Earl Bartley, Contributor
THE VOLATILITY and rapid depreciation of the national currency in recent weeks has caused many Jamaicans to sigh wearily again? Will it ever end? How far this time?
Currencies are strong or weak according to the confidence holders of the currency place in it as a store of value, and the ease with which they can convert it, or spend it on what they want.
Of the 10 Caribbean countries that started out like Jamaica with freshly minted currencies to complement their brand new independence in the 1960s, Guy-ana and Jamaica have the most depreciated currencies. From a one-to-one relation the Guyanese dollar now trades at Guy$248 to US$1. From a parity of J$0.90 to US$1 the Jamaican dollar at the time of writing this column was trading at J$62 to US$1.
The currencies of other West Indian countries though they have also depreciated have been far more stable. One US dollar trades for Bds$2.00 or TT$6.20 or for $2.70 in the Eastern Caribbean. In Jamaica's former province, Grand Cayman, US$1 still equals Cay$0.82.
The story behind the rapid slide of the Jamaican and Guyanese dollars is the economic stagnation and political instability that have affected both countries for prolonged periods over the past 30 years. The relative stability of the currency in Trinidad, which has also seen its fair share of political and economic turmoil, is probably due to the fact that it is underwritten by 'black gold' oil. The unmoved stability of the Caymanian dollar underscores the fact that the fundamental source of strength of a currency is a growing, productive economy and stable polity.
THE DEVOLUTION OF THE JAMAICAN DOLLAR
Pressure on Jamaica's currency began in the early 1970s during Michael Manley's first tenure as Prime Minister with the shaken confidence of the middle and upper classes regarding the future stability and security of Jamaica. Adding to middle class ideological fears, the early '70s was a period of change and instability in international monetary arrangements following the collapse of the Bretton Woods system; and of high international inflation with steep increases in the price of oil, wheat and other commodities.
At the time, Jamaica operated a fixed exchange rate system with J$0.90 equal to US$1.00, having realigned our currency from the British pound in January 1973. Probably because of this fixed exchange rate system, middle class nervousness, and instability in international currency and commodity markets, did not so much affect the exchange rate as the level of reserves. Between 1972 to the end of 1973, the country lost about 50 per cent of its reserves reducing it to the lowest level since 1967.
RESTRICTIONS
The Michael Manley Govern-ment tried to stop the haemorrhaging of reserves through exchange controls sharply limiting the amount of foreign exchange Jamaicans were permitted for foreign travel; and with import restrictions, and selective credit controls; as well as measures to encourage exports. These measures did not stop the haemorrhaging. And in the two years following the PNP reaffirmation of democratic socialism in 1974, capital flight from the country escalated to an estimated US$300 million, or about 40 per cent of the country export earnings in 1976.
From early 1976 Net Inter-national Reserves became negative and stayed that way for the next 15 years. The significant fact is that despite the depletion of reserves, there was only a 100 per cent depreciation of the exchange rate from $0.90 equal US$1.00 in 1972 to $1.80 in October 1980 when the PNP was voted out of office.
Notwithstanding their catchy election slogan, the victory of the JLP in October 1980 did not signal a "return of confidence", at least, not in terms of filling the foreign exchange coffers and ending the hoarding that had been widespread under the PNP. In fact, the JLP continued with the exchange controls and administrative rationing, though they incorporated some features of a market mechanism to the rationing by introducing the auction system. That mainly ensured that the cash-rich importers got the bulk of the foreign exchange at the Bank of Jamaica weekly auctions. More significantly, the black market in foreign exchange, which was nascent under the PNP, mushroomed under the JLP with several active 'open-air' cambios operating in tourist areas like Ocho Rios and Montego Bay.
Because of the black market, a dual exchange rate system operated in Jamaica during the 1980s, and more often than not, it was the black market that led the way in setting the exchange rate.
When the JLP demitted office, the official rate was US$1.00 to $5.50 while the rate on the black market was $8.20.
