Wed | Mar 20, 2019

Jamaica currency woes, an underlying solution

Published:Friday | February 21, 2014 | 12:00 AM

Wilberne Persaud, Financial Gleaner Columnist

In its
February 7 offering, the New York Times (NYT) Editorial Board commented on the fact that in recent years "developing countries like Brazil complained that the United States and other industrialised countries were waging a 'currency war' against them by artificially driving down the value of dollars, euros and yen. Now officials in some nations, like Argentina and Turkey, are blaming foreign 'vultures' and 'the interest rate lobby' for the sharp depreciation of their currencies."

The board disagrees with this interpretation of their current woes. Admittedly, devaluation of emerging market currencies immediately increases the cost of imported oil and as well, magnifies the cost of debt servicing associated with loans denominated in hard currencies like dollars and euros.

Notwithstanding this, they suggest that rather than complaining about what may appear to be 'conspiracy' - orchestrated or not - leaders of "developing countries ought to be ... addressing economic problems like inflation and corruption while investing in infrastructure and education. Going forward, emerging markets could better protect themselves from the rapid flow of foreign capital into and out of their financial systems by regulating them."

The logic of this advice is impeccable. In our age of financial globalisation, however, the second part of their proposed remedial action is hugely problematic. For starters, such moves would extinguish an already fragile investor confidence these countries try to assemble. Additionally, it is questionable whether multilateral financial institutions would express much joy about such a policy shift.

Addressing depreciation

We meet face to face, freely flowing global financial movements with no global central bank - if ever such a beast could exist!

Actually, for Jamaica, part of this advice is spot on: address inflation, fight corruption, invest in infrastructure and education. These policy objectives, if achieved, would definitely improve prospects for the country's developmental growth. But they constitute a hard road to travel. Jamaica's foreign capital movements don't mimic those of the emerging markets the editorial board discusses.

Jamaica currency depreciation or devaluation derives first, from poor export performance as against an exceptional import record and second, perhaps more important, expectations of currency depreciation leading to both precautionary and speculative foreign-currency holdings by Jamaican businesses and individuals.

Undoubtedly, the huge and, until recently, growing fiscal overhang contributed heavily to both these outcomes. Government expenditures in excess of revenues fuel consumption and import demand.

The feedback loop kicks in when businesses must price their output in expectation of increased import costs subsequent to adverse exchange-rate movements. They must also hoard foreign exchange to meet their expectation of such movements - which they have come to predict as inevitable. Their attitude ceases to be something we might capture as probabilities. Rather, their behaviour smacks of certainty. This scenario tells a three-decade-old tale, at least.

How to combat inflation? Exchange rate depreciation of the frequency the economy faces builds inflation into the system. So to fight inflation, we need a stable dollar for a relatively long period. Infrastructure development is costly and requires imports. Funding is hard to come. Foreign real sector investment can go a long way towards easing this bottleneck.

What about corruption and education? Corruption is costly both in terms of dollar figures and the destruction of efficiencies the economy may achieve. Furthermore, it renders the return on 'capital expenditure' less than it should be. We have suggested that perhaps one reason for the differences in return on capital exhibited by Jamaica, compared to some other CARICOM countries in the recent past, might reflect accounting niceties.

Protection-racket costs may become muddled with capital expenditure, cost overruns may reflect systemic corruption.

Return on education requires neither defence nor exposition - take it as given. Let's simply say that a growing population of youth, subject to an exemplary education system delivering citizens as polished gems from rough stones, might actually transform some of the negative lyrics of dancehall. Lyrics reflect life as experienced. Think of the novel as enhanced, doctored biography.

This piece of advice from the NYT Editorial Board, although not meant for us, is well worth contemplation.

Wilberne Persaud, an economist, currently works on impacts of technology change on business and society, including capital solutions for Caribbean SMEs.