André Haughton, Contributor
A country enters a currency crisis if its exchange rate depreciates by more than 25 per cent in a given year. So far this year, the Jamaican dollar has depreciated approximately 12 per cent, moving from J$93 to US$1 in January to roughly J$104 to US$1 at the moment.
The last time the Jamaican dollar had such a significant depreciation was in 2008, when the exchange rate fell by 11 per cent from $71.59 to US$1 in January to J$80.21 to US$1 in December.
Last year, the dollar depreciated in total just over six per cent for the entire year, and 50 per cent of this depreciation came in the last quarter, from September to December. If the trend continues this year, we can expect the dollar to depreciate beyond $105 to US$1 by December.
The increase in the Jamaican exchange rate since the start of the year is as a result of the high local demand for US dollars relative to the supply. As it approaches Christmas and our demand for goods and services increase, so will our demand for foreign goods. As a result, our demand for foreign currency will increase, which will put additional pressure on the value of the dollar.
The Bank of Jamaica could defend Jamaica's currency by selling foreign reserves (NIR) to cushion any increases in demand, which helps to keep the exchange rate stable. However, Jamaica is low on reserves, as such, it does not have the ability to sell as much reserves to meet the demand as it would like to. Furthermore, the limited foreign exchange support we receive from the IMF has to be budgeted over a period.
If our import habits continue, we should expect the exchange to continue depreciating.