Ex­plain fully FX plan

Jamaica Gleaner - - OPINION & COMMENTARY -

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.

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