IMF encourages development of forward forex market
In the wake of lingering concerns about the depreciation of the Jamaica dollar, the International Monetary Fund, IMF, is encouraging development in hedging and forward instruments as well as the establishment of a trading platform to facilitate foreign exchange transactions among traders.
Outgoing IMF Mission Chief to Jamaica, Uma Ramakrishnan, noting that infrastructure is needed for the market to provide pricing transparency, said “this is something we have been discussing for a long time and I know the central bank is working on putting in place a platform which is supposed to come on stream early next year.”
In a statement Tuesday, the Bank of Jamaica, BOJ, said it is advanced in the development of a trading platform for foreign exchange that will introduce greater transparency. That same day, BOJ pumped US$40 million into the market.
“We continue to urge Jamaicans to make use of forward contracts in managing their foreign exchange needs,” it added.
Ramakrishnan, responding to the rapid depreciation of the Jamaica dollar against its United States counterpart, especially during the past four weeks, said “a lot more education is needed about why the exchange rate is moving and what is the benefit of a flexible exchange rate.”
She was addressing a briefing on the sixth and final review under the standby agreement with Jamaica during a video conference broadcast from Washington, DC, to the IMF Jamaica Representative offices in Kingston on Monday. The standby agreement officially ended on November 10.
Ramakrishnan noted a lot more noise accompanies the depreciating part of the foreign exchange cycle than the appreciating part. “There is no communication, no conversation around when the currency is appreciating and if you look at the swings they are happening both ways. And that’s what a flexible exchange rate does. It goes up and it goes down,” she said.
“But the conversation cannot just dwell on one side. If you look at the mean of the exchange rate in the last 12 to 18 months it has not depreciated a whole lot. So the conversation has to go in a direction where people understand that flexibility means swings in both directions,” she added.
JA MORE DYNAMIC
According to Ramakrishnan, “those swings are happening because Jamaica is becoming a more dynamic economy. There are capital coming in and capital flows going out and that represents a country that is growing, a country that is being closely looked at.”
She added that, “What is driving the disorderliness needs to be understood before the central bank intervenes in the market. There is no single variable that will drive a disorderly market. What is needed now is market development so that people know that hedging instruments are available, people are educated about hedging instruments, about forward markets and that they are able to manage the swings in such a way that it doesn’t hurt their day to day business.”
In the statement the BOJ said it remained committed to maintaining orderly conditions in the foreign exchange market and will only intervene to prevent disorderly market conditions.
Referring to the trading platform, Ramakrishnan said, “Hopefully, that will help to provide more transparency so people can make more informed decisions. I think there’s a lot of intermediate steps that are missing. I am hopeful that the education campaign to get the information on forward markets out there is going to intensify.”
The central bank said it sold US$40 million to authorised dealers and cambios on Monday to augment supply in the market.
“The factors behind the recent depreciation in the exchange rate are well known and Bank of Jamaica expects that these impulses will subside and that normalcy will return to the market. There has been an increase in demand for foreign currency due to the regular re-stocking by retailers for the Christmas season. Further, there has been extraordinary demand relating to portfolio transactions,” it added.
The BOJ said that notwithstanding the recent depreciation, inflows into the foreign exchange market remain healthy.
For October 2019, average daily inflow from currency earners was approximately US$31 million, in line with October 2018. Due to supply-demand dynamics, the JMD has edged close to $142 against the US dollar, but the bank says it does not expect the recent pace of exchange rate movement to be sustained.
“The current account deficit of the balance of payments is expected to remain low and sustainable, albeit slightly higher than the deficit recorded in 2018. Accounting for the impact of foreign direct investment, inflows will be sufficient to cover this deficit,” the central bank said.