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Financial News

Mar 2014 Financial News

Rising foreign exchange rate movement cause for concern. BOJ seeks to allay fears

Mar 19, 2014

THE continual deprecia-tion of the Jamaican dollar against the US greenback, Canadian dollar and the UK Pound is a cause for concern, given the country's propensity for imported goods.

Then there is the inflationary component that sees people having to pay more for goods, thus reducing purchasing power. A trip to the supermarket on a weekly basis bears this out.

If you are being paid in Jamaican dollars, you have already taken a 20 per cent hit in your earnings from December 2012 to March 2014 — and it looks set to get even worst!

At a special luncheon hosted by the Jamaica Observer at the beginning of this year, the Minister of Finance Dr Peter Phillips was asked where does he see the dollar ending up against its US counterpart by the end of this year and where would he like to see it?

He would not be drawn on either question but declared that market forces would determine just where the Jamaican dollar would end up. There are those who speculate that it should steady at around $112 to US$1, but on the current trajectory that may well be a tad ambitious.

With the rapid depreciation of the Jamaican dollar and salaries not increasing commensurately, the dollar in your pocket or purse does not get one a lot.

In an effort to address this concern, the Bank of Jamaica has issued a press release that read in part: " Against the background of recent movements in the exchange rate, Bank of Jamaica wishes to assure the public that it stands ready to provide support to prevent disorderly conditions from emerging in the foreign exchange market."

The Jamaica dollar today is $108.80 to US$1. Since the beginning of March this year, its depreciation has become particularly marked, something not lost on the BOJ.

"Since the beginning of March 2014 the exchange rate has depreciated by $0.93 (0.85 per cent) against the US dollar. This movement over the two-week period compares to a $0.49 (0.45 per cent) depreciation over the previous two weeks. The faster pace of depreciation has occurred despite increased supply in the foreign exchange market, where volumes from earners for the month to date are higher than for January and February 2014," said the BOJ through its issued press release on the subject matter.

With the movements in the exchange rate causing jitters, the shadow spokesperson on finance, Audley Shaw is calling on Jamaica to adopt a fixed exchange rate.

Speaking on fiscal policy at the Department of Economics at the Mona Campus of the University of the West Indies last week, Shaw said: "Government's tabling of legislation on fiscal rules now provides a perfect opportunity, in my view, for the introduction of a fixed rate of exchange. We need to look at fixing its exchange rate even for a time.

"Here we are with the debt stock at almost $2 trillion in two short years, from the $1.6 trillion at December 2011 - despite having done JDX and NDX and fiscal consolidation.

"A one-dollar movement in the foreign exchange rate adds $8.3 billion to the stock of debt when expressed in Jamaican dollars. We have had a $21 movement in the foreign exchange rate since December 2011.

Head of the department of Economics at UWI, Dr Damien King disagrees with Shaw and believes that a fixed exchange rate will work to the detriment of the country.

"Fixing the exchange rate would be a futile exercise and would have a negative impact on the economy including hitting manufacturing by making imports cheaper and cheaper," said the academic.

Despite concerns over the exchange rate, the BOJ says that the economic conditions in the country continue to improve. It points to the fact that economic growth resumed in the September quarter and is expected to strengthen over the subsequent six months in the range of 1.0 to 2.0 per cent.

"The current level of net international reserves (NIR) is US$1.121.4 billion, increasing by US$52 million since the end of February 2014. Bank of Jamaica now expects to comfortably meet the NIR target under the IMF agreement for the March 2014 quarter.

Headline inflation was lower than projected at 0.5 per cent for the month of January, and the fiscal year to March 2014 is now likely to fall close to or below the bottom of the 8.5 per cent to a 10.5 per cent target range. These positive trends provide an increasingly solid base for improved stability in the foreign exchange market," said the BOJ.


Source:
By Al Edwards
Jamaica Observer
Wednesday March 19, 2014

http://www.jamaicaobserver.com/business/Rising-foreign-exchange-rate-movement-cause-for-concern_16302687