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Leader of the Opposition, Edward Seaga is proposing that the Government adopt a fixed exchange rate macro-economic policy to stabilise the economy, which he claims will have a domino effect of low interest rates and low inflation.
The Opposition Leader made the proposal on Thursday (April 22) while making his contribution to the 2004/05 Budget Debate at Gordon House.
In addition, he also suggested that the Government should examine the option of either a Currency Board with a fixed rate of exchange or an independent central bank with a special regime to maintain a pegged rate.
Mr. Seaga argued that, “the benefit of a fixed rate of exchange would be the capability to drive interest rates down without impact in the rate of exchange”.
Continuing, he said: “With a fixed exchange rate, liquidity could accumulate in the banking system without the need for Central Bank intervention to sop up the liquidity in order to ensure that the extra funds are not used to depreciate the exchange rate”.
He noted that as liquidity accumulated, banks would have to reduce rates, as in the case of any commodity in surplus where prices were lowered to move the goods.
Citing further benefits of a fixed exchange rate, Mr. Seaga said that production costs would decrease substantially; consumer spending would increase as goods and services became more competitively priced and business would expand and new investments would flow.
He pointed out that with a fixed exchange rate, Government would be able to lower the borrowing rate on Government variable debt stock by three per cent to five per cent.
This, he said, could realise savings of some $20 billion, which he explained, would substantially reduce or even wipe out the fiscal deficit. “The national debt would be quickly reduced to reasonable proportions, and greater revenues freed from debt service to development,” he added.
He said several Caribbean countries including the Cayman Islands have maintained fixed rates of exchange over many years and have benefited from cheap interest rates.
“Today, many Caribbean countries enjoy high national incomes per capita, as do Barbados and the Bahamas, with fixed rates of exchange and cheap interest rates, while Jamaicans have failed to improve their per capita income meaningfully over the past 40 years,” he said.
“Jamaicans must remove control of the value of the Jamaican dollar from human judgement and regulate it by system and law so that it will no longer dissipate, depreciate and deteriorate,” he suggested.