Sliding dollar requires policy response — CaPRI

Monday, April 08, 2013

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THE Caribbean Policy Research Institute (CaPRI) is advocating that the Government assess its social safety net initiatives, such as the Programme of Advancement Through Health and Education (PATH) — in light of the sliding dollar — to cushion the impact of increased prices on the most vulnerable, even while it implements reforms that will encourage businesses to be more efficient and expand.


According to CaPRI, the devaluation of the Jamaican dollar will lead to increased prices, which could have severe consequences for the most vulnerable in the society, such as pensioners and persons living at or below the poverty line.


"For them, it will be a painful adjustment as their incomes are primarily fixed or are already inadequate and will now value less," Co-executive Director of CaPRI Dr Christopher Tufton said in a release issued yesterday.


According to Tufton, the Government would also have to brace for social pressures from wage increase demands which could have a further destabilising effect on the economy.


Meanwhile, CaPRI said a policy response is needed to address the consistent slippage of the Jamaican dollar against the United States currency, as the sliding dollar will change the dynamics of the Government's economic variables and impact Jamaican business and citizens.


The Government, CaPRI said, must demonstrate an understanding of the impact and implication of exchange rate adjustment and sharpen its policy focus to hasten the growth prospects in the country.


This, it said, should be done through the key institutional reforms related to taxes and doing business, as well as being more targeted in protecting the most vulnerable in the society through initiatives such as the PATH.


According to CaPRI, the value of the Jamaican dollar against its US counterpart, which is quickly approaching $100 to US$1, has long been argued to be a source of uncompetitiveness for the Jamaican productive sector and its export prospects.


"Those proponents who argue in support of devaluation of the Jamaican dollar, argue on the basis that Jamaica will benefit because its debt in Jamaican dollars would be easier to service, while Jamaican exporters and prospective exporters would be able to offer cheaper prices to the international market and hopefully in the process, increase the demand for exports," CaPRI argued.


Additionally, CaPRI said proponents of devaluation argue that the costs of imports due to a devalued dollar would discourage imports and encourage more local production and consumption which would support critical sectors such as agriculture, and similarly would discourage demand pressures for foreign exchange.


But according to Tufton, while these may be desired features of the sliding Jamaican dollar, many are not convinced that the history of devaluation in Jamaica has shown a net gain in international competitiveness, increase in exports or less debt.


Tufton further argued that proponents against devaluation make the case that Jamaica has too many systemic and structural deficiencies to realise any net benefit from further devaluation, while increased hardships on the general citizenry are certain to follow due to inflationary price hikes.


"Any benefits of exchange rate adjustment are likely to be overtaken by the lack of efficiencies in the public sector, critical to facilitate private sector expansion, as well as incomplete tax and pension reforms," Tufton said.


Similarly, he further explained, other critical cost issues that would need to be simultaneously addressed would include energy and security risks which contribute significantly to the costs of doing business. Of note too, he said, is the high import content of direct and indirect inputs for local production.


CaPRI will be hosting a public forum on policy implications of the sliding dollar tomorrow at the University of the West Indies, Mona, at 5:30 pm. Speakers will include Dr Denzil Williams from the Mona School of Business and Management; Aubyn Hill, international banker; Brian Pengelley, president of the Jamaica Manufacturers' Association; and Tufton.



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