By Ramesh Sujanani
Op-Ed Contributor
It is now being touted that, with Jamaica’s expenditure exceeding its income, constant depreciation of the Jamaican Dollar is imminent. It has been said that this is no different to what has occurred in the past four years.
It is true that devaluation of the Jamaican Dollar (JMD) has been occurring over the past 10 years, but in the past four years the rate moved plus or minus 2.5 percent over a mean rate of 87.00 JMD to the US dollar, which may be considered steady. A 2.5 percent fluctuation in the exchange rate of most currencies will occur from time to time.
But there are forces that contend Jamaica’s exchange rate must remain at a constant figure to deal with inflationary pressure.
In the Observer two days ago, this notion was being suggested, inspired by a former Prime Minister, which supports “inflation targeting” by creating a truly independent Central Bank approach (independent of the government’s fiscal policy), which would support inflation control and remain independent other considerations.
What I gather from this is that the Central Bank should not concern itself with other matters, such as interest rates, production levels, deficit monitoring and a host of other monetary problems which are the worries of bank governors all over systems throughout the world; and which are interdependent with inflation and its ramifications.
I think that all central bank activities should be concerned with the entire economy of their countries, and the control of only one aspect, inflation, is jejune.
I recall a similar experience having occurred to Jamaican business, in which the JMD rate was held steady for almost eight years in the 1980s, ending with the closure of many good businesses, including exporters.
The banks increased interest rates to compensate for the loss of exchange rate income by making massive profits on exchange rates, and started to charge 68 percent interest on overdrafts and loans.
Exporters were denied the benefit of the dollars they had earned, as all foreign sales were based on a 5.50 JMD to USD rate, while raw materials continued to escalate due to rising duty values and peculiar interpretation of product descriptions, raw material and packing material, at the expense of the manufacturer.
Foreign exchange went underground to the black market, and when there was a change of government, a new exchange rate policy was effected which liberalized foreign money rates. All of a sudden, US dollars sprang from various sources, enough to fill the needs of the country.
We now have to consider our present situation. In my opinion, the Bank of Jamaica, in all aspects, has been doing a marvelous job, at keeping exchange rates under control. Plus or minus 2.5 percent, with our history of indecisive and negative approach to production, is quite good when you consider that, since the beginning of the year, the Euro has declined around 10 percent, the pound has ranged from $132 to $142 — around 4 percent deviation to the mean, the Canadian dollar from J$84 to J$ 89, again around 2.5 percent deviation and the US dollar has ranged from from Y76 to Y83, the same 2.5 percent as the Canadian dollar, which is expected.
We have to consider two options: increasing our exports, and improving our import-substitution costs, our tourism, our bauxite growth, our attraction of investments, while reducing imports and other non-productive services. If this can be done with BOJ at the helm controlling inflows/ outflows of foreign exchange, so as to keep a steady exchange rate, this is the best option.
If not, we continue a minimal sliding-scale devaluation, to adjust the exchange rate to a balance point. Then we compensate and consider the effect of all these factors on the people, especially the poor.
We need quick results to delay the possible effect on inflation. Energy costs need to be reduced, made available in sufficient quantity to build more large hotels.
Sheer construction will increase all auxiliary industries and improve employment of labor, so the proposed energy projects should move full speed ahead, and tourism should invite developers and investors to consider new projects. We cannot succumb to negative thinking.
Ramesh K Sujanani can be reached at rsujanani78@gmail.com.
Note: the opinions expressed in Caribbean Journal Op-Eds are those of the author and do not necessarily reflect the views of the Caribbean Journal.