'IMF deal is not magic'
MARKET jitters over the lack of an International Monetary Fund (IMF) agreement played a part in the devaluation of the dollar.
The reduction in foreign currency reserves, as a result, also fed into investor nervousness, according to Brian Wynter.
However, the central bank governor said "there is no magic to an IMF agreement", but rather emphasis was being placed on what it meant for Jamaica.
"In the absence of a sense of confidence in what the future policy direction is, a sense of confidence about the IMF negotiations, for example, it is possible you will see an increase in demand (for US currency)," he said at the Bank of Jamaica (BOJ) in Kingston yesterday. "That pushes the (exchange rate), then everybody starts to focus on the rate, then you start to get behaviour that is driven by the fact that it has moved."
During the three months from April to June, the Jamaican dollar depreciated by 1.6 per cent against the US dollar, due to hard currency inflows falling short of increased demand for the greenback.
In response, the central bank sold US$134.9 million (net) to bolster supplies of the currency, which contributed to a US$236.7 million reduction in the net international reserves (NIR) over the three-month period.
As at June 30, gross foreign currency reserves stood at US$2.4 billion, equivalent to 15.8 weeks of imports of goods and services.
Indeed, the BOJ's survey of expectations for May and June showed business perception for both present and future business conditions falling over the three months, "reflecting the current uncertainty surrounding the timing of an agreement with the IMF on Jamaica's medium-term economic programme". Firms were less optimistic about the current situation.
The central bank is expecting that business confidence will begin to improve once stakeholders are able to assess the performance and implications of the full range of measures begun with the recent Budget exercise, according to Wynter.
Measures aimed at achieving fiscal sustainability, such as tax and pension reforms, as well as removing impediments to growth, have been cited as targets required by the IMF for a deal to move forward.
The Government only has a month to convince the IMF that it will meet the multilateral agency's requirements, if it is to realise its hope of wrapping up negotiations when the Fund sends its mission on September 24.
Not wanting to disclose why he felt this was a possibility, the central bank governor concurred with his counterpart at the Planning Institute of Jamaica (PIOJ), Gladstone Hutchinson, that a deal would be struck this year.
"Improved investor confidence and official inflows unlocked by an agreement between the Government and the IMF later in the year should contribute to a recovery in the NIR to the level that it was at the start of the fiscal year," he said.
Finance Minister Peter Phillips has already made public the Government's plan to cut 3,000 posts from the public sector by year-end, while better-than-projected fiscal out-turn for April to June is considered to be an encouraging sign.
But tougher measures aimed at other reforms may come as a bitter pill to many. It is not yet clear if action has to be taken before an IMF agreement is signed.
"I don't think everybody will be satisfied and agree with every aspect of policy decisions, like taxation," Wynter said. "So let's not expect it to be a nice, harmonious and smooth process."
He added: "But at the same time, these reforms, we all appreciate, are critical in order to meet medium-term growth opportunities. We need to have these medium-term issues resolved, which have come to be symbolised by an IMF agreement."
Aside from improving confidence in investors and the business community, better fiscal numbers form the basis for sustaining low interest rates, which allow the BOJ to manage inflation expectations more actively to achieve low and stable inflation in the medium term, according to the central bank.
However, inflation and growth targets continued to be threatened by external factors.
In particular, international commodity prices could be higher than expected, while Jamaica may yet experience adverse weather during the hurricane season, which runs to November.