Can Jamaica's record of performance be salvaged? - Part 4

Edward Seaga, Gleaner Writer

The pegged exchange rate, referred to in Part 3 of this serialisation, was the most decisive stimulant which pulled Jamaica out of the deep recession of the 1980s. Unfortunately, that stimulus was abandoned when the peg was removed in 1989. This contributed decisively to the meltdown of the economy by the mid-1990s when some 40 financial institutions collapsed and recessionary conditions were re-established.

Overriding this meltdown, the savage recession of 2008 required emergency shock treatment of US$1.2 billion of massive assistance from the International Monetary Fund (IMF) and the World Bank. However, while this assistance will reduce current fiscal and foreign-exchange gaps to minimal levels, it will not be enough to deal with the underlying perennial recession. It will require a pegged exchange rate to revive confidence and stimulate the economy with buoyancy for investment and growth, as was the case in the 1980s.

A pegged exchange rate would promptly relieve a significant amount of fiscal strain. Over the last five years, Bank of Jamaica (BOJ) losses from interventions to protect the exchange rate from significant weakening totalled $110 billion, or more than $20 billion per year. These intervention costs represent losses in the BOJ accounts and reduction of amounts which should have otherwise been transferred to the revenue of government. The annual average amount of $20 billion is comparable to the largest package of new taxes raised in any annual budget presentation.

Put another way, if the pegged exchange rate was in force, and there were no interventions over the last five years, the BOJ would have improved its account by $110 billion and new taxes of that amount could have been avoided, or the national debt reduced correspondingly, or the fiscal deficit lowered accordingly. The last two are imperatives of the IMF programme.

Dynamic impact

A pegged exchange rate would also have a dynamic impact on foreign-exchange inflows. By pegging the rate, there would be no exchange-rate risk for inflows of investment funds. The rate of exchange of the Jamaican dollar to the US dollar would remain fixed. Hence, with no fear of adverse foreign-exchange rate movements, low-interest money would be available for private investment in mortgage financing, tourism expansion, large- and small-scale agricultural development, small-business loans and the financing of higher education by private institutions, since there would be no change in the cost of the US dollar in Jamaican dollars over the years. These investments are prime job creators, or training for the job market.

The vital importance of a decisive move to peg the exchange rate would spur local private investment, as it did in the late 1980s, stimulating growth because of the certainty of planning without the uncertainties of additional cost resulting from adverse exchange-rate movements.

Accumulating surplus funds

Finally, there is no easier and better way to reduce excessive commercial bank interest rates than to discontinue BOJ interventions to mop up the surplus (liquidity) in the banking system. This would allow surplus funds to accumulate at a cost to the banks. To avoid the extra cost of bearing high liquidity, interest rates would have to be lowered to promote greater borrowing to reduce the pressure.

It should be noted that a greater body of support exists for a variable (managed) rate, dictated by monetary and exchange-rate policy, than for the more rigid (pegged) rate in which monetary and exchange-rate policies are inactive.

To those who think the system should not peg the exchange rate, the precedent exists in the islands of the English-speaking Caribbean forming the Organisation of Eastern Caribbean States (OECS), and Barbados, which have maintained pegged rates for 20 or more years during which, because the exchange rate was pegged, there was much less fluctuation of commodity prices and interest rates, minimising the negative impact on growth.Accordingly, those states grew faster than Jamaica, which was drastically overpowered by runaway depreciation of the exchange rate, reducing per capita growth and GDP. This has been a leading factor in the plunge of the Jamaican economy to worst-ever levels of performance.

Easy decision

Taking these arguments into consideration, it should be a relatively easy decision to switch the Jamaican economy to a pegged rate. But because this switch would involve the value of the currency, it would have to be based on maximum confidence among all players in the financial system. To achieve this, discussions at an appropriate level should be initiated to thoroughly review all the consequences in order to take the correct decision.

If the pegged rate is adopted by consensus, a new future awaits Jamaica based on the stimulant it would readily apply to a lethargic economy. If not, we must soldier on in the hope that the state can keep its head above water over the years to come.

The three proposals set out in the proceeding three articles, and the opening section of this closing presentation, represent three relatively easy initiatives to transform Jamaica into a society with:

• a successful education system based on an effective literacy and numeracy programme for all;


• a justice system to provide justice for all, by enactment of the Charter of Fundamental Rights and Freedoms;


• an economic system which maintains low price and interest movements, inducing investment and creating jobs.

Jamaica has struggled for too many decades with models which do not work. It is time to inject the society with infusion of transformational energy to take dynamic leaps forward into the future. The three initiatives proposed are at minimal costs while yielding maximum results, an ideal formula to relieve the pent-up frustrations of the people and salvage the performance of the nation by 2012 in time for a 50th anniversary triumph over adversity and hope over hopelessness.

Edward Seaga is a former prime minister. He is now the pro-chancellor of UTech and a distinguished fellow at the UWI. Email: odf@uwimona.edu.jm or columns@gleanerjm.com.