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JMD undergoing yearly check-up for bloatedness - IMF assessing whether Jamaican currency still overvalued

Published:Wednesday | April 16, 2014 | 12:00 AM

McPherse Thompson, Assistant Business Editor

The International Monetary Fund (IMF) is doing another assessment of the Jamaican dollar to determine whether it is still overvalued and the degree to which it should be adjusted to boost competitiveness.

The fund previously estimated that the JMD was overvalued by 9-22%, but has not specifically indicated the level at which it expects the exchange rate to level off over time.

To pinpoint a specific rate is to suggest there is a magic number and that "when you reach that number everything is fine"; but that is not the case, said IMF mission chief for Jamaica, Dr Jan Kees Martijn.

"The answer is, everything is fine when you have a balance of payments that is sustainable, when you have a reserve level that is high enough and doesn't go down, (and) it is not under threat," said Martijn in an interview on the margins of the Spring Meetings of the IMF and World Bank last week in Washington, DC.

"We would really judge it by the economic outcomes rather than by any prior numerical target," he added.

The implied exchange rate against the US dollar at the end of fiscal year 2013-14 - based on projected NIR in the summary accounts of the Bank of Jamaica (BOJ) and included in IMF country report on Jamaica dated March 2014 - was $110.

At the end of fiscal year, on March 31, the Jamaican dollar traded at $109.57 to the US dollar, and has continued to slide - averaging $109.80 on Monday.

IMF resident representative in Jamaica, Dr Bert van Selm, who was jointly interviewed with Martijn, observed that the outcome corresponded to the lower end of the 9-22% overvaluation range indicated in the May 2013 country report.

The Jamaican dollar fell by approximately 11 per cent in the last fiscal year. According to the BOJ's summary accounts, the implied exchange rate at the end of fiscal year 2014-15 is $120 based on a projected J$175 billion or US$1.45 billion of net reserves. It implies a further depreciation of about 9% this fiscal year.

Chief executive officer of the Private Sector Organisation of Jamaica, Dennis Chung, says there are countervailing forces that can cause it not to get to the level forecast.

"If we continue to improve the balance of payments, there's no reason for big movements in the dollar," he said.

Projects for energy solutions are happening, business confidence is returning, and the fiscal accounts "are moving in the right direction," said Chung, emphasising that a reduction in oil and food imports will take pressure off the exchange rate and hence "there's no reason for the dollar to go to $120."

Martijn, in response to a Wednesday Business query on the rate, said, "The Fund does not comment on projected exchange rate trajectories, other than by assessing the valuation of the exchange rate."

The IMF's assessment of the valuation of the exchange rate will be included in the upcoming Article IV consultation, he said.

In the May 2013 report, the IMF said Jamaica's external competitiveness had continued to deteriorate partly because of long periods of an appreciating real exchange rate.

Real exchange rates compare the cost of similar goods or services across borders.

The negative correlation between the real exchange rate and export market share shows the importance of the exchange rate in restoring competitiveness and promoting growth over the medium to long term, said the IMF report.

Martijn said the IMF would be doing an assessment of the exchange rate for each year of the four-year extended fund facility agreement with Jamaica.

"We redo it every year and this sets the tone as to what we would expect more or less to happen," said the IMF official. "And, just as we had this 9-22% range the last time, we will have another range this time," he said.