BOJ Gives Reasons for Recent Sharp Devaluation of JA Dollar

Jamaica’s unusually high debt service requirements during the course of this year at $US1.3 trillion, coupled with the seasonal increased demand for foreign exchange, increased margin calls and the remnants of a historically high crude oil bill, have been largely responsible for the sharp depreciation of the Jamaican dollar, against the United States (US) dollar, in recent weeks.
This was disclosed by the Governor of the Bank of Jamaica, Derek Latibeaudiere, during a discussion radio programme interview on Wednesday. Emphasising that the Central Bank does not have in place, nor is it contemplating a devaluation policy, the Central Bank Governor noted that the exchange rate was market determined and so would respond to demand and supply pressures.
“What is not generally known, is that Jamaica’s debt servicing requirements, during the course of this year is of the order of US$1.3 trillion, as against what they would normally be, in the order of US$700 or US$800 million. Next year, for example, it will be US$800 million, which means that there will be less pressure on the country’s balance of payments for next year and the year after that”, he observed.
With respect to the significant draw-down of over US$400 million from the Net International Reserves (NIR) between the end of September and the end of October 2008, the Governor, while admitting that this level of intervention was not sustainable, explained that “the demand pressures are unlikely to persist, unabated at that rate.”
He observed that the fall in remittances is likely to be moderate based on past experiences and the fact that up to the end of September, remittance flows was nearly nine per cent higher than the previous year. Flows totalled US$1.5 billion for the first nine months of the year, 8.8 pre cent higher than in the same period of last year, but slower than the 11.1 per cent pace in the first nine months of 2007. The Finance Ministry projects a 5.6 per cent increase of remittance flows this year, over the previous calendar year.
Internationally, there has been a sharp decrease in commodity prices and in recent weeks, there has been a steep decline in crude oil prices, down from nearly US140 per barrel to just over US$60.
The Central Bank, in a recent statement, also scotched fears that the exchange rate depreciation will fuel a new spike in the inflation rate. This is because the significant fall in crude oil prices will moderate the inflation impulses generated by the recent bouts of depreciation.
“With respect to the exchange rate, a combination of a bunching of payments for oil and commercial imports, as well as additional demand by dealers themselves, have led to a slippage in the exchange rate over the past few days. Information on the regular sources of inflows to the market – tourism and remittance flows – indicate that these inflows remain robust.
“Remittances have increased by over 8 per cent in the last nine months, while tourist arrivals and bookings to December continue to be positive despite the drastic changes in overseas financial markets. As the prices of commodity imports continue to move in Jamaica’s favour, the demand for foreign exchange related to these imports will moderate and help to reinforce overall stability in local financial markets. These trends also support the Bank’s expectation of a slowing in inflation over the rest of the fiscal year,” the statement noted.