The Jamaican dollar, a major distraction
Published: Sunday | May 24, 2009
Many homeowners now quote rental and sale prices in United States dollars. - File
Now that carnival is over in Trinidad, Brazil, Panama, Ecuador and many other countries, it may be a good time for us to end the masquerade in Jamaica. Whereas in these countries carnival lasts two days, usually the Monday and Tuesday preceding Ash Wednesday, Jamaicans have been jumping up for almost 40 years wearing a costume and mask called the Jamaican dollar.
During this time, we have seen our costume getting skimpier and skimpier, leaving us indecently exposed to the cynically fascinated gaze of Mr and Mrs United States (US) dollar and other foreigners. Moreover, our blushing discomfort is in no way assuaged by the stark realisation that the costume, that once covered us from head to toe and also left some material dragging behind us, cannot today cover even the smallest of our toes. In other words, the Jamaican dollar that 40 years ago had a value of US$1.20 now has a value of approximately one 'deggae deggae' US cent.
While we have been jumping up with epicurean verve and abandon, many of us, feeling the breeze of nether exposure, have become aware of the inadequacy of our costume; but this disturbing awareness has always been met by concerted effort on the part of the bandleaders and costume designers to produce for us the right road march to keep us chipping down the devaluation road. That breeze has been the reality of the US dollar.
The road marches have had a common thread, that of the reciting of 'Exchange Rates Determinants 101' ad nauseam, balance of payments, interest rate variance, supply and demand, etc.
Why has the Jamaican dollar continued to depreciate so much over the last five decades?
The reason glibly adduced has always been that the demand has been exceeding the supply and that the country, therefore, needs to earn more foreign exchange. This answer is based on the erroneous premise that the supply of foreign currency available in this market represents the sum total of foreign exchange earned in or by Jamaica.
Since the US dollar is a commodity like any other, it would not be unreasonable to assume that earners, producers and inheritors of this commodity have the opportunity and right to determine how much is brought to the market.
Moreover, those who have bills, responsibilities or liabilities denominated in Jamaican dollars would quite reasonably and rationally wish to reduce, and indeed minimise, the quantity of US currency required to cover these.
It is this writer's view that speculators are not monsters. They are rational investors. It is going to be very difficult for anyone to ignore the relative return that the US dollar has yielded over the last 40 years. The staggering rate of devaluation and depreciation of the Jamaican dollar is tantamount to the Jamaican-dollar return for the holders of US dollars over this period. It also represents the stark absence of confidence in the Jamaican dollar as a repository of value.
Appealing to patriotism and social conscience has not elicited the desired response. What is absolutely necessary is the institution of policies conducive to a confluence of interest between the holders of US dollars and the economic development of Jamaica.
Every year, we have been engaged in the exercise of trying to establish equilibrium between desirable interest rates and the protection of our beleaguered dollar. We have been talking about balance of payments, debt-to-GDP (gross domestic product) ratios, the interest rates of our competitors, Bretton Woods, etc.
For years, experts of every ilk, hue and accent have trotted out the above variables as the determinants of the exchange rate. The problem is that, in Jamaica, these variables represent no more than 50 per cent of the picture. The other 50 per cent is speculation.
I strongly suspect that all holders of US dollars would welcome an opportunity to increase their contribution to the development of the Jamaican economy. It behoves us, therefore, to create the macro environment that would make investment in the production of goods and services much more attractive than government paper and leaning on the Jamaican dollar.
To this end, the only logical option available to us is to get the Jamaican dollar out of the way. It may very well be not only the major obstacle to economic development in Jamaica, but also an illusory distraction from the serious business of implementing the correct strategies for development and growth. Let us take the steps to retire our beloved dollar from active duty, while it still has a value that is positive, albeit one US cent.
