By Andrew Green, Staff Reporter
IT TOOK consumers $4.80 more to buy a US dollar yesterday than it did at the start of the year. This slippage in the average selling rate in just under three months, is greater in straight dollar terms than the $3.68 depreciation for all of last year. It is also greater than the slippage for any of the last five years.
"The government has to contract the economy, or allow the exchange rate to reflect the reality of the situation," said economist Dr. Omri Evans. The reality, he said, was that Jamaica was "in a very difficult situation."
The problem facing the country was that the fiscal deficit in dollar terms is now greater than it has ever been, he said. This is being driven by the cost of servicing the country's debt which in turn had become dependent of foreign financing. But the government has lately been unsuccessful in attempting to borrow overseas, he said. As well, there are now no major assets to sell to foreign investors.
Most areas of foreign exchange earnings are in decline, Dr. Evans said. The strong inflow of remittances is not alone sufficient to counteract the overall decline, he said.
The fall in the value of the currency can be arrested when export earnings are boosted and productivity levels begin showing significant increases, he said. Due to the desperate immediate need for foreign exchange, the government will have to get assistance from multilateral or bilateral sources to solve the current dilemma. One University of the West Indies (UWI) economist said an issue that needs to be considered is the level of speculation affecting the currency at this time. He said a lot of the demand for foreign exchange appeared to be derived from speculation and not from demand in the real economy.
The slide in value of the Jamaican dollar must be due to "people who are holders of cash who move between the two currencies and who try to optimise their returns," the UWI economist said.
While Anya Schnoor, senior vice president at Pan Caribbean, agreed that the problem was based on an imbalance between supply and demand in the foreign exchange market, she said the imbalance was caused by an insufficient supply.
"The fundamentals just aren't there," Ms. Schnoor said. "There is not enough supply."
The government has repeatedly sought to raise interest rates to protect the currency, but this will not succeed, she said. "Raising rates to 30 or 40 per cent will only drive banks out of business."
The problem for the Jamaican dollar started in September, last year, when the Bank of Jamaica (BoJ) hiked interest rates to halt the slide in the dollar, she said. That created tight liquidity through September when US dollar inflows are lowest.
That BoJ action helped hold interest rates during that period. But the currency has received a series of blows since, including the revelation about the massive deterioration of the fiscal accounts, the Standard & Poor's review, reduced tourism inflows and now the Iraq war.
"What do you do in bad times?" she asked. "You buy US dollars."
