IMF OF­FERS CLAR­ITY ON JA­MAICA’S FOREX POL­ICY

Jamaica Gleaner - - FRONT PAGE - Con­stant Lonkeng is IMF res­i­dent rep­re­sen­ta­tive in Ja­maica and Uma Ra­makr­ish­nan is IMF mis­sion chief for Ja­maica. Email feed­back to col­umns@glean­erjm.com.

IN ITS ed­i­to­rial of Novem­ber 21, The Gleaner asked for more clar­ity on prospects for the Ja­maican dol­lar. It is, of course, the Gov­ern­ment’s pre­rog­a­tive to de­fine its poli­cies on this and other economic is­sues. The IMF is here to sup­port those ef­forts and pro­vide the best pol­icy ad­vice we can.

How­ever, we be­lieve we can con­trib­ute to the do­mes­tic de­bate and dis­pel some in­cor­rect no­tions that have been floated in re­cent days, par­tic­u­larly as they re­late to the new IMF­sup­ported standby ar­range­ment with Ja­maica. Q. Is the Ja­maican cur­rency over­val­ued? A. No. The ev­i­dence shows that the Ja­maican cur­rency is broadly in line with the ex­ist­ing economic fun­da­men­tals. We fully agree with the Bank of Ja­maica on that point. There are, as you may imag­ine, a lot of mov­ing parts and risks to any such as­sess­ment. If we are asked to de­scribe the risks around our as­sess­ment, our best judge­ment is that there is a risk that the Ja­maican dol­lar is more likely to be mod­estly over­val­ued. How­ever, such risks are linked to the speed at which the coun­try in­tends to liq­ui­date its ex­ter­nal li­a­bil­ity po­si­tion. If Ja­maica wants to liq­ui­date its ex­ter­nal li­a­bil­i­ties faster, the cur­rency is at the risk of be­ing mod­estly over­val­ued. We have out­lined more de­tails on how we un­der­take our ex­change-rate as­sess­ment in our re­cent staff re­port www.imf.org/ex­ter­nal/pubs/cat/lon­gres.aspx? sk=44394.0.

Q. What is the IMF-sup­ported pro­gramme’s ob­jec­tive for the ex­change rate?

A. Our goal, which we have shared with the Ja­maican Gov­ern­ment over the past four years, is that the Ja­maican dol­lar should be flex­i­ble and mar­ket-de­ter­mined. We have also sup­ported the Gov­ern­ment’s goals to build for­eignex­change re­serves. Ex­change-rate flex­i­bil­ity – which works as an economic shock ab­sorber – im­plies that the cur­rency can freely move in ei­ther di­rec­tion, and there is no no­tional tar­get range for the ex­change rate. Of course, if there are abrupt move­ments in the ex­change rate be­cause of ex­tra­or­di­nary cir­cum­stances, the Bank of Ja­maica should use FX in­ter­ven­tion to smooth out the volatil­ity, as it has been do­ing.

But, out­side of those un­usual move­ments, it is in Ja­maica’s best in­ter­est to al­low mar­ket forces to de­ter­mine the level of the ex­change rate and for the Bank of Ja­maica to fo­cus on its in­fla­tion ob­jec­tive and to steadily build its in­ter­na­tional re­serves.

Q. Has the Ja­maican dol­lar de­pre­ci­ated too much?

A. No. We know there are sen­si­tiv­i­ties on the level of the Ja­maican dol­lar with re­spect to the US dol­lar. We recog­nise also that there has been anx­i­ety as the cur­rency has moved from 119 to 129 over the past 12 months. But we be­lieve it is im­por­tant to look at the ex­change rate in a broader way – not just rel­a­tive to the US dol­lar, but rel­a­tive to all of Ja­maica’s trad­ing part­ners (in­clud­ing Canada, Europe, and Caribbean neigh­bours) and to ad­just for dif­fer­ences in in­fla­tion across coun­tries.

On this ba­sis, as the pic­ture shows, the Ja­maican dol­lar to­day is roughly at the same place it was three years ago. We know that sounds coun­ter­in­tu­itive. But re­mem­ber, from Septem­ber 2014 to Septem­ber 2015, the US dol­lar it­self was ris­ing by more than one per cent per month against its trad­ing part­ners. Tak­ing such a broader per­spec­tive is likely to be­come in­creas­ingly im­por­tant in the months ahead.

With the change of ad­min­is­tra­tion in the US, one can­not dis­count that the US dol­lar could strengthen fur­ther against in­ter­na­tional and re­gional cur­ren­cies. In­deed, the US dol­lar has al­ready risen around two per cent over the past two weeks against a global bas­ket of cur­ren­cies. It would be a mis­take for Ja­maica to hitch it­self to a ris­ing US cur­rency.

Q. Is the IMF go­ing to dis­man­tle the ex­ist­ing in­sti­tu­tional ar­range­ments in the cur­rency mar­kets?

A. No. We are work­ing, how­ever, to sup­port the Bank of Ja­maica in im­prov­ing the ways in which it in­ter­acts in the cur­rency mar­kets to make those in­ter­ac­tions more ef­fi­cient and more mar­ket-based.

The cur­rent sys­tem has worked well to build re­serves, but it is rudi­men­tary and re­sults in a rel­a­tively shal­low FX mar­ket. This, in turn, leads to in­creased day-to-day volatil­ity in the ex­change rate. The idea is for the Bank of Ja­maica to grad­u­ally phase out its sur­ren­der re­quire­ments, which is a blunt tool to buy for­eign ex­change. In­stead, if the Bank of Ja­maica wishes to buy or sell re­serves, it would have to do so like ev­ery­one di­rectly in the FX mar­ket. To en­sure those trans­ac­tions are trans­par­ent and mar­ket-based, a new FX auction mech­a­nism for freely buy­ing and selling FX would be in­tro­duced. The end goal would be for the Bank of Ja­maica to be one of many mar­ket par­tic­i­pants in the in­ter­bank FX mar­ket.

If suc­cess­ful, mar­ket par­tic­i­pants would be able to trade with each other with­out the Bank of Ja­maica sit­ting in the mid­dle of the mar­ket. Sup­ply and de­mand would be de­ter­min­ing the day-to-day move­ments in the ex­change rate. We would em­pha­sise, such a shift in in­sti­tu­tional ar­range­ments will be grad­u­ally phased in and should have no added ef­fect on the level of the ex­change rate. These changes are en­tirely tech­ni­cal and aim to mod­ernise the op­er­a­tional tool­kit of the Bank of Ja­maica in line with those of other cen­tral banks.

Uma Ra­makr­ish­nan Con­stant Lonkeng

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