The falling dollar and us

Oran Hall, Personal Financial Adviser

It is quite the norm these days to hear that the value of the Jamaican dollar is falling against the US dollar and other foreign currencies, meaning it requires more Jamaican dollars to buy the same amount of foreign exchange as before.

This makes imports more expensive and our exports cheaper to foreigners as less foreign currency is required to pay for our goods and services.

The value of the Jamaican dollar is depreciating against other currencies.

Devaluation has the same effect on a currency but the two are not the same. Depreciation occurs when a country has a floating exchange rate regime; the exchange rate is thus determined by the market, by the demand for and supply of currency.

Even though governments and central banks can try to influence the rate, in the end, it is the market which determines it. Devaluation is policy based and occurs when a country makes a deliberate decision to lower the exchange rate of its currency in a fixed or semi-fixed exchange-rate regime.

How does depreciation of our dollar affect us? We buy a lot of what we use from abroad. For January to November 2012, we spent the equivalent of US$6.15 billion on imported goods from countries around the world.

We cannot use Jamaican dollars to pay for Canadian goods or British goods, for example. Our dollar has no use in those countries, so we have to buy Canadian dollars or the pound to pay for these goods and services.

When our dollar depreciates, we have to use more of our currency to buy theirs to make payment.

The price of these goods and services thus increases in Jamaican dollar terms and pushes up the general price level in the country. The increase in the general level of prices is called inflation.

Inflation is not good generally. It increases the cost of living and thus reduces our standard of living as it makes us less able to buy as much as we used to. In order to continue living as we used to, we either have to earn more, save less, withdraw from our savings, sell our investments or borrow.

These short-term actions can make us feel good today but we eventually get worse off. Inflation is particularly bad for persons on fixed incomes.

Some of the worse affected are pensioners because their pensions are usually fixed. Some persons are fortunate; their pensions are indexed, meaning that they increase as inflation increases.

Increase in prices

How then will the depreciation of the Jamaican dollar affect you and me? Expect the price of many of the things we use to increase either because we import them from abroad or they are made in Jamaica but with inputs that are imported.

The price of gas will increase. Well, that has been increasing perennially but here is one more reason why it will increase again.

Bear in mind that our dollar has been doing poorly for a long time but the slippage was creeping, so we hardly noticed it. It certainly is not creeping now, so we cannot help but notice what is happening. We should have good reason to curtail our travelling now.

Watch the cost of electricity. A significant portion of the fuel used to give us electricity is imported. Have you seen any change in your bill yet? Well, I have. The bill I received today is 27 per cent higher than the previous one although I only used 14 per cent more electricity.

We have to monitor our usage more as the time gets warmer. But another reason for the change was the increase in the billing exchange rate. Electricity is required to get water to us, among other products and services. Watch the cost of that too.

What about food? We import lots and lots of all kinds of foods. Watch those prices. Are we prepared to eat more local foods? What about growing more of what we eat? It will do some persons a world of good to eat less.

Here is a good reason to start. And bear in mind that the prices of locally-produced goods and services could rise as their producers try to make up for the increase in their expenses generally.

Try not to get sick. That could hurt the pocket at the pharmacy. In the same vein, car parts will cost more. It will cost more to travel abroad and to keep children in school abroad.

Consider yourself lucky if you get remittances from abroad as you will receive more Jamaican dollars on conversion of the foreign currency to Jamaican dollars.

That is no reason to splurge. You probably will not be better off, anyway, considering that it will cost more to live. If you sell goods and services to persons in foreign countries, expect to earn more in Jamaican dollars.

A weakening local currency is not good news for our financial plan. It makes it more challenging to maintain savings levels, to maintain assets in good condition, to protect assets, to educate children and do much of what we routinely do to live now and prepare for the future.

To keep our plan on track, we must do more regular reviews and make adjustments where possible.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Send feedback to finviser.jm@gmail.com