Gov’t Policies Have Stabilised the Economy

KINGSTON — The Bank of Jamaica (BoJ) is attributing the prevailing stable economic conditions to the Government's macro-economic policies, which have slowed inflation and brought stability to the exchange rate.

Head of the BoJ’s Research and Economic Programming Division, Dr. Wayne Robinson, points to a significant slowing in the depreciation of the exchange rate to a mere 0.5 per cent for the first nine months of 2011, compared to an  average annual movement of approximately six per cent for the previous five calendar years.

He tells JIS News that this level of stability has prevailed since the administration signed the Standby Agreement (SBA) with the International Monetary Fund (IMF) in February 2010, following the implementation of the Jamaica Debt Exchange (JDX) a month earlier.

The JDX was a new debt management initiative, which entailed the voluntary exchange of existing domestic bonds (excluding Treasury Bills) issued by the Government in the domestic market, for new bonds of the same principal value, but at a lower interest rate and over a longer maturity period.  The exchange ratio saw each $100 of old bonds being exchanged for new $100 bonds.

The medium-term initiative was a pivotal pre-requisite to Jamaica securing up to US $2.4 billion in low cost financing from the IMF, and other multilateral institutions such as the World Bank and the Inter-American Development Bank (IDB).

"In fact, following the successful implementation of the JDX and the signing of the IMF Standby Agreement… private capital inflows into the economy showed marked improvements from the depressed levels that had existed in the immediate aftermath of the global financial crisis," Dr. Robinson informs.

Additionally, he says there has been some slowing in the demand for foreign currency to buy imported goods and services, when compared to the three years immediately preceding the global financial crisis.

In addition to the purchase of commodities, foreign currency demand is associated with income outflows, such as profits remitted overseas by firms operating in Jamaica; outgoing personal remittances; and capital outflows by Jamaicans desirous of acquiring financial and non-financial assets (e.g. interests in enterprises) overseas.

The supply of foreign currency inflows arises from the revenue earned from the export of goods and services, remittances as well as capital inflows from persons or entities seeking to acquire domestic assets.    

Dr. Robinson notes that the exchange rate is "determined within a market" and therefore “reflects the interplay of demand and supply of foreign currencies”, further, “the exchange rate will move in the face of an imbalance between the demand and supply of foreign currency, arising from these sources".

Pointing out that the BoJ does not target a particular level at which the exchange rate should be set, Dr. Robinson says the institution, nonetheless, has an interest in maintaining orderly conditions in the foreign exchange market.

"The Bank intervenes in the market to buy foreign exchange currency, if there is a temporary surplus that is likely to cause a very sharp appreciation. It will, on the other hand, sell if there is a temporary shortage of funds in the market that could cause significant or excessive depreciation of the currency, particularly over a short period," he outlines.

Additionally he says: “the Bank acts in the market to smooth short-term imbalances, which could lead to excessively large swings in the exchange rate.  I must stress that the BoJ’s operations in the foreign exchange market seek to ensure orderly adjustment(s) in the rate”.

Dr. Robinson explains that exchange rate depreciation can and will result in increases in the prices of imports of finished goods, or inputs, such as wheat or crude oil. If these higher costs or a portion thereof are passed on to the domestic consumer, then this will be reflected in the overall rate of inflation, which is the rate of change in the general price levels.

He argues that within a stable economic environment, it is unlikely that a one per cent movement in the exchange rate would cause adjustments in the domestic inflation rate, however, sustained sharp depreciations in the exchange rate and, consequently, higher inflation, can and will have a deleterious effect on consumer confidence, "as persons would anticipate a decline in their welfare".

He, however, describes recent trends in inflation in the economy as "very encouraging".

"In fact, annual inflation has declined from about 13.3 per cent in March 2010, to 8.1 per cent as at September 2011. From all indications, the Bank’s target range of an inflation rate of six to eight per cent by the end of the current fiscal year, which will be March 2012, will be achieved," he says.

"The Bank of Jamaica and the Government are, therefore, encouraged by the current trends in inflation. The Bank’s medium-term target is to achieve inflation, broadly, in line with that of Jamaica’s main trading partners, which, currently, is approximately four per cent," he adds. 

The improving economic situation has helped to boost consumer confidence, with a  survey conducted by the Jamaica Chamber of Commerce (JCC), in the April to June quarter this year, showing that both business and consumer sentiments towards the economy, are improving. 

"The report indicated that consumers judged the state of the economy more favourably in the June 2011 quarter than at any other time in the previous two years," Dr. Robinson says.

By Douglas Mcintosh, JIS Reporter