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As we all know, the world is going through a serious financial and economic crisis – in its extensiveness and complexity perhaps worse than anything we have ever experienced. Most of the major economies of the world are heading into recession. Some already are- like the USA, Germany, Italy and Japan. We in Jamaica are not able to escape the impact of this global crisis.
We have had to deal with global crises before:. The oil crisis in 1973; another in 1979/80 and yet another in 1990 after the Gulf war. The collapse of the alumina market in 1985. The recession in the US economy in 1982/83 and the devastating effect it had on our economy, especially in tourism.
But we have never had to deal with crises on all of these fronts all at one time. That is what we are facing today. It has pulled down economies much stronger than ours. The economy of Iceland which had the 6th highest per capita income in the world is in shambles and it had to be rescued by the IMF. Our bonds have not been downgraded – the rating agencies have only said that the outlook is negative. But powerful economies like Russia and Brazil have had their bonds downgraded by the rating agencies.
Economies all over the world are in turmoil and no one knows how long it will last or whether the worst has passed.
2008 as a year
High oil prices2008 has, indeed, been a difficult year. We were battered in the first half by high oil prices and rising food prices which drove up the cost of living. We all felt it, but the poor, the unemployed and working class, felt it the hardest.
Wall Street crashThen, in the second half of the year came the Wall Street crash which ricocheted all across the world, including here in Jamaica. In the last six months, the alumina market on which our bauxite sector depends has virtually collapsed. Our tourism sector has been affected as many of those who would want to holiday in Jamaica, can no longer afford to do so because they have lost their jobs or have seen their savings and investments wiped out in the global meltdown.
ExportersOur exporters are hurting because consumers abroad have had to cut back on their consumption expenditure. Even producers and suppliers in the local market are hurting because they are no longer able to get credit from their suppliers and overseas banks to purchase their raw materials or finished goods.
How have we in Jamaica responded to this global tsunami?
Banking sector and financial institutionsFirst, we had to ensure that our banking sector and financial institutions were secure because banks were crashing in the United States, Britain and other parts of Europe. Where necessary, we stepped in to assist. Our banks are sound and well regulated but a few of our securities dealers were faced with margin calls as the liquidity crisis in the US pressed heavily on the value of Jamaican bonds. The Bank of JamaicaThe Bank of Jamaica provided US$168 million in liquidity support to these dealers to safeguard the integrity of our financial system. These margin calls and the uncertainty about what the future holds combined to put pressure on the foreign exchange market. The BOJ made US dollars available from the NIR to meet the demand but, as it turned out, this was not just a supply and demand problem.
Foreign exchange availableIndeed, the amount of foreign exchange available to the market this year is greater than last year. But everyday we are bombarded with bad news about the calamity taking place in the global financial markets. In times of calamity, markets get nervous. People instinctively take precautions. As a result, countries the world over have seen their exchange rates depreciate as the global crisis unfurls, many of them with currencies that are supposed to be much stronger than ours. Since the beginning of September, the Jamaican dollar has devalued against the US dollar by 10%. But in that same period, many other countries experienced even worse devaluations. These include the: . Euro 11%. India 12%. Russia 13%. Canada 17%. Britain 22%. South Korea 22%. Sweden 24%. New Zealand 27%. Australia 29%. Mexico 29%. South Africa 30%. Brazil 46%
Hike in interest rates We had to take strong measures to stem the slide of the Jamaican dollar. The BOJ had to apply the brakes. No one likes to hike interest rates. But we had to protect the dollar. Once the authorities are satisfied that stability has returned to the foreign exchange market, the interest rates can be rolled back.
The capital marketsThe capital markets, on which we have relied heavily in recent years for foreign exchange financing, have been virtually shut down. But there is no need to panic. There will be more than enough foreign exchange to meet our needs; including repaying our debts that will become due.
Re-engagement with the multilateral institutionsFrom before the last elections we signaled our intention to re-engage with the multilateral institutions like the World Bank and IDB. They offer cheaper money for longer terms. Even before we became government, Audley Shaw and I went to Washington and outlined to them, our economic strategy. Since the elections these discussions intensified and they are now fully back on board.
As Minister Shaw told you in a broadcast on November 23, since April we have secured US$350 million from these multilateral agencies. For the rest of this fiscal year we will secure a further US$600 million to meet our foreign exchange needs with most of it coming in within the next 6 weeks. Adequate foreign exchange flows have been identified for the next fiscal year when debts due for repayment will be significantly less than was the case this year and hence the government’s own foreign exchange needs will be much less than last year’s.
We are going to weather the storm. Thank God we took the decision to re-engage the multilaterals. If we hadn’t done so, we would have had nowhere else to turn and we would have been faced with total disaster.
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