EDITORIAL - No reason to panic over dollar

We are surprised at the panic over the recent depreciation of the Jamaican dollar, given the logic of the adjustment and the supposed pedigree of many of those at the head of the herd.

In this regard, we welcome last week's efforts by a handful of academics and officials, including central bank governor Brian Wynter, to contain the fear with doses of reason.

Largely, Mr Wynter reminded, the exchange rate of the Jamaican dollar is market determined, impacted by a slew of economic variables. These include, of course, the efficacious use of monetary policy by the central bank to keep the value of the domestic currency at a rate that helps ensure a balance between competitiveness and social stability.

The background against which the Jamaican dollar has depreciated by around nine per cent so far this year is, therefore, important.

Jamaica has a debt of 150 per cent of annual national output and an economy that, over the past 40 years, has grown at an annual average of less than one per cent. Even after an agreed default on the domestic portion of the debt, it demands nearly half of the Government's annual Budget to service it. We have been forced by our foreign creditors, who will now lend only grudgingly, to acknowledge that the debt is no longer sustainable.

But when we could borrow, we did so not only to meet the expenses of a bloated, inefficient government, but that we could binge on imports.

So, Jamaica has a gap on visible trade of nearly US$5 billion and a current account deficit of half that amount, or nearly a fifth of GDP. Further, between 2008 - the year of the global financial meltdown - and 2012, inflation in the United States was a cumulative 11 per cent. In Jamaica, it was more than 40 per cent.

Propped up by inflows

Despite the yawning balance of trade and current account deficit, the Jamaican dollar - propped up, largely, by inflows associated with a short-lived 2010 economic support agreement with the International Monetary Fund - the Jamaican dollar revalued by more than four per cent in 2011.

The net effect of this, as the University of West Indies economist Damien King pointed out, was to make imports cheaper, even as domestic prices rose.

One result of the depreciation is to reprice imports, which should have a positive effect of narrowing the trade and current account deficits. At the same time, the exchange-rate adjustment should enhance the competitiveness of exports and, in several cases, production for the domestic market, given that imported raw materials account for a portion, rather than all, of the input costs in domestic production.

This newspaper, however, appreciates that the adjustment of the exchange rate is not the only factor in creating a competitive economy.

Bringing the debt under control must be the first order of business. Less borrowing by the Government will ease its crowding effect, lower interest rates, and release capital for investment, job creation and growth by the private sector. These actions, however, have to be underpinned by a restructuring of the public sector to make it more efficient and facilitatory of enterprise.

There are still many tough things to be undertaken, which, if they are done, will, as happened with exchange-rate adjustment, bring out the whingers and embracers of the status quo.

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.