Andrew Green, Staff Reporter
TRADING ON Jamaica's foreign exchange market has declined sharply since last year as sellers stay away, forcing buyers to exercise caution.
Despite the much vaunted expansion of the tourism and bauxite/alumina industries, less foreign exchange is being traded on the official market this year than last year. Data extracted from published Bank of Jamaica (BoJ) figures show that the foreign exchange traded in the first four months of this year was more than 20 per cent lower than for the same period last year.
"Activity seems to be down," said Alan Morrison, president of the Cambio Association of Jamaica. He was responding to a question about the state of the foreign exchange market as purchasers have had to pay an average of over $61 for a US dollar since Wednesday last week.
Between January and April of this year, US$2.7 billion in foreign currency was sold on the market. This was 21 per cent less than the US$3.5 billion sold last year.
Sales are down because purchases have also fallen by 24 per cent in the same period.
The fall in activity is not a new phenomenon. Data from the BoJ shows that the decline started in May last year. Comparative data for October was not available on the BoJ Web site but the trend for previous and succeeding months suggests that it was not an exception.
In the months leading up to May 2003, the foreign exchange market flows were higher than levels in 2002. That pattern was reversed in May.
INTERVENTION
During May, the Government intervened aggressively to halt a precipitous slide in the value the Jamaican dollar. The BoJ provided ample supplies of foreign exchange for the market and the Ministry of Finance issued an indexed bond that pushed up interest rates. Additionally, to bring discipline to the market, "the BoJ tightened up its regulations," one financial sector executive told Sunday Business, speaking on condition of anonymity.
Under provisions of the Money Laundering Act, cambios and remittance companies are expected to report to the BoJ all transactions involving sums of US$8,000 and over. But data from the Jamaica Constabulary Force's Financial Crimes division released in 2002 showed that 'less than 10 per cent' of the agencies in Jamaica were actively reporting suspicious money dealings. Since the BoJ started enforcing the rules more strictly, "people can't just walk in and do what they want any more," the executive said. The result is that 'hot money' can no longer enter the official system easily. He said it is now believed that some major underworld figures are being forced to sit on large piles of foreign exchange which they find difficult to convert into local currency.
"End users are waiting for the Bank of Jamaica (BoJ) to become active in market," Mr. Morrison said. "Most of the funds in the market come from the BoJ." Funds are available above the BoJ rate but it makes no sense going after the high priced funds, the Cambio Association president said.
Market activity is now so low that, "At times this week we have not been able to take up our BOJ allocation (of foreign exchange)," Mr. Morrison said.
"There is a bit of pressure now on the dollar," said Vernon James, head of the stock broking division of Dehring Bunting & Golding. He said oil prices are at very high levels and it is not clear what impact that will have on the national budget.
CONCERNS
Concerns have also been raised because going into summer months, there will be the need to satisfy the summer foreign exchange demands as well as the needs of merchants making early purchases for Christmas, said economist Errol Gregory. And there is also a problem with excess liquidity in the financial system with, he said, "surplus funds looking for a home."
The local currency shot past the $61 mark during May last year before the market was brought under control and fell back below that level. It then hovered around the $61 level in March before easing back and then again crossed the mark on Wednesday, closing the week at a weighted average exchange $61.05 to the US dollar.
But purchasers "are not stockpiling the US dollar," Mr. Morrison said. They are buying foreign currency to satisfy their immediate needs.
"We will not see any runaway in the exchange rate," Mr. James said. "But we are in a strange period It would take little to erode confidence."
