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EDITORIAL - Revaluation dangers
Published: Monday | June 28, 2010
If, indeed, the heavy thumping sound that many people perceive to be coming from National Heroes Circle is in fact joyous chest-beating by finance ministry officials celebrating the revaluation of the Jamaican dollar, our advice to the politicians and technocrats there is to be cautious. Such chest-thumping can be dangerous.
This is not, of course, to suggest that the average four per cent gain of the Jamaican currency against the greenback is universally bad. Domestic consumers will readily point to its positives.
A stronger domestic currency, for instance, suggests imports at a cheaper price in Jamaican dollar terms. This, on the face it, means the possibility of consuming more foreign products at a lower domestic currency price and a containment of inflation.
The problem here is that the Jamaican dollar is revaluing not because of the underlying strength of the Jamaican economy or robust gains in exports, inclusive of tourism. It is the result, primarily, of the inflows of foreign exchange under Jamaica's loan agreement with the International Monetary Fund (IMF), the latest of which was last week's release by the fund of nearly US$94 million or J$8.06 billion. In total, the IMF has released approximately US$705 million (over J$60 billion) since the signing of a 27-month standby facility in March, which has helped to boost the central bank's net international reserves to more than US$1.7 billion.
Easing the pressure
Matters, of course, have also been helped by the private sector-supported rescheduling of more than J$700 billion in domestic debt at sharply lower interest, which has eased pressure on the fiscal accounts
and accommodated the central bank's aggression in the lowering of rates in market transactions.
But there is a flip-side to the proverbial coin that demands close attention from the finance minister, Audley Shaw, and his key technocrats, including the financial secretary, Dr Wesley Hughes, and the governor of the Bank of Jamaica (BOJ), Brian Wynter.
We understand the lag time between policy adjustments presumed to be supportive of investment and projects on the ground which, perhaps, will be among the arguments proffered by officials. However, a sharply revalued currency is unlikely to stimulate key export sectors, which earn foreign exchange, in the absence of productivity gains elsewhere, which are not apparent.
Significantly higher
Indeed, Jamaica's inflation, at over six per cent for the first five months of the year and expected to be a high as 9.5 per cent in 2010, is significantly above that of its major trading partner, the United States - and a time when, as the Planning Institute of Jamaica pointed out, international demand for Jamaican goods and services remains soft because of 'the impact of the global recession'.
Tourist arrivals may have held up in the face of hard marketing and heavy discounting. But in a sector whose business is generally denominated in US dollars and gross margins are extremely narrow, it is hardly imaginable that many hotels can easily take a four per cent hit. The current environment, too, is hardly conducive to tourists lining up to buy a Jamaican holiday that has grown more expensive. The same applies to other Jamaican exports.
We expect, too, that the BOJ will be paying close attention to the balance sheets of financial companies, which having taken a hit with the debt restructuring, now worry about their foreign exchange portfolios.
The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.
Published: Monday | June 28, 2010
If, indeed, the heavy thumping sound that many people perceive to be coming from National Heroes Circle is in fact joyous chest-beating by finance ministry officials celebrating the revaluation of the Jamaican dollar, our advice to the politicians and technocrats there is to be cautious. Such chest-thumping can be dangerous.
This is not, of course, to suggest that the average four per cent gain of the Jamaican currency against the greenback is universally bad. Domestic consumers will readily point to its positives.
A stronger domestic currency, for instance, suggests imports at a cheaper price in Jamaican dollar terms. This, on the face it, means the possibility of consuming more foreign products at a lower domestic currency price and a containment of inflation.
The problem here is that the Jamaican dollar is revaluing not because of the underlying strength of the Jamaican economy or robust gains in exports, inclusive of tourism. It is the result, primarily, of the inflows of foreign exchange under Jamaica's loan agreement with the International Monetary Fund (IMF), the latest of which was last week's release by the fund of nearly US$94 million or J$8.06 billion. In total, the IMF has released approximately US$705 million (over J$60 billion) since the signing of a 27-month standby facility in March, which has helped to boost the central bank's net international reserves to more than US$1.7 billion.
Easing the pressure
Matters, of course, have also been helped by the private sector-supported rescheduling of more than J$700 billion in domestic debt at sharply lower interest, which has eased pressure on the fiscal accounts
and accommodated the central bank's aggression in the lowering of rates in market transactions.
But there is a flip-side to the proverbial coin that demands close attention from the finance minister, Audley Shaw, and his key technocrats, including the financial secretary, Dr Wesley Hughes, and the governor of the Bank of Jamaica (BOJ), Brian Wynter.
We understand the lag time between policy adjustments presumed to be supportive of investment and projects on the ground which, perhaps, will be among the arguments proffered by officials. However, a sharply revalued currency is unlikely to stimulate key export sectors, which earn foreign exchange, in the absence of productivity gains elsewhere, which are not apparent.
Significantly higher
Indeed, Jamaica's inflation, at over six per cent for the first five months of the year and expected to be a high as 9.5 per cent in 2010, is significantly above that of its major trading partner, the United States - and a time when, as the Planning Institute of Jamaica pointed out, international demand for Jamaican goods and services remains soft because of 'the impact of the global recession'.
Tourist arrivals may have held up in the face of hard marketing and heavy discounting. But in a sector whose business is generally denominated in US dollars and gross margins are extremely narrow, it is hardly imaginable that many hotels can easily take a four per cent hit. The current environment, too, is hardly conducive to tourists lining up to buy a Jamaican holiday that has grown more expensive. The same applies to other Jamaican exports.
We expect, too, that the BOJ will be paying close attention to the balance sheets of financial companies, which having taken a hit with the debt restructuring, now worry about their foreign exchange portfolios.
The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.