Explain fully FX plan
THERE IS an urgent need for Finance Minister Audley Shaw and central bank Governor Brian Wynter to offer clarity on where Jamaica’s foreign exchange (FX) policy is headed and a frank and lucid explanation that will forestall potential risks to confidence in the system.
We raise this issue in the context of the Government’s plan, outlined in its new US$1.7-billion standby arrangement (SBA) with the International Monetary Fund (IMF), to reintroduce a foreign exchange auction system which, in the absence of details, is causing disquiet in some quarters.
Foreign exchange policy, especially the rate at which the Jamaican dollar trades against other currencies, has been a sensitive and often controversial issue in the quarter-century – and even before – since Michael Manley liberalised the market. In a small, open economy heavily dependent on imports, there are often complaints about the generally downward movement in the value of the Jamaican dollar, without, it seems, a concomitant economic expansion.
Indeed, some analysts, including economic strategists within the governing Jamaica Labour Party (JLP), among them its elder statesman and former prime minister, Edward Seaga, have advocated a fixed, or managed, exchange rate system.
Yet, these debates notwithstanding, and the occasional nuanced differences between the IMF and the Jamaican authorities on exchange rate equilibrium, it was widely thought that the island’s exchange rate mechanism was a settled matter: that rates are set between myriad buyers and sellers in an open market. That was until last week’s publication of the Government’s letter of intent to the IMF, and the Fund’s technical report on the SBA.
It says: “In order to develop a liquid and deep FX market, with support from the IMF technical assistance, the [Bank of Jamaica] will institute a multiple-price auction system – where successful bidders are allocated at the price of the bid – to buy and sell FX in the market.”
The central bank plans to publish the specifics of the arrangement, and the rules that will govern it, by next March, with trading to begin in July 2017. “As these auctions become effective, the BOJ will gradually phase out its use of surrender requirements,” the IMF document says. “The auction system could be replaced by an interbank market, once the latter is established and becomes sufficiently deep to serve as the site for price discovery.”
FUTURE OF EXISTING ARRANGEMENT
Among the questions that have arisen is whether this implies the dismantling of the existing arrangement, with the BOJ becoming a central clearing house for FX, and how it will impact on private foreign exchange users and purchasers who operate within the market. Small holders of foreign exchange, too, want to be certain they won’t be disadvantaged.
The background noise to his issue is an echo from the 1980s when the Seaga administration experimented with myriad exchange rate mechanisms before settling on an auction arrangement, which, on the face of it, ensured stability, facilitating, according to its supporters, economic growth. But critics question the reality of that stability. They claim that moral suasion – or muscle, according to some – was often used against large foreign-exchange users to keep them out of the market and dampen demand.
This is too sensitive a matter to be left to uninformed discourse. A robust, fact-based debate must start now, led by the Jamaican authorities.