Is the IMF to blame for J$ depreciation?

By Aubyn Hill, Financial Gleaner Columnist

Human beings are an amazing specimen. We mismanage, underperform, misbehave and then we blame someone else for our behaviour.

We will then approach another for help, sign an agreement of our own free will, without any duress by the helper - in this case the lender - and then some of us will turn around and blame the lender for demanding of us terms that are too onerous, after we signed and they have disbursed.

The blame becomes downright vitriolic and scathing if, perchance, the lender was to speak some unpalatable and desired-not-be-heard truth about us, like our currency is overvalued - and, therefore, needs to depreciate.

Jan Kees Martijn of the International Monetary Fund (IMF) said so about the Jamaican dollar last week and he and the Fund have suffered a measure of public and private opprobrium over that statement.

One would never believe that this lender of last resort, the IMF, has been through every fiscal number and each piece of macroeconomic data on Jamaica and so has a clear idea and objective view - very likely more objective then most Jamaicans' - of where our currency should be and will go.

While some argue and say what they will about what a depreciating currency will do, others know the IMF's position is empirically correct and are taking steps to protect their valuables and their savings.

The Bank of Jamaica responded with deferring silence. They know the IMF is right and they could not pick a fight with our main financial supporter.

BASes OF CURRENCY VALUE

What are the bases of a currency's value? From some of the arguments I have heard and read, it is apparent that some persons believe that the value of a country's currency is decided by the government of that country, or it is a fiat of the central bank. That is generally not so in a globalised, linked-up and interdependent set of national economies.

A currency's value is a function of a country's productivity, what it exports compared to its imports, and matched against those of a trading partner or another country's.

There is an interesting paradox that countries which have or are perceived to have strong and productive economies fight to keep the value of their currencies low in order to help drive up their exports - China - always; Japan; Turkey; South Korea; and sometimes the United States, are some examples.

Our trade and balance-of-payments deficits have worsened over the decades because, as a nation, our political, business and other leaders have done little or nothing to educate our people well, and invest wisely and in a timely manner. Much lip service has been given but little action taken to encourage local production, increase productivity by our workers in both the private and government sectors - especially in the latter - fight to expand and protect local markets for our indigenous products, and push to grow our exports in regional and wider international markets.

Those are the main reasons why our currency had to depreciate against the currencies of countries that consistently beat us at the production, productivity and export game.

Without a combination of increases in our locally produced products and services, and ever-growing exports from South Korea, Turkey and the small Scandinavian countries, our currency will continue to fall.

Outsiders, investors and those who some call speculators will form the perception that we will not be able to pay for our lifestyle and expensive tastes. They will exact a damning price known as currency depreciation or even a more precipitous devaluation.

In the past, we have foolishly borrowed money to prop up our currency. Note the glee earlier this month when we received the first drawdown under the new IMF US$932-million facility and the joy - quite ephemeral, as one could have predicted and as it turned out - when the Jamaican dollar 'stabilised' at about US$1:J$99 for a few days before it started to fall again.

That same fools' joy was there many times before when our finance ministers announced that we were able to borrow quite unsustainable hundreds of millions of US dollars, which gave our already overvalued currency a temporary pop.

REALLY SERIOUS RISKS

The IMF is not so easily fooled. It has seen lots of foolishness around the world and on our part.

The Fund knows that we have two extreme risks which threaten our economic performance and chances of meeting the targets we agreed with them, and by extension the continuing depreciation of the Jamaican dollar.

The first of those two major risks is the shortfall in collection of taxes - underper-formance against our revenue targets. The IMF is aware, Jamaicans painfully so, that our economy shrank for the last quarter of 2012 and again for the first quarter of 2013.

The Fund knows that many workers are losing their jobs and those who have jobs are fearful and try in every way to cut back on their spending.

Tax collection is a difficult activity at the best of times in Jamaica. In a shrinking economy aggravated by job loses and low spending by consumers, it is fair to conclude that the risk is high of the Jamaican Government missing its tax-collection targets, and especially as we go further into a declining economic climate.

We can hide our heads in the sand; overseas economists of influence are stating it.

The second major risk is the failure to meet even our very modest growth target; the economy has been shrinking rather then growing. Persons see no real leadership being applied to put into effect growth strategies as a combined effort of the Government and private sector. Priorities are not being changed fast enough.

We cannot set up a growth committee - we have not done even that - and expect results. We need to empower a growth leader with authority to choose his or her growth team, pay them to do the job and hold them accountable on a fairly tight leash.

This is a period of economic crisis and sensible and radical implementation is critical. What we used to do and has not worked - look where we are! - must be abandoned and a new approach employed.

We have been able to borrow enough, regularly, to sink us in debt. Thankfully, borrowing will not be so easy in the future. Foreign lenders do not want to hear from us, and our local financial houses having been burned by JDX, NDX and NDX Private are very shy of government debt and are finding new and creative excuses and ways to say no to GOJ paper.

That easy borrowing addiction has led us to adopt a short-termism approach to macroeconomic problems and we have consistently ignored our underlying structural problems.

The improvement of overall efficiency of growth-hindering government machinery seems to have been put on the back burner.

Tax and pension reforms have been studied ad nauseum by any number of committees - forget another committee to drive growth - and we still have no reforms approved by Parliament.

The absence of effective energy and agriculture reforms and modernisation is responsible for two of the biggest drains on our foreign exchange and the continuing depreciation of our currency.

These changes are within our power to make and as long as they are delayed and we fail to grow and export, our currency will continue to slide.

The only silver lining is that the depreciating currency will force us to import less and lead us to focus on what we can produce and export to earn hard foreign currency.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. Email: writerhill@gmail.comTwitter: @HillAubynFacebook: facebook.com/Corporate.Strategies