Finance Minister Cautions against Fixed Exchange Rate

Minister of Finance and Planning, Dr. Omar Davies has said that while a fixed exchange rate system, provided a greater level of certainty and stability, and would temper inflation, there were critical factors as it related to the removal of flexibility to respond to domestic and external shocks.

Dr. Davies’ remarks came as he closed the 2004/05 Budget Debate in Gordon House on Wednesday (April 28). Responding to Opposition Leader, Edward Seaga’s proposal last week for Jamaica to return to a fixed exchange rate system, the Finance Minister cited the collapse of Argentina’s economy in 2002, stating that it demonstrated the potential negative consequences if the Central Bank was unable to respond to difficulties within the domestic financial sector. “Consider the calamity if the Bank of Jamaica had not been able to provide funding for distressed institutions during the period of turmoil in our financial sector,” he stated.

On a fixed exchange rate, Dr. Davies said, the country would experience difficulties in terms of inflexibility of adjusting domestic costs as was also demonstrated in the Argentina situation. The reduction in Jamaica’s cost of production, the Finance Minister pointed out, had been a critical factor in influencing ALCOA’s decision to invest.

He said Jamaica had come a long way since the fixed exchange rate system of the late 1980s when the country’s Net International Reserves (NIR) stood at minus $560 million compared to the present $1.6 billion (positive). Other fundamental issues that would arise with a fixed rate, Dr. Davies said was foreign exchange accounts and the question of what rate the exchange rate system would be fixed at and how it would be changed if needed.

He said while Mr. Seaga’s proposals were worthy of analysis, the reality was that an arbitrary decision to reintroduce a fixed exchange rate system just would not “wash”, as decision-making where exchange rate systems were concerned had become more sophisticated.

“There is a whole generation of decision-makers in the public and the private sectors, who are far more exposed to information and data, not just on Jamaica but on all our trading partners,” Dr. Davies stated.