The market value of the Ja dollar
published: Wednesday | May 21, 2003
Delroy Chuck
ONCE AGAIN, the Jamaican dollar has come under intense pressure and, predictably, depreciated against other currencies. Since the start of the year, the dollar has moved from approximately 50 to US$1 to over 65 to US$1, and the government is now bereft of options to defend it against further depreciation. Even more predictably, the government and others are sure the problem is caused by those selfish, unpatriotic, even though wise and prudent, individuals who are buying and hoarding foreign currency.
The economic fundamentals are right and the economy is on the right track, the Prime Minister and his government spokespersons argue, and so the dollar should be stable and, perhaps, appreciating instead of depreciating. In its delusion, the government believes it is doing a great job and should be allowed to continue to borrow more, seek grants and budgetary support everywhere, and use higher, and higher, interest rates to mop up liquidity here and attract foreign currency to take advantage of these attractive interest rates. Well, absolutely no economic entity can survive for long, if it depends primarily on loans, grants and remittances, which have been the perennial saviour of the government. If the fundamentals are right, why is the ratio of debt to GDP moving in the wrong direction, from 132 per cent to over 152 per cent, and our creditors have started to doubt our ability to service our debts?
WRONG ECONOMIC
FUNDAMENTALS
Somehow, the government needs to understand that the economic fundamentals cannot be right if the economy is not providing increased jobs and opportunities, if the trade balance gets worse yearly, if it is more profitable to trade in paper than to manufacture and produce, if the interest rate is four times the inflation rate, and so on. In truth, the economy is in deep trouble but no one in authority wants to accept that simple reality.
What really hurts, especially to those of us on the sidelines, is to see and know the economy is heading for collapse and into the unimaginable abyss but the government thinks otherwise and believes it is on the right track and will miraculously take off into the promised land of prosperity. No one in government seems to understand that the fundamentals can only be right if the economy is expanding through increased production and investment and that can only happen if we have a stable economic environment, sound monetary policies and, most importantly, a realistic exchange rate.
Amazingly, when the market seeks to generate a realistic exchange rate, everybody panics and the government howls and lambastes everybody and everything, except itself, for the runaway dollar. Well, we have to make up our minds, are we going to run a command economy or a market economy? It is stupid, thoughtless and wrong to blame the speculators. We should actually thank speculators for risking their assets to determine a realistic rate for our dollar, which is one of the pre-conditions for a sound economy. Admittedly, speculators act out of self-interest but in heaven's name what is wrong with that? Interestingly, who is speculating more than the government through its central bank? When Bank of Jamaica uses high interest rates to attract and hoard foreign currency in the NIR or to sterilise tens of billions of Jamaican dollars from the marketplace, what is it doing?
SPECULATION
Speculation is in fact a normal part of any market mechanism. It is through speculation that economic equilibrium is eventually reached. Holding prices to artificial levels merely cause disequilibrium, inefficiency and instability in the marketplace. More importantly, stupid and misinformed speculators get burned and suffer the consequences of their foolish risk-taking. History is replete with examples of speculators who have suffered the consequence of foolish risk-taking while at the same time, I admit, some astute speculators have benefited temporarily from reading the market correctly. Let's get real. Why have Barbados, the Eastern Caribbean, Bahamas and the Cayman Islands had stable currencies for over 25 years? Could speculators, with all the money in the world, successfully speculate on those currencies? At the same time, are the speculators responsible for the continuous depreciation of our dollar? Only an economic fool would believe that!
DO NOT FORGET
Let us not forget that the Cayman Islands used Jamaican currency up to 1974 when, at the value of 80 Jamaican cents to US$1, which was the value of our dollar then, they converted to Cayman currency, which has maintained its value ever since. And, do not ignore Guyana, which has more resources than we can even contemplate but has had similar government policies to ours, with the natural consequence that the Guyanese dollar has depreciated even faster than ours to over 240 to US$1. If we continue with the present economic and monetary policies, I warn, it will only be a matter of time before we have a dollar similar to the Guyanese!
To be sure, wide and wild swings in the value of the dollar can have a devastating impact on businesses, cause unnecessary turmoil in the financial market and create a climate for social upheaval and political unrest. Yet, it is the market that can truly determine the real value of the dollar and avoid the present instability and lack of confidence, everywhere. If we really believe in the market economy, it is time we start to trust the market and, always remember, the market is more powerful than ministers.
Delroy Chuck is an attorney-at-law and Opposition Member of Parliament. He can be contacted by e-mail at delchuck@hotmail.com.
