Currency is the magma that holds the tectonic plate of any economy. More so, in the case of Jamaica. The plate has shifted and there are gapping holes in the currency. The ground we are now standing on is a shaky ground. Some might say that we have a flawed currency.

The Jamaican dollar is now worth only 0.0113 US dollar that is approximately one US cent. This is a decline of 98.70 per cent(1/77) since 1971 when we had fixed exchange rate and the gold standard was in vogue. In December 1971 the Jamaican dollar was worth 77 US cents. The government seems to be deaf to the clarion call from the economy for a currency reform. Not too sure what weather vane they are looking at. They need to be reminded that it is better to be roughly right than to be precisely wrong.

What is happening to the Jamaican dollar feels like a pantomime farce. It is obvious that the palliative measures being implemented do not work. We are not exporting anything to take advantage of a weak currency. Moreover, Jamaica would be a major beneficiary of carry trade versus the US dollar. We would have significantly capital flow to exploit the much higher interest rate Jamaica is offering.

One way of showing their resolve towards addressing this crisis is with the current negotiation with the IMF. They should not fatuously march to the IMF tune. In many cases the IMF prescript has proven to be toxic. It begins with a firm stand against deficit reduction at the expense of GDP growth. The priority should be an accelerated GDP growth. Our major problem is the underperformance of the economy. Logics dictates that the IMF needs to make a cognitive shift in its traditional approach to emerging economies. In other words, they need to be pragmatic and loosen their ideologue.

It is idiotic to try and implement a reduction in the fiscal deficit without looking at the consequence of offsetting adjustments in the private sector.

The idea that a weak currency aids the economy has been proven to be empirically false. At least in the case of Jamaica. What this perpetual decline has done is to stimulate inflation. Given our current account deficit we are constantly importing inflation. We have no local substitute to alleviate the price pressure of imported products. This has a negative impact on purchasing power. Also, a devastating blow to output and employment.

Keeping interest rate high to help the dollar has proven wrong. A weakening currency in an inflationary environment does not help Jamaica. If that remedy works then Zimbabwe would be among the best performing economy in the world. Granted it will take more than lower interest rate to get the economy going, but it will go a long way. It has been proven so far that a dogmatic inflation target does not help the Jamaican economy. What is has done is to stunt any recovery in its track.

The performance of the Jamaican dollar has been abysmal. We may not reach the stage that Iceland found itself in, but we are rapidly approaching the precipice just behind Argentina and Ukraine. Strangely, the US dollar has appreciated against only a few currencies this year and guess what, Jamaica is among unfortunate few.

Country Currency Change (%)

Ghana Cedi 13

Jamaica Dollar 11

Argentina Peso 8

Fiji Dollar 6

Pakistan Rupee 5

Algeria Dinar 2

Sri lanka Rupee 2

Vietnam Dong 2

Kuwait Dinar 2

(Source: paul.kedrosky.com)

To this list you could add the Congo 62 per cent, Nigeria 10 per cent and Belarus 24 per cent.

Some will say dealing in currency is a beauty contest. In this contest gold has been judged as the overwhelming winner. Look at India buying 200 tons for $6.7 bil. This can be interpreted as a lost of faith in the US dollar as the uni-polar reserve currency. Even though these may be headline grabbing, the Jamaican economy is still tethered to the American economy and as a result the currencies have a symbiotic relationship. So what ever happen to the US dollar will equally affect the Jamaican dollar.

It is time we take a look at what should be done about the Jamaican dollar. We cannot continue in this protracted decline. This vicious cycle of destructive devaluation needs to be abated. In this era of globalization there will inevitable be less currency. We will be seeing more currency unions. Eventually all countries in the European Union will be using the euro. The Middle East and Latin America be will following soon with their own currency union. The question need to be asked does Jamaica needs its own currency? If we insist on maintaining our own currency then we need to do a revaluation sooner rather than later. How about a reverse split? Let’s take one zero off the exchange rate. So rather than the Jamaican dollar at 90 to the US dollar it become 9 instead.

Let’s take a look at the performance of the Jamaican dollars over the years. It is obvious it has underperformed. How much longer are we willing to continue on this path?

Jamaica can engage in some passive currency hedging but it is very unlikely this that will be of much help. It could also encourage or should I say promote a higher saving rate. This could make a positive contribution in the government borrowing. Look at Japan with its high saving rate, foreign ownership of its debt is only 6per cent. Whereas with the US with it low saving rate it is over 60per cent. There would be less reliance on foreign borrowing. As the chart below indicates higher savings rate and improved trade balance have an immense impact in reducing pressure on the dollar.

Currency board may not be the answer. Look at Argentina and its success with currency board in the 1990s.Then it experienced a massive capital flight reversing all the gains. As a result fiscal policies were the only effective tool available to the government to manage the economy.

Jamaica does not have the luxury of a commodity base economy such as Australia, Brazil, Canada, Norway and Russia. These currencies will be appreciating against the US dollar for a long time to come. Therefore Jamaica needs to focus on the factors that affect it currency most. These are foreign direct investments, current account, portfolio flow and productivity.

We are not experiencing an exogenous shock but a glacial decline. Eventually we are going to reach the point of diminishing return. By all indications we are already there. The currency decline needs to be arrested.

This nascent currency crisis needs to be addressed promptly. If not we are destined for a major economic collapse. We must get out of this debt trap where the interest rate on government debt is higher than economic growth.

It is the tenet of any prudent government to alleviate the burden on the future generations. The way things look now we are punishing them. We can start to mitigate this impediment by seriously developing a cogent currency policy. Let us either dollarize the economy or take one zero of the exchange rate.

Del Warmington is a managing partner with Delwar Capital Management LLC. You can email him at dlwarm2001@yahoo.com.