By the way, it should be noted that, in real terms, we have already dollarised. Real estate, hotel rooms, travel packages, electricity, food etc., are already priced in US dollars; but it is the informal nature of this dollarisation that is wreaking havoc on the disposable income and purchasing power of all who are innocently engaged in the business of earning Jamaican dollars.
What are our options for establishing a reliable, development-engendering currency in Jamaica?
Confidence in the Jamaican dollar has been so eroded that attempting to fix an exchange rate managed by the Bank of Jamaica would be, at best, an exercise in futility.
Adopting the Eastern Caribbean, Barbados or Trinidad dollar (notwithstanding the decades of stability that these currencies have enjoyed) would not be psychologically palatable.
Pushing Caricom to establish a common currency, which we would adopt, would be a process that may give rise to an agreement signed by one of our grandchildren. The same gentlemen, who in the '60s heartily engaged in 'ST' on the block in Taylor Hall, Chancellor Hall and Irvine Hall on the Mona campus of the University of the West Indies, have over the years done little more than change the 'ST' venue.
For this and other reasons it is difficult for unrepentant 'federationists' like me to determine whether Caricom gone or done.
The only real option is, therefore, dollarisation, or the adoption of the US dollar as the currency of Jamaica.
Is this writer compos mentis? Is there no regard for our sovereignty and national pride?
Adopting the US dollar is no different from buying a foreign-made motor car. We do not insist on buying locally manufactured cars. We want vehicles that can take us reliably from point A to point B.
Currency is no more than a vehicle. It is not something that should have us engaged in flag-waving. Reliability of value is the most important criterion.
We need have no fear about venturing into the unknown. There are at least three countries close to us that have implemented the dollarisation strategy to good effect. These countries are Panama (1904) El Ecuador (2000) and El Salvador (2001).
The effect of dollarisation on these countries has been positive.
Annual inflation has been reduced to single digit.
Domestic interest rates have been brought into line with international rates.
Savings and investment have increased as a direct result of confidence in the currency. Companies have seen an increase in productivity, largely as a result of lower financing cost.
Employees' spending power has been protected.
The export base has been broadened.
Debt as a percentage of GDP has been reduced considerably.
Fiscal discipline is maintained, as governments cannot print money.
Long-term planning has been facilitated.
There are, of course, disadvantages to dollarisation.
We would lose the seigniorage, or the difference between the face value of the notes and coins put into circulation and the cost of producing them; but it may not be impossible for a shared seigniorage to be negotiated with the US Federal Reserve.
In the worst-case scenario that we would have to lose it entirely, we could consider it a small price to pay for monetary stability.
Government would be unable to use devaluation to cover budget deficits.
Cost of living will increase in the short run.
Here, however, the International Monetary Fund could be asked to provide the balance-of-payments support that would ensure not only a tolerable conversion rate, but also a smooth transition from one currency to the other. It is quite timely that we are having discussions with the fund.
It is true that the central bank would no longer be able to function as a lender of last resort for banks in trouble (although recently it has had to function as a borrower of first resort), but this does not mean that those banks would not have access to credit.
My view is that the benefits of dolarisation far outweigh the disadvantages. Moreover, this is the ideal time for us to dollarise. There will be no capital flight. Whither would capital flee? There are no enticing paper offers available in the US at this time; nor will there be any in the near future.
The world is in pause mode; and herein is our window of opportunity to survey, rethink, retool and refocus. Let us take the steps necessary to release the creative energies eagerly poised to transform our economy and engender the progressive, just, empathetic, empowered society that would be the envy of not only the diaspora but also the rest of the world.
Dollarisation is no panacea. Jamaica must also make the structural and institutional adjustments that will ensure that monetary stability give rise to sustainable economic development and growth.
This is our opportunity to make investment in the Jamaican economy the best game in town. My estimate is that the window of opportunity will not be open for more than twelve months. We must, therefore, 'take the current while it serves or lose our venture'.
Bramwell Shepherd is a marketing consultant. He may be contacted at email@example.com.