Briefing | What is the true value of the J’can dollar?

The Jamaican dollar exchange rate depreciated to a new all-time value of J$139 to US$1 at the end of October 2019. Since the Bank of Jamaica embarked on their new monetary policy stance of the process of inflation targeting, much attention and advertisement has been directed towards publicising the benefits and rationale for the country to maintain low stable inflation and less attention on the value of low stable nominal exchange rate.

What is the issue now?

Normally, the JMD would display a negative relationship with the US on a steep one-way trajectory. Nowadays, the exchange rate appreciates and depreciates in a fluctuating manner, but always to new highs and new lows, overshooting its previous limits opening new bands of volatility extremes. Although not constantly depreciating, these occurrences sometimes invoke more risk. The Bank of Jamaica (BOJ) and the International Monetary Fund, however, stipulate that exchange rate volatility is not a real issue if the country can properly target a set inflation rate. As a result, the up-and-down movements of volatility displayed by the nominal exchange rate, instead of the usual one-way depreciating trend observed prior to the declaration of the inflation targeting regime, is not a concern to them.

What does the BOJ believe?

The BOJ believes that through targeting inflation, there is no need to target the exchange rate because inflation determines the cost that is borne by the Jamaican, irrespective of the exchange rate. However, inflation is a domestic consumption issue and if not calculated from the gross domestic product (GDP) deflator, it does not include the price of consumer and producer durables because these are excluded from the Consumer Price Index, which is the main method of calculating inflation. As a result, the exchange rate might have some relevance given that Jamaica is a price taker for imported goods, services and debt servicing; therefore has no control over these prices. Furthermore, the value of the currency continues to be determined by demand and supply.

What is demand vs supply?

According to the BOJ, at the end of trading day on Wednesday, October 23, approximately US$70 million was purchased at an average price of $137, while approximately US$63 million was sold for an average price of $139. Huge volumes are being purchased and sold at varying prices. The purchasing prices ranged from a low of $104 to a high of $139.80 while the sale prices ranged from a low of $104 to a high of $144.5. As you can realise, the sales band is wide. These up-and-down movements create planning and forecasting issues for importers of goods and services, who need stability in their purchasing prices to plan ahead. No real stability in the price of the dollar means no real stability in the prices of imported inputs, imported raw material and imported consumer goods and services, durable and non-durables.

What is the solution?

As a small island developing nations, Jamaica has to think about and plan critical for the development path it wishes to embark on as a nation. Simply leaving production and productivity pursuits to the invisible hand and the business community will not be enough to improve the nation’s growth and development pursuits.

What is the country producing, for whom and at what price or mark up? Are they of value? Should Jamaica really be producing something else with the time and effort that has more value so that it increases its collective earning potential? How do we close the gap between imports and exports in our terms of trade? What are the goods that we imports, is there room to substitute any of these goods with a cheaper domestic alternative? If not, what can then be produced of high value to increase the country’s earning potential?

Always remember that the nominal exchange rate is a market occurrence. We cannot expect to sell good at less value than what we purchase from the rest of the world and expect our terms of trade to improve. GDP has within it a component of exports minus imports. If imports is four times greater than exports, the excess depletes domestic government, business and household expenditure.

Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email: editorial@gleanerjm.com.