THE EDITOR, Sir:
I AM both appalled and amused at Mr. Seaga's advice to the Government to revert to a fixed (or pegged) exchange rate. The Leader of the Opposition, in effect, wants to set us back at least 20 years. I could easily invite one of my students to give Mr. Seaga a lesson as to why a fixed exchange rate cannot be good for Jamaica at this time. Allow me, sir, to quote extensively from a research paper done by one such student at the William Knibb High School to show that a fixed exchange rate cannot be good for Jamaica.
In referring to the time when Jamaica had a fixed exchange rate, she writes, "The Jamaican economy faced serious competitive problems as reflected in the current accounts and in the balance of payments along with stagnation and decline in output. Part of the reason is because a fixed exchange regime is difficult to manage over the long term. In Jamaica's case, an attempt to maintain a high value of the Jamaican currency to the US dollar resulted in the Jamaican dollar becoming overvalued. This made Jamaican products uncompetitive on the world market while helping to flood Jamaica with imported goods."
FIXED RATE OF EXCHANGE
Then she says, "In order for a country to maintain a fixed rate of exchange, it needs to have adequate foreign reserves. If such reserves become depleted it affects the stability of the exchange rate system. This is exactly what happened to Jamaica where, by the late 1980s, the country had a huge negative balance in its Net International Reserves (NIR). The state of the NIR in 1990 (where it stood at negative US$447.8m) is an indication that the authorities were never in a position to defend a fixed exchange rate regime. This meant that the government was no longer able to meet the demands of converting the local currency into foreign currency at the fixed rate of exchange.
"If a central bank cannot meet demands on the local market, then this will inevitably lead to what has affected several countries that have adopted a fixed exchange regime: the rise of the black market. This was the experience of Jamaica for much of the 1980s where, despite the controls put in place by government, the black market continued to thrive. This happened because the fixed rate did not reflect the true value of the Jamaican currency against the United States dollar."
CLASSIC
Her next three paragraphs are classic, "One reason why a fixed rate of exchange is difficult to maintain at this time is because only a few of the major economies of the world share a pegged system of exchange. The United States, for example, abandoned the pegged system in 1971 when that country could no longer hold the value of the pegged rate against the gold standard of US$35 to one ounce of gold. In fact, all of the major economies of the world eventually abandoned the pegged or fixed rate by 1985. With these major economies abandoning the peg, a fixed exchange rate regime becomes less effective.
"Another reason why a fixed exchange system is unattractive to Jamaica is because such an exchange rate regime is often associated with having an unsophisticated capital market and a weak regulatory system. Jamaica has come a far way in developing its own capital market and has become a player in the international capital market, regularly raising money through the international monetary system. Additionally, Jamaica has developed a stronger and more sophisticated regulatory system through the Bank of Jamaica which has wider and broader regulatory powers than it did during the time of the maintenance of a fixed exchange rate regime. The creation of the Financial Services Commission has also ensured that Jamaica's monetary and financial systems observe internationally accepted systems of control.
"Perhaps the greatest example as to why a fixed exchange rate is not the best is because most countries that have had a crisis in their financial system in recent times adopted a pegged or fixed system of exchange. Examples include the Mexican crisis in 1995 and the Russian and Asian financial crises in 1997. In the case of Mexico, the government had to devalue the peso by 50 per cent and in Thailand the government eventually had to allow the local currency to float."
Mr. Seaga's advice to the Government to revert to a fixed exchange rate system leaves questions in the mind as to whether he is the right man to lead this country. Perhaps he should call the William Knibb High School and seek audience with Tanekia Williams.
I am, etc.,
ERON M. HENRY
eronhenry@yahoo.com
Falmouth, Trelawny
Via Go-Jamaica