LIBERALISATION
The PNP made the smart move of abolishing exchange controls and liberalising the economy. The hope was that liberalisation would get rid of the cumbersome and inefficient auction system; absorb the black market and bring more foreign exchange into the official system; strengthen official control over the exchange rate; and generally make it easier for people to do business. After years of pent-up demand for foreign exchange, however, liberalisation in the context of continuing shortages of that commodity served to intensify pressures on the exchange rate.
Between 1991, when the liberalised regime was introduced, and the end of 1993 the dollar depreciated by 255 per cent sinking to $35.00 to US$I.00 and seemed to be spiralling out of control. Then in one of the more meaningful re-affirmations of confidence in the prospects and future of Jamaica, thousands of Jamaicans joined by hotel mogul Butch Stewart, put their money where their mouths were, and backed their call for patriotism, by selling dollars into the official system. The dollar revalued to $22.00 for the rest of 1994. But by 1995 it had resumed its depreciation, albeit in a more orderly way. The boost in confidence, however, was more long lasting. The years 1994-98 marked the highest number of returning residents and a mini-construction boom in residential dwellings and commercial plazas.
Increasing crime since 1997 and continuing intractable economic problems, worsened by globalisation, have since dissipated a lot of that confidence. The Government's mis-administration has contributed to the disenchantment.
Though the PNP won the October 2002 elections by 'creative accounting' and manipulating the people's desire for badly needed social goods, over the past few months, the 'con' has begun to unravel demonstrating that people are far more careful with their money than their votes. It is the dissipation of confidence a feeling that Jamaica is going nowhere fast, fuelled by a fair deal of speculation, that has been driving the hoarding and rapid slide of the Jamaican dollar in recent weeks.
EFFECTS
The worst effect of the lack of confidence and the volatility it has generated in the foreign exchange market and on the exchange rate is that it distorts and destabilises expectations. When people make investments in a factory, hotel or farm, they expect their asset on the ground will appreciate, or if it depreciates, it will be in a tax recoverable way. They also expect that inflation or depreciation will not erode their future earnings; that is, their net present value will be positive. With a weak and volatile currency, however, investors become apprehensive about tying down their money in fixed long-term investments and prefer to hold cash for short-term money market investments and easy convertibility.
Another serious effect of prolonged depreciation of the exchange rate is that it tends to devalue labour and output in the affected country. Devaluation is supposed to increase exports and reduce imports. But in our situation most of our exports are already priced in hard currency, while we have no control over import prices, and high inelastic demand for imports. Its main effects are on depressing internal prices, especially labour, as we have to be producing more to purchase the same or less, of imported items.
If high interest rates in Jamaica over the past decade has stifled growth and job creation, the 7,200 per cent depreciation of the local currency over the past 30 years have done the most to depress Jamaican living standards relative to our CARICOM partners and our main trading partners.
ISSUES AND OPTIONS
Like Humpty Dumpty, since the shattering of confidence in the currency in the early 1970s, the country has not been able to put it together again. De facto, the country now operates a dual currency system with the Jamaican dollar being used for transactions, and a large part of the savings accounts, but with the US dollar playing an increasing role as the preferred store of value, especially for the well-to-do. Many of our local banks now accept unlimited foreign exchange saving accounts, and in a limited way permit the operation of foreign exchange checking accounts. But it seems that more brainstorming needs to be done to facilitate a more frictionless integration of these foreign balances into the local economy so as to minimise their destabilising effects on the local currency, and maximise their benefits to the economy.
The decline of confidence is largely a psychological manifestation of complex causes related to high crime rates and deficiencies in economic policies and performance. Nonetheless, it seems like a better public relations job could be done even as the country grapples with the long-term economic and crime problems. Government spokesmen have little credibility. But business and social leaders should consider using the public relations machinery of the Jamaica Information Service to reaffirm their commitment and sell the belief in the long-term viability of Jamaica.
The Jamaican dollar has been the weather vane registering the social, political and economic stresses the country has experienced over the 40 years of independence. From $0.90 to US$1.00 the Jamaican dollar is now valued at less than US$0.02. Before the dollar starts being measured in fractions of a US cent, and considering the dynamics of global trading, it seems we need to review the long-term possibilities of the Jamaican dollar. More anon.
Earl Bartley is an economist and businessman. E-mail: adapapa@cwjamaica.com.
