Dr André Haughton, Contributor
Where is the exchange rate now?
As we enter the final quarter of the year, it is important to look at the value of the Jamaican dollar. Having started the year at approximately J$93 to one US dollar, the Jamaican dollar depreciated by more than $10.50, selling for a record high of $103.59 to US$1 at the end of trading day on Monday.
This comes as no surprise, as Jamaica has failed to attract the foreign-currency inflow needed to support the country's high demand for foreign goods and services. Although some speculate that this depreciation might be good for exports, as Jamaican goods and services now appear cheaper to the rest of the world, it is really of no use if the country is incapable of producing in mass quantities.
It seems a currency crisis might be looming as Jamaica continues to rely mainly on IMF drawdowns as one of the main sources of foreign-currency inflow.
Are the IMF funds enough?
The IMF has reported that Jamaica passed the test for the quarter ending June 2013, giving way to the disbursement of an additional US$30.6 million. To prevent the dollar from depreciating further, Jamaica should try, as best as possible, to strengthen its financial sector to attract foreign investment to increase the inflow of foreign currency.
Relying on the IMF alone is not enough. As explained in previous briefings regarding the exchange rate, countries need to provide incentives to attract foreign investors with foreign currency. The interest-rate channel is one such avenue. However, Jamaica has been a long-standing high interest-rate regime that this channel has been exhausted, so the country cannot explore this option.
Furthermore, given the current energy crisis and overall cost of doing business in the country, much is to be done before we can confidently attract investors to the country.
What are the other sources of foreign-currency inflow?
Remittances have been a consistently good source of foreign currency inflow for the country. Net remittance for the period January to June this year has been marginally higher to the corresponding period last year - US$899.3 million, compared to US$809.8 million last year - although actual remittance outflows, as well as inflows, are less this year, relative last year.
Total inflow, up to June, last year, was US$1026.7 million, relative to just US$1020.2 million this year. Total outflow last year was US$135.8 million, compared to just US $120.9 million this year.
The net effect is an overall increase of US$8.4 million, or 0.9 per cent, this year, compared to last year. However, the figures for June tell a different story. Net remittances for June fell by 4.8 per cent, or US $7.3 million, compared to last year.
Remittance inflow has been falling gradually, which puts more emphasis on the need to increase production for exports as the only real alternative to provide meaningful foreign-currency inflow. Tourism also has been one of our major foreign-exchange earners, but there is little in terms of new strategies to attract tourists as we rely mainly on sun, sand and beach, as if tourists cannot get this cheaper elsewhere, with little emphasis on our cultural appeal.
Where are we now?
Our exchange rate continues to depreciate due to our continuous high local demand for foreign goods and services, relative to what we supply abroad. Our inability to increase the production of goods and services for export, or production of goods and services at all, is our major downfall.
Countries with budding economies such as China, or even Guyana, have been increasing emphasis on production and export. The IMF foreign-currency inflows from the agreement alone are really not enough to increase the supply to stabilise the dollar.
Jamaica does not have the ability to sell as much reserves to meet the demand as it would like to keep the dollar stable. Therefore, it has less control over exchange-rate depreciation. The exchange rate will continue to depreciate until Jamaica can replenish its reserves, attract foreign investment, increase local production for export, or increase its foreign currency inflow by some means, while reducing its demand for foreign goods and services.
Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email email@example.com.