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Damien King - Guest Writer
Everyone needs to just calm down. The slide of the Jamaican dollar from approximately $70 to the US in November of last year to nearly $90 today is causing some public consternation and outright alarm at Jamaica House.
It is time to bring some sense - some economic sense - to the issue. The exchange rate movement is not only no cause for alarm, but may even do the economy some good.
Two years ago, you could walk out of the supermarket with a modest basket of groceries for around $1,000. If you walked into a supermarket today for a few days sustenance, you better have at least $1,400 in your pocket, otherwise you will have to skip a meal or two.
Paying More For Less
Since December 2006, the cost of the typical grocery item has risen by some 40 per cent. To put it another way, the value of the 'Manley' - $1,000 bill - that you walked in with two years ago has fallen by that proportion.
But if the value of the currency has fallen by 40 per cent, then at some point that fact has to be reflected in the exchange rate, which is just another measure of currency value.
That point has arrived. The movement from $67 to $90 over the last two years is a depreciation of approximately 34 per cent. So the movement we see in the exchange rate is a reflection, not of a problem with the foreign-exchange market itself, but of inflation.
Even if you go back a dozen years to when the exchange rate was $34.87 at the end of 1996, the same pattern emerges.
The movement from then to the current rate of almost $90 is a depreciation of around 158 per cent. If you work out the rise in the cost of living in using Jamaica's Consumer Price Index, over the movement of its American counterpart, you get a nearly identical 153 per cent.
Controlling Inflation
So if a solution is be found to the current slide of the dollar, it cannot be sought in manipulation of the exchange regime or in management of the foreign-exchange market. It must lie in the control of inflation. Until we do that, we have to just 'hug up' the exchange rate outcomes.
But even if we now understand what is causing the exchange rate movement, surely the higher cost of imported goods must be bad for the economy, and therefore cause for some alarm? In a word, no. Foreign exchange transactions are transfers between Jamaicans. Ignoring the intermediaries such as banks, the transaction is between the earners and users of foreign exchange.
So while users - petrol guzzlers and vodka drinkers - have to pay more, they are paying it to the earners - ginger exporters and hotel housekeepers - who also have families to feed.
Whether the transaction takes place at $70 or $90 or $900 does not make the country as a whole worse off. It only transfers income between the two groups.
Rather than asking, then, why the currency is depreciating, we should be asking, given inflation, why it didn't occur sooner.
The answer perhaps lies in the inflows of foreign exchange that accompanied the recent investments in highways, hotels, and maybe even government debt. The extra foreign exchange pushes the exchange rate down, or at least discourages it from going up.
Those flows having diminished, the exchange rate now makes the overdue adjustment, and an adjustment that we want it to make. No economic good comes from holding to a rate that discourages the ginger exporters and subsidises the petrol guzzlers, which the old rate at $70 had begun to do.
It is time to bring some sense - some economic sense - to the issue. The exchange rate movement is not only no cause for alarm, but may even do the economy some good.
Two years ago, you could walk out of the supermarket with a modest basket of groceries for around $1,000. If you walked into a supermarket today for a few days sustenance, you better have at least $1,400 in your pocket, otherwise you will have to skip a meal or two.
Paying More For Less
Since December 2006, the cost of the typical grocery item has risen by some 40 per cent. To put it another way, the value of the 'Manley' - $1,000 bill - that you walked in with two years ago has fallen by that proportion.
But if the value of the currency has fallen by 40 per cent, then at some point that fact has to be reflected in the exchange rate, which is just another measure of currency value.
That point has arrived. The movement from $67 to $90 over the last two years is a depreciation of approximately 34 per cent. So the movement we see in the exchange rate is a reflection, not of a problem with the foreign-exchange market itself, but of inflation.
Even if you go back a dozen years to when the exchange rate was $34.87 at the end of 1996, the same pattern emerges.
The movement from then to the current rate of almost $90 is a depreciation of around 158 per cent. If you work out the rise in the cost of living in using Jamaica's Consumer Price Index, over the movement of its American counterpart, you get a nearly identical 153 per cent.
Controlling Inflation
So if a solution is be found to the current slide of the dollar, it cannot be sought in manipulation of the exchange regime or in management of the foreign-exchange market. It must lie in the control of inflation. Until we do that, we have to just 'hug up' the exchange rate outcomes.
But even if we now understand what is causing the exchange rate movement, surely the higher cost of imported goods must be bad for the economy, and therefore cause for some alarm? In a word, no. Foreign exchange transactions are transfers between Jamaicans. Ignoring the intermediaries such as banks, the transaction is between the earners and users of foreign exchange.
So while users - petrol guzzlers and vodka drinkers - have to pay more, they are paying it to the earners - ginger exporters and hotel housekeepers - who also have families to feed.
Whether the transaction takes place at $70 or $90 or $900 does not make the country as a whole worse off. It only transfers income between the two groups.
Rather than asking, then, why the currency is depreciating, we should be asking, given inflation, why it didn't occur sooner.
The answer perhaps lies in the inflows of foreign exchange that accompanied the recent investments in highways, hotels, and maybe even government debt. The extra foreign exchange pushes the exchange rate down, or at least discourages it from going up.
Those flows having diminished, the exchange rate now makes the overdue adjustment, and an adjustment that we want it to make. No economic good comes from holding to a rate that discourages the ginger exporters and subsidises the petrol guzzlers, which the old rate at $70 had begun to do.