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When the Jamaican dollar valued more than the US dollar
KEN CHAPLIN
Tuesday, August 04, 2009
As the exchange rate of the Jamaican dollar slides against the US$ the prices of imported goods and services have risen accordingly, triggering inflation which is rather worrisome to people already suffering from the global economic downturn.
KEN CHAPLIN
In light of this, there has been much discussion on whether the exchange rate should be fixed or continue as a floating exchange regime governed by the law of supply and demand. At present, the exchange rate is floating at over J$89 to US$1 and no one knows for sure where it will stop, because it is much a matter of supply and demand. There has been a great deal of argument for and against fixed rate and floating rate, but each has to be backed up by macroeconomic stability.
There are certain structural factors, such as the economy's structure of production and international trade that have to be taken into consideration. Based on Jamaica's economic performance and export, the present exchange rate of the Jamaican dollar is considered by many economists to be overvalued.
The supply of US$ has been reduced sharply. The tourist dollar is barely holding its own, but the earnings from bauxite and alumina have dropped sharply. Remittances from Jamaicans in the United States of America have fallen significantly. This means that the country has got to increase export of goods and services to increase foreign currency earnings and, at the same time, reduce imports by producing and eating more local food and developing and diversifying exports.
But Jamaicans have an insatiable appetite for certain imported goods. An inspection of the goods in any large supermarket will show that at least 70 per cent of them are imported, some of which could be grown or manufactured in Jamaica.
The Bank of Jamaica (BOJ) has been stabilising the foreign exchange market by its input of foreign exchange into the system, but this cannot be continued indefinitely because it has to maintain enough foreign exchange in its international reserves to meet at least three months of imports. The foreign exchange situation will, of course, improve as soon as Jamaica draws down from the Stand-By Agreement with the International Monetary Fund (IMF), but this can only be considered a stop-gap measure to give Jamaica time to build up on its foreign exchange supply through exports.
So after we have received the IMF money we cannot afford to relax, as in the past, and spend imprudently or continue to be engaged in corruption of state funds. We have to aggressively attract investment, improve our export earning capacity, develop import substitutes to make our currency strong, and pay back the IMF because its assistance is not free money.
Tale of exchange rate regimes
The BOJ has sent me, by request, an important document on the various foreign exchange regimes and movement of exchange rates which should be surprising to many Jamaicans. Prior to December 1971 the regime was a fixed rate, pegged to the Pound Sterling, of US$1.00 = J$0.833 and one Pound Sterling = J$2 00. That was when our exports were at a high level, with earnings from bauxite and alumina flooding the country and banana and sugar receiving preferential treatment in the United Kingdom. But all that has changed.
Today it is one Pound Sterling = J$146:00. From December 1971 to January 1973 it was a floating rate regime of US$1.30 = J$1.00; February 13, 1973 to April 1977, under a fixed rate dual system pegged to the US dollar, the rate was US$1.10 = J$1.00; April 22, 1977 to October 1977 there were two rates - a basic rate of US$1.10 = J$1.00 and special rate of US$1.10 = J$1.25.
The devaluation of the Jamaican dollar in relation to the US$ continued, and from May 9, 1978 to June 8, 1978, under a unified system, the rate was US$1.00 = J$1.55. Then there was the crawling peg regime between June 9, 1978 and May 2, 1979 when US$l.00 = J$1.57, followed by the parallel exchange system from January 10, 1983 to November 23, 1984 when there were two rates - official rate of US$1.00 = J$1.78 and parallel rate of US$1.00 = J$2.45.
Under the preliminary auction system, from November 24, 1983 to March 19, 1984 the rate was US$1.00 = J$3.15 and from March 20, 1984 to October 31, l989 under the comprehensive auction system the rate was US$1 = J$3.25. From November 1, l989 to September 16, 1990 under the allocation system, the rate was US$1.00 = J$6.50. Since September 17, 1990 to the present, the rate has jumped to more than J$89.00 = US$1.00.
The rate is determined daily in an inter-bank market which is comprised of authorised foreign exchange dealers (banks) and cambios. Many Jamaicans and Americans also cannot come to believe that prior to 1971 the Jamaican dollar was valued more than the US dollar.
According to the BOJ, in 1991 Jamaica eliminated capital controls and liberalised the foreign exchange market, thereby adopting a floating exchange rate regime or, more aptly, a managed float. This reform followed the operation of various types of fixed exchange rate regimes which served to suppress the impact of foreign inflation on the domestic economy. The emergence of significant macroeconomic imbalances in the early 1999s, which were manifested in substantial arrears in the foreign exchange system, indicated that a market determined rate, which would facilitate a more efficient allocation of resources thereby promoting growth, was the obvious policy choice.
Additionally, says BOJ, there was the conventional thinking that with a floating exchange rate, domestic monetary policy would be free from the task of defending an exchange rate peg to pursue other goals, primarily price stability. However, Jamaica's experience, particularly in the initial period following liberalisation, points to the fact that even with a float, monetary policy in a small open economy is not necessarily free from the concerns of the foreign exchange rate.
For example, owing to lack of an appropriate mix of monetary and fiscal policies, the exchange rate depreciated by 79 per cent by the end of 1991, which translated immediately into an acceleration in inflation rate to 80.2 per cent. The rate of inflation moderated in subsequent years as the rate of depreciation slowed.
It seems to me that to borrow is one thing. The important factor is to use the money wisely to generate foreign exchange so that when the money is finished we will not have to borrow from the IMF again, thereby tightening the noose around the necks of the people.
