Jamaica is in a deep financial crisis and the Ministry of Finance ought to be telling the people what the situation is. Using December l971 as the date of departure, the Jamaica dollar has slid from $0.77 = US$l.00 to an unprecedented $90.32 = US$l.00. As a result, prices and inflation are rising because it is costing importers more to import goods and services.
The Net International Reserves (NIR), a critical component to the country's ability to pay for the import of goods and services at the end of September this year, could pay for only 14 weeks of supplies. Unless foreign exchange flows in quickly as a result of an agreement with the International Monetary Fund, or some holding funds are obtained elsewhere until the agreement is signed, the country will be in serious trouble.
It was against this backdrop that the matter of foreign exchange dominated the news last week. Edward Seaga, former prime minister and minister of finance, pointed out the advantages of having the Jamaican dollar pegged to the US dollar.
He said it would:
o Reduce inflation to the minimal levels.
o Lower the still high interest rate on commercial loan rates of financial institutions to business-friendly levels.
o Reduce expenditure in the cost of servicing external debts and making payments on interest, profit and dividends earned by overseas investment, and indeed, reduce the stock of debt.
o Open the door for potential massive inflows of low-interest foreign exchange for mortgage financing and investment since the risk of devaluation or depreciation of the rate of exchange would no longer exist. This would be revolutionary for attracting low-cost funds for agriculture, education, infrastructure and low-cost housing, creating thousands of new jobs.
o Most of all, a pegged rate would restore economic growth which has been stagnant for two decades because increased prices which follow devaluations would cease and ensure that none of the substance of growth would be extracted from the gross domestic product (GDP) to pay the higher prices of devaluation.
Before the government could study the merits of Seaga's suggestion, former Bank of Jamaica governor, Derick Latibeaudiere, dismissed it as a simplistic solution which will not help Jamaica's economic situation. In an interview with the Gleaner's Larraine Luton, Latibeaudiere noted that the country should look more on the fundamentals instead of the system. "If the fundamentals are right, you don't have to think about which system you are going to use," he said.
Latibeaudiere hit the nail on the head when he declared: "The fact of this matter is that Jamaicans are not earning as much foreign exchange as what we spend." This view of the former governor is not new. He expressed a similar view during an interview I had with him many years ago when he was governor. I think he was right then - as he is now - and I have been writing about the need to grow the foreign exchange over the years.
Jamaica has tried many foreign exchange systems over the years. With the possible exception of the comprehensive auction system from March 24, l984 to October 3l, l989, none was a marked success. The low or slow inflows of foreign exchange were a perennial problem. We have had a floating rate regime, fixed rate dual system pegged to the US dollar, unified system, crawling peg regime, parallel exchange system, preliminary auction system, comprehensive auction system and allocation system. There were two rates from January 10, l983 to March 20, l984 - an official rate and a parallel rate. Now we have an inter-bank system where the rate is determined by the law of supply and demand. When demand outruns supply the rate increases. Whatever the system, the fundamental problem remained: the country was not earning sufficient foreign exchange or saving foreign exchange by reducing imports.
In l991, Jamaica eliminated capital controls and liberalised the foreign exchange market, thereby adopting a floating exchange rate regime, or more aptly a managed float. The emergence of significant macroeconomics imbalances in early 1999, which were manifested in substantial arrears in the foreign exchange system, indicated that a market-determined rate, which would facilitate a more efficient allocation of resources thereby promoting growth, was the obvious policy choice. There was also conventional thinking that with a floating exchange rate, domestic monetary policy would be free from the task of defending an exchange rate pegged, to pursue other goals, primarily price stability.
For example, owing to lack of an appropriate mix of monetary and fiscal policies, the exchange rate depreciated by 79 per cent by the end of 1991 which translated immediately into an inflation rate of 80.2 per cent. The rate of inflation moderated in subsequent years as the rate of depreciation slowed.
The government must think of ways of increasing the foreign exchange inflows. One way of doing so is to expand the export of goods and services. Another way is to attract more foreign investment. Remittances of Jamaicans living overseas are vital to our foreign exchange build-up and they should be encouraged to increase the remittances. At the same time we could save on foreign exchange by reducing imports through producing and eating more local food and developing and diversifying exports.
Disincentive to investment
Some financial institutions including money markets are paying just five per cent on investment while the national interest rate is as high as 90 per cent. This is most troubling, is a disincentive to investment and development and a major scandal which is going unnoticed. These institutions should do better and lift the burden from the heads of many Jamaicans.