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Sliding dollar will drive inflation, say experts

Published:Tuesday | October 8, 2013 | 12:00 AM

Richard Browne, Business Reporter

Devaluation of the Jamaican dollar will result in an increase in inflation for a number of reasons, says Dr Howard Haughton, managing director of Holistic Risk Solutions and adjunct professor of finance at the University of Technology.

The exchange rate hit US$1 to J$104.15 yesterday.

And Haughton said merchants would push up prices, adding, "So much of what we eat and use is in US dollars."

Haughton said the devaluation would also "contribute towards unemployment, which, at 16.3 per cent, is at a 10-year high." He said that a natural place for making cuts was the non-essential staff.

"We can speculate that, ultimately, the government strategy does not appear to be working, as (if it were working) the result would be a fall in unemployment," he argued. "Private-sector bodies are mistrustful of Government, and people are looking to sell Jamaican dollars and buy US dollars."

He also noted that the banks have put restrictions on the amount of US dollars people can take out at any one time, saying that was, in effect, monetary control or exchange control.

What to export?

On the argument of devaluation promoting exports, Haughton asked, "But what do we have to export?"

He said that Jamaica needs to have not only "a diversity of products to export, but also have products from Jamaica that other countries want to acquire".

Financial analyst and CEO of the Private Sector Organisation of Jamaica, Dennis Chung, said devaluation would drive inflation but may also lead to a contraction of the economy.

"If companies can't increase prices, then you can get a contraction in economic activity," Chung said.

While not speaking specifically to job losses, he said the economy would see a reduction in both services and manufacturing "because it makes no sense to produce at a loss".

Noting that "the Government has had no choice but to reduce fiscal spending," he said there had been a reduction in confidence.

Government of Jamaica paper is no longer a "sought-after" investment, he said, adding, "People are now going more into US$ investments."

He noted that in August, the Government received $5 billion less in revenue than it had projected.

"This tells us what is happening in the economy."

But even with the dollar hitting US$1 to J$104.15, there is some hope for improvement, particularly with tax reform, depending on "how it happens," Chung said.

He said that "business-friendly" reform could result in "people getting back into real investments".