KEN CHAPLIN
Tuesday, August 04, 2009
As the exchange rate of the Jamaican dollar slides against the US$ the prices of imported goods and services have risen accordingly, triggering inflation which is rather worrisome to people already suffering from the global economic downturn.
KEN CHAPLIN
In light of this, there has been much discussion on whether the exchange rate should be fixed or continue as a floating exchange regime governed by the law of supply and demand. At present, the exchange rate is floating at over J$89 to US$1 and no one knows for sure where it will stop, because it is much a matter of supply and demand. There has been a great deal of argument for and against fixed rate and floating rate, but each has to be backed up by macroeconomic stability.
There are certain structural factors, such as the economy's structure of production and international trade that have to be taken into consideration. Based on Jamaica's economic performance and export, the present exchange rate of the Jamaican dollar is considered by many economists to be overvalued.
The supply of US$ has been reduced sharply. The tourist dollar is barely holding its own, but the earnings from bauxite and alumina have dropped sharply. Remittances from Jamaicans in the United States of America have fallen significantly. This means that the country has got to increase export of goods and services to increase foreign currency earnings and, at the same time, reduce imports by producing and eating more local food and developing and diversifying exports.
But Jamaicans have an insatiable appetite for certain imported goods. An inspection of the goods in any large supermarket will show that at least 70 per cent of them are imported, some of which could be grown or manufactured in Jamaica.
The Bank of Jamaica (BOJ) has been stabilising the foreign exchange market by its input of foreign exchange into the system, but this cannot be continued indefinitely because it has to maintain enough foreign exchange in its international reserves to meet at least three months of imports. The foreign exchange situation will, of course, improve as soon as Jamaica draws down from the Stand-By Agreement with the International Monetary Fund (IMF), but this can only be considered a stop-gap measure to give Jamaica time to build up on its foreign exchange supply through exports.
So after we have received the IMF money we cannot afford to relax, as in the past, and spend imprudently or continue to be engaged in corruption of state funds. We have to aggressively attract investment, improve our export earning capacity, develop import substitutes to make our currency strong, and pay back the IMF because its assistance is not free money.
Tale of exchange rate regimes
The BOJ has sent me, by request, an important document on the various foreign exchange regimes and movement of exchange rates which should be surprising to many Jamaicans. Prior to December 1971 the regime was a fixed rate, pegged to the Pound Sterling, of US$1.00 = J$0.833 and one Pound Sterling = J$2 00. That was when our exports were at a high level, with earnings from bauxite and alumina flooding the country and banana and sugar receiving preferential treatment in the United Kingdom. But all that has changed.
Today it is one Pound Sterling = J$146:00. From December 1971 to January 1973 it was a floating rate regime of US$1.30 = J$1.00; February 13, 1973 to April 1977, under a fixed rate dual system pegged to the US dollar, the rate was US$1.10 = J$1.00; April 22, 1977 to October 1977 there were two rates - a basic rate of US$1.10 = J$1.00 and special rate of US$1.10 = J$1.25.
The devaluation of the Jamaican dollar in relation to the US$ continued, and from May 9, 1978 to June 8, 1978, under a unified system, the rate was US$1.00 = J$1.55. Then there was the crawling peg regime between June 9, 1978 and May 2, 1979 when US$l.00 = J$1.57, followed by the parallel exchange system from January 10, 1983 to November 23, 1984 when there were two rates - official rate of US$1.00 = J$1.78 and parallel rate of US$1.00 = J$2.45.
Under the preliminary auction system, from November 24, 1983 to March 19, 1984 the rate was US$1.00 = J$3.15 and from March 20, 1984 to October 31, l989 under the comprehensive auction system the rate was US$1 = J$3.25. From November 1, l989 to September 16, 1990 under the allocation system, the rate was US$1.00 = J$6.50. Since September 17, 1990 to the present, the rate has jumped to more than J$89.00 = US$1.00.
The rate is determined daily in an inter-bank market which is comprised of authorised foreign exchange dealers (banks) and cambios. Many Jamaicans and Americans also cannot come to believe that prior to 1971 the Jamaican dollar was valued more than the US dollar.
According to the BOJ, in 1991 Jamaica eliminated capital controls and liberalised the foreign exchange market, thereby adopting a floating exchange rate regime or, more aptly, a managed float. This reform followed the operation of various types of fixed exchange rate regimes which served to suppress the impact of foreign inflation on the domestic economy. The emergence of significant macroeconomic imbalances in the early 1999s, which were manifested in substantial arrears in the foreign exchange system, indicated that a market determined rate, which would facilitate a more efficient allocation of resources thereby promoting growth, was the obvious policy choice.
Additionally, says BOJ, there was the conventional thinking that with a floating exchange rate, domestic monetary policy would be free from the task of defending an exchange rate peg to pursue other goals, primarily price stability. However, Jamaica's experience, particularly in the initial period following liberalisation, points to the fact that even with a float, monetary policy in a small open economy is not necessarily free from the concerns of the foreign exchange rate.
For example, owing to lack of an appropriate mix of monetary and fiscal policies, the exchange rate depreciated by 79 per cent by the end of 1991, which translated immediately into an acceleration in inflation rate to 80.2 per cent. The rate of inflation moderated in subsequent years as the rate of depreciation slowed.
It seems to me that to borrow is one thing. The important factor is to use the money wisely to generate foreign exchange so that when the money is finished we will not have to borrow from the IMF again, thereby tightening the noose around the necks of the people.
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