Mark Ricketts | Why can’t our dollar revalue and remain stable?
Following my recent column, ‘What’s happening with our dollar?’, I received many requests from readers to write a column on whether our dollar can truly revalue and remain stable under our current-free floating exchange-rate regime.
Many people hate devaluation. Why can’t our dollar revalue and stabilise at around J$125 to US$1 seems to be the question uppermost on people’s mind.
The dollar revalues, clawing its way to J$125 from J$137, then, like a recalcitrant child, reverses course and begins another descent, then a rebound.
Bank of Jamaica (BOJ), sensing the public’s concerns, announced recently its intention to provide additional information on foreign-exchange transactions by identifying the volume and price of transactions of US$100,000 or more. Hopefully, greater transparency leads to less volatility.
A day later, the dollar again made headline business news when Keith Duncan, co-chairman, Economic Programme Oversight Committee (EPOC), admitted that there is instability in the currency market because the Jamaican dollar has lost competitiveness in international markets.
This has adversely affected our terms of trade. Put simply, imports will be favoured over exports, a worrying sign given our huge visible trade deficit.
Explaining the dollar’s weakness, Duncan adds, “Our trading partners’ economies have outperformed ours up to March this year.”
This is not good news. Government loves when the dollar revalues since it requires fewer Jamaican dollars to repay its gargantuan foreign debt. Last year’s devaluation accounted for an increase in our national debt, and government is trying to avoid a repeat this year.
When the dollar revalues, imported items such as oil and gas, cars and car parts, in which most of us have a vested interest, are less expensive. So, too, household fixtures and household furnishings, including stoves, TVs, and the fancy shoes everyone likes to wear, as well as brand-name sneakers, suits, and dresses.
Imported raw materials represent a high percentage of the manufacturers’ final product, so manufacturers are upset when the dollar devalues and demand that government correct the situation immediately.
Manufacturers want a revalued dollar with less volatility, so do consumers, as well as the government. Why can’t it happen?
Finance Minister Dr Nigel Clarke points to the transition that has occurred, “from an exchange rate that has been characterised by a one-way movement to one of two-way movement, to one currently of small movements.”
That should provide certainty, confidence, clarity, and commitment as to our dollar’s capability to revalue while remaining stable under a floating exchange rate regime.
Also encouraging is the country’s adequate reserves (reserves adequacy), exceeding familiar benchmarks, including weeks of import cover and cover for short-term external debt.
An interesting, though intellectually more challenging, approach in assessing the dollar’s likely strength, is the current account minus foreign direct investment (FDI). Imports related to FDI are paid from FDI. If our current account, minus those imports, allows us to have current inflows sufficient – or close to sufficient – to meet outflows, the dollar could hold its own.
The small deficits in the current account over the last few years partly explain the trend stability of our dollar even as BOJ built up reserves, albeit more slowly, because of the country’s reserves adequacy.
(The current account minus FDI is a useful but approximate indicator as some FDI inflows are spent on domestic investments.)
To me, BOJ’s frequent extraordinary interventions (flash sales) into the FX market to stabilise and force a revaluation of the dollar, while adding credence to B-FXITT’s legitimacy, says that there are underlying weaknesses with the pricing of our currency.
It is that weakness why some call for a pegged dollar to presumably lock in a non-sustainable, revalued rate of say, $125. The society can’t think devaluation, so we repress it, offering pegging as the answer.
Alternatively, with our floating exchange rate, we shore up the dollar by using precious reserves. Understandably, we shudder at the thought of devaluation, and using such devaluation as a signal to indicate that hardnosed leadership is needed to tackle the intractable problems and difficult choices that confront our society 56 years after independence.
In two years, May 2017 to May 2019, apart from normal flows in our FX market, US$500 million was pumped in to allow our dollar to strengthen and project an image of reasonable stability. The tourism winter season just ended and BOJ’s intervention was US$200 million. That is with a limited footprint.
MAKING MATTERS WORSE
With our currency vacillating between J$125 and J$137 twice in five months, even with BOJ’s continued intervention, this third time around, the dollar appears somewhat lethargic on the rebound, and summer has not yet arrived.
When a dollar moves between two resistance points, say J$125 and J$137, with regularity, it establishes a pattern that astute investors take advantage of.
At J$125, or thereabouts, potential foreign exchange purchasers will buy, and holders of foreign exchange will delay disposing of theirs, knowing that devaluation will occur until BOJs steps in.
Investors will then sell, gaining attractive returns in a matter of weeks. Such activity amplifies the volatility of the market and produces skittishness among traders, importers, and the general public.
We have to do better than a yo-yo pricing arrangement with predictable patterns and with BOJ intervening frequently at one end to shore up a declining dollar.
Making matters worse, Government has introduced policy measures that are at odds with each other and will produce unnaturally strong demands for foreign exchange.
In trying to boost investment, increase employment, foster growth in the economy, and stabilise prices, we have had an easing and loosening in fiscal policy and an expansionary monetary policy that is excessive.
With the country’s supply side impediments, misallocation of resources, labour market rigidities, and an open economy, expansionary policies affect not only variables in the domestic economy, such as consumption and investment spending, but also variables in the foreign sector such as the exchange rate. And that’s our problem.
B-FXITT is a phenomenal tool, but it should not be used to mask the signals our dollar’s weakness, including declining competiveness, is telegraphing the society.