in several years," Mr. Pratt said. "When you have a situation where interest rates will be 18 per cent one day and 30 per cent the next, that is not conducive to investment."
"The instrument is said to be temporary, but what you have done is to erase that expectation in the market that the Government would be able to manage interest rates within a certain band," Mr. Pratt said. "Six months ago the Government was offering seven-year instruments at interest rates in the teens," Mr. Pratt said. "I don't think they could come back to the market with an instrument like that for quite some time."
Dr. Evans said the interest rate structure of the economy had been warped by the instrument. Financial institutions are now under pressure to hike the 17-18 per cent returns they have been offering. This is because returns of 29-32 per cent are now available on the market.
FUNDAMENTAL PROBLEM
One fundamental problem with this scenario is that the high interest rates discourage exports and production, Mr. Harriott said. To "genuinely" stabilise the Jamaican dollar, interest rates have to be lowered to encourage investment and growth.
"Given the promise by the Bank of Jamaica that the five-month instrument will be removed as soon as possible, and given the weakened state of the economy, it is likely that the appreciation of the value of the dollar will be only temporary, Dr. Evans said.
