BANK of Jamaica (BOJ) Governor Bryan Wynter told Parliament's Public Administration and Appropriations Committee (PAAC) yesterday that he was confident the benefits of the current economic strategy will eventually emerge.
"It will become evident to participants and stakeholders, over time, as we get a more stable macro-economic environment, and as our return to debt sustainability is perceived as more and more credible," Wynter told the committee.
The BOJ governor said that, while there were many sceptics, for various reasons, their issues could be tackled with performance, as the business climate improves and the country attracts new investments.
Wynter noted, however, that the risk of debt default in the United States has been a matter of concern for Jamaica, and was an example of the kind of "unexpected sources of shock" that could dislocate the current efforts to improve the economy and create growth.
"I think that it should help to underscore for us the importance of tackling these issues, painful as many of them are, and tackling them with resolve and pursuing them with determination," he said.
Wynter said that, while there was much more to be done, the improved credit ratings from Standard and Poor's was clear evidence "from an objective, external party who has a stake in being right", that the steps that were being taken have shifted Jamaica from a very precarious position a year ago.
"That is not a position that we should take lightly. We should also not assume that, having done that, we just stay there; there is more to do," he cautioned.
Turning to the devaluation of the Jamaican dollar and its effect on inflation, Wynter stated that for the first half of the fiscal year, it has been much less than had been projected. He said that while the BOJ had anticipated a pass-through effect of approximately 0.5 per cent, it had turned out at 0.3 per cent.
"The exchange rate itself contributes to price rises in the country, but the exchange rate movement is not the same as the price rise in the country. So, the inflation rate that we are currently running at is within the lines that we have projected as our target, and we are confident that the current exchange rate is not jeopardising the target for inflation," he said.
He suggested that this may have been the effect of the fiscal consolidation and the fact that some entities have held back on price increases in order to promote sales.
However, PAAC chairman, Opposition MP Edmund Bartlett, asked whether it was strictly market forces influencing the movement of the Jamaican dollar, or a managed process which should also have a sense of where the rate should settle.
Wynter said that the exchange rate was market-determined, but that the BOJ is actively involved in an open way which, he said, is important because the market is "small and very thin".
He said that where actors in the market may need to buy large blocks of foreign exchange, which could present challenges to the smooth running of the market, the bank is able to intervene, and does so.
"Different investors make decisions at different points. Some markets are broad enough to capture these points, and the bank's role is that if the market becomes too disorderly, in our judgement, then we have the capacity to intervene," he said.
"We can intervene on both sides: We can intervene in terms of foreign exchange players themselves, and we have done this from time to time, because we have resources that we can use to sell dollars into the market. We also can manage liquidity in Jamaican dollars, because anybody buying US dollars has to pay for it, so they need Jamaican dollars to pay for it," he explained
He said that the BOJ also has constant dialogue with the market participants, on both a formal and informal basis, in order to respond.
"All of this is aimed at ensuring that the disorderly conditions don't emerge or, where they do emerge, they don't persist. So that we can, albeit at prices that people may not like, we can nevertheless have, over time, a continuous availability of foreign exchange for those who need it; and those who have foreign exchange sense that they can continually go to the market and sell, and be sure that they are getting the best price for their hard-earned foreign exchange," he said.