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Dollar whine

Mitchell reiterates call for exchange rate stability

BY RICHARD BROWNE
Business editor
browner@jamaicaobserver.com

Friday, April 26, 2019

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Private Sector Organisation of Jamaica (PSOJ) President Howard Mitchell yesterday reiterated his call for action to reduce the extreme volatility of the exchange rate. At the same time, he appeared to be carefully walking back his proposal to peg the Jamaican dollar to its US counterpart that received sharp criticism from the International Monetary Fund (IMF) this week.

According to Mitchell, while there have been mixed reactions to his call for pegging the dollar or the introduction of dollarisation, it is important to move the discourse further to arrive at a viable solution.

“There has been much commentary and criticism in the wake of my suggestions to consider alternative systems which do not require the current level of complex management, but we still have not addressed the manifest issues of high-price volatility and supply dislocations in the FX market which negatively affect the efforts of the productive sector to achieve real growth,” Mitchell said in a statement.

“An eight per cent decline in the value of the Jamaican dollar in less than a month wreaks havoc on businesses, particularly small businesses that are the lifeblood of the economy, and their pain should not be dismissed by arrogant one-liners that can stimulate fatigue and regressive responses,” he said. “I am therefore renewing the call for constructive and mature dialogue and urgent practical solutions to address the continuing uncertainties in the foreign exchange market.”

Mitchell had made the dollarisation call last week in an address to the Jamaica International Exhibition Breakfast hosted by the Jamaica Manufacturers and Exporters Association in Montego Bay.

“I submit that dollarisation is an appropriate strategy today, especially because we in Jamaica have come to grips with our fiscal challenges. We know what they are, especially because our confidence is high and our commitment is certain,” Mitchell said at the function.

“We are tired of devaluation, we are tired of a volatile dollar. We do not have confidence in the management of our exchange rate, and our small businesses and our poorer citizens have had enough of this brutal and unnecessary uncertainty and erosion of their finances,” he said, adding, “Devaluation is a curse, it is a self-imposed albatross around our neck and it is time that we face that reality.”

However, on Wednesday this week, IMF Mission Chief to Jamaica Dr Uma Ramakrishnan said talking about pegging an exchange rate without commenting on the financial structures needed to bring that about is “highly irresponsible”.

“It's not a right approach,” Ramakrishnan, who was in Washington, DC, told journalists in videolink at the IMF office in the Bank of Jamaica, downtown Kingston.

Ramakrishnan noted that changing from the current open rate of exchange would mean that many other mechanisms would need to be put in place to defend the pegged position – not least of all a much higher rate of reserves.

“For me, to talk about a fixed exchange rate is irresponsible,” she reiterated. “To talk about a fixed rate in isolation is misleading. There has to be a comprehensive conversation that looks at the pros and cons. That conversation is not happening.”

The level of resources needed to defend a pegged dollar should have to be far higher, she said, questioning whether with debt at 98 per cent Jamaica had the necessary fiscal space for such a strategy.

In addition, Ramakrishnan noted that even a stable rate of exchange might not give the desired result, as, at a time when Jamaica had a relatively stable exchange rate, it also had unstable inflation.

Financial analyst Keith Collister agreed. “Jamaica could only consider a fixed exchange rate in very specific circumstances,” he said. “The Jamaica Chamber of Commerce actually looked at the pros and cons of dollarisation in 2001, and got comments from the then Bank of Jamaica governor, minister of finance and the IMF's Stanley Fischer. We even looked at doing a study tour of some of the dollarised or Euroised countries (Ireland and Greece) but in the end decided we were better off working on the underlying problems through mediums such as the partnership for progress initiative, many of which initiatives are finally bearing fruit,” he said.

“In addition to needing a much higher level of 'non-borrowed' foreign exchange reserves to defend any pegged rate, a country like Jamaica, that has seen decades of negative productivity growth and lost competitiveness, has to be extremely careful in fixing its exchange rate, as the severe stagnation of Greece, Italy and a number of other European countries has proved beyond all possible doubt. As both our local technocrats correctly noted at the time, we would need a much more flexible labour market to avoid a similar fate,” added Collister.

He also pointed out the higher risk of default that Jamaica could face if it went down the pegged route.

“A country with very high debt that is not denominated in its own currency — as Jamaica would have if it dollarised — would automatically have a much higher level of default risk. We don't have any big brother like the European Central Bank, and importantly, the US Federal Reserve is not going to become our lender of last resort,” Collister argued.


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