Is devaluation working?
Peter-John Gordon, GUEST COLUMNIST
On December 31, 2014, the Statistical Institute of Jamaica (STATIN) released some trade data covering the period January to September 2014. These data indicated that Jamaica's expenditure on merchandise imports was US$4,393.3 million, a fall of US$80.6 million compared with the corresponding period of 2013.
The release further stated that earnings from total export fell by US$107.6 million to reach US$1,109.0 million. As a result, the trade deficit had widened by US$27.0 million over the corresponding period of 2013.
Omar Azan appeared on television in the early part of January 2015 declaring, on the basis of the STATIN report, that devaluation was not working. He indulged in a tirade against lettered persons advising the Government, which he declared lacked common sense. His prescription was that the Government should hire some people with common sense (and, no doubt, good business acumen).
We will ignore Mr Azan's outburst about the quality of the people advising the Government and seek to explore the validity of his claim that devaluation is not working.
The immediate effect sought of devaluation is to reduce the difference between the outflows of money from Jamaica and the inflow of money into Jamaica.
STATIN's end-of-year bulletin had to do with merchandise trade, not total trade. Merchandise trade is concerned with the movement of physical things, which must be moved between Jamaica and the rest of the world by ships and aircraft. These are things that can be touched. They are referred to as goods.
Jamaica also buys and sells services to the rest of the world. These exports and imports must be included in total exports and total imports. In addition, there are income flows between Jamaica and the rest of the world that must be accounted for.
ja's current account
STATIN, in coming to the conclusion that expenditure on imports for the first nine months of 2014 was US$4,393.3 million, used a valuation referred to as cost, insurance, freight (cif). This valuation includes not only the value of the goods imported, but also the cost of freight and the insurance cost associated with their travel to Jamaica.
Transportation and insurance are, however, not goods, but, rather, services. Using the figures supplied by STATIN takes account of goods and some, but by no means all, services.
To better understand what is happening with Jamaica's economic transactions with the rest of the world, it is better to look at the current account statistics. The latest current account statistics were released by the Bank of Jamaica recently and allow us to fully examine Mr Azan's claim.
The current account is made up of three accounts: the goods account, the services account, and the income account. The goods account records all transactions in goods. These are physical items such as cars, sugar, steel, oil, etc. The valuation used here is the cost of the good, i.e., its value when placed on the vessel that will take it to Jamaica, before the journey is undertaken, referred to as free on board (fob).
The service account records transactions in services. Included in this account would be tourism, transportation, communication services, financial services, government services, royalties, etc. The third account is the income account, which includes the compensation of employees, investment income (consisting of dividends and profits), interest on debt and remittances, among other things. (See table below).
Exports of goods for January-September 2014 was US$1,110.1 million, a decrease of US$117.8 million compared with the corresponding period of 2013. Imports of goods fell by US$237.8 million. Because imports fell by more than exports, the goods account moved from a deficit of US$2,917.6 million in the first nine months of 2013 to a deficit of US$2,797.7 million in the same period of 2014, i.e., the goods account improved by US$119.9 million.
increased service exports
Service exports during the 2014 period accounted for US$2,111.5 million, an increase of US$77.7 million over the 2013 figure. Service imports increased by US$91.6 million. The services account balance, therefore, fell by US$13.9 million.
When goods and services are combined, the deficit stood at US$2,253 million, an improvement of US$106.1 million over the previous year. On the income account, flows into the country fell by US$14.1 million, while flows out of the country fell by US$113.5 million, thus causing the income account to improve by US99.7 million.
If all the earnings for the period January to September 2014 from the three accounts are added together, the country earned US$5,351.9 million, while total expenditure from the three accounts totalled US$6,143.3 million, leaving a deficit of US$791.5 million on the current account. This is US$205.7 million (20.6 per cent) better than the situation was in 2013.
Mr Azan's conclusion that devaluation has failed to have the desirable effect is, therefore, unfounded. What is clear is that the import side of the economy is responding faster than the export side. This is to be expected as imports adjust easier to price signals than exports and, therefore, are likely to be the first of the two sides to show significant movements.
US$ millions Jan-Sept 2014 Jan-Sept 2013 Change
Current account balance -791.5 -997.2 205.7
Credits 5,351.9 5,405.9 -54
Debits 6,143.3 6,403.1 -259.8
Goods & services -2,253 -2,359.1 106.1
Exports 3,221.5 3,261.6 -40.1
Imports 5,474.6 5,620.8 -146.2
Goods -2,797.7 -2,917.6 119.9
Exports 1,110.1 1,227.9 -117.8
Imports 3,907.8 4,145.5 -237.7
Services 544.6 558.5 -13.9
Exports 2,111.5 2,033.8 77.7
Imports 1,566.9 1,475.3 91.6
Income 1,461.6 1,361.9 99.7
Credits 2,130.2 2,144.3 -14.1
Debits 668.8 782.3 -113.5