Standing by floating dollar, but ...
WE HAD thought that there was no cause to relitigate the matter, that it was settled policy that Jamaica has a floating currency, whose value fluctuated against other currencies. It can go up and down. Some, it seems, would wish to reopen that debate with an insufficient focus on the larger issues.
The central bank, if it so wishes, can short-circuit the growing disquiet over foreign-exchange (FX) management with greater transparency of its operations in the FX market. And it need not await legislative changes as part of the moves to enhance its independence.
Like the value of the dollar itself, Jamaica’s currency has, over the past two decades, been on an often gutwrenching, mostly downhill, roller-coaster ride. At the start, the value of the Jamaican currency was fixed against the greenback. This was followed by a raft of experiments in currency management, ranging from parallel markets to multiple exchange rates, and manipulated currency auctions.
The upshot of the myriad arrangements, given the insufficiency of foreign exchange, imprudent fiscal policies, and large fiscal deficits, was a currency black market, which persisted until the elimination of capital controls and the floating of the currency in the early 1990s, albeit, the critics insist, without the reserves to cushion the Jamaican dollar. The currency fell precipitously, fuelling inflation.
DOWNWARD MOVEMENT
In the years since then, the movement of the Jamaican dollar has been mostly downwards, but that has largely been because, until the reforms of the last six years, the macroeconomy was still awry. Recent events, though, in the absence of an adequate explanation for their happenings, appear to be threatening the policy consensus around a floated Jamaican dollar, in favour of a fixed currency, however achieved.
On Monday, the rate was close to J$136.55:US$1. Yesterday, it neared J$136.90:US$1. But over the past year, the Jamaican dollar has depreciated by approximately seven per cent, while inflation was less than five per cent, just over two percentage points above the rate in Jamaica’s major trading partner, the United States. There is perhaps some need for adjustment to maintain Jamaica’s currency competitiveness. The concern, though, is the recent pace of depreciation. Since the end of June, the local currency has dipped approximately five per cent, accounting for more than 70 per cent of the value it has lost in the past year.
The resultant anxiety at what this might mean for prices has not been assuaged by the fact that the currency appreciated marginally in June and was relative stable for most of the year. Nor has it been helped by the absence of clear, easily understood explanations of the cause for the recent decline.
ACCUMULATING US DOLLARS
Prime Minister Andrew Holness blamed speculators “betting” against the Jamaican dollar, while Brian Wynter, the central bank governor, at one point argued that it was primarily the result of businesses accumulating US dollars to close out foreign exchange loans in favour of Jamaican-dollar debt. Others have raised the possibility of the central bank seeking, through its interventions in the market, to use the depreciating currency to drive inflation towards its target rate of four per cent to six per cent. There is no clarity.
Nobody wants to return to the bad old days of capital controls and currency black markets, and when fiscal adjustment was the only tool in the policy kit to address misalignments in the macroeconomy.
In Jamaica’s circumstance, confidence in the foreign exchange system, and acceptance that the currency can sway either way, require easily digestible information on how it works and the mechanism to which it responds.
The Bank of Jamaica now puts out basic explanations for its policy rates, which are to guide banks on what they should pay and or charge their customers. That ought to be expanded, by providing a fuller discussion of the bank’s monetary policy drivers, as well as regular explanations of its actions in the FX market and how these actions complement each other.