THE IMF deal, the budget, the general state of the economy, the nation’s debt burden: we have all been bombarded with references to these obscure items that supposedly affect our lives. It’s the reason you can’t liquidate your inventory, meet your sales target, get a job, a raise or a promotion. The science of economics shapes our financial and social well-being in so many different ways and through so many different mechanisms. It is important for us to understand how these forces affect us and what they mean.

Here we start a series of articles on how economics is affecting us socially and financially. The populations of poorly managed economies are not just impoverished, but are also plagued by the pervasive social problems that result from economic contraction. Almost every problem that we experience as Jamaicans has its root in economics. In these articles, we will examine an event that results from a particular economic policy, and highlight the ways in which the Jamaican citizen is affected.

The movements in the exchange rate have proved to be of concern to all corners of our society: the shopkeeper, the media, and importers of all kinds. As at the end of May 2013, the Jamaican dollar had devalued by 6.96 per cent (or a loss of $6.47). The value of the Jamaican currency impacts the performance of the economy, and as such has a significant effect on our nation’s stakeholders.

On the ground, we as consumers will see our costs of living rising as imports become more expensive. The ultimate effect on us will be the need to consume less. It may sound counter-intuitive that cutting our expenditure and saving more can be a good thing; but our pockets and more importantly the wider ecomony may stand to benefit in this case.

Assuming that the demand for most of our imports is not completely unresponsive to changes in price, we should see a reduction in the volume of imports into the country. This will act to improve the island’s current account balance (i.e. the value of our exports less the value of our imports) in the same way the individual improves his bank balance by cutting expenditure and saving more.

Additionally, exports stand to benefit from a cheaper Jamaican dollar. What is a cheap currency and why would it be desirable? A currency is cheap if it takes fewer Yen or US dollars or Euros to buy one dollar in that currency. When a country’s currency is “cheap” the exports of that country are more competitive and attractive to the rest of the world. This should result in a higher demand for exports. Exports tend to be a large source of economic growth and they can be stimulated with just a simple change to monetary policy. As exports rise, job creation, access to foreign exchange and eventually the standard of living, should also increase.

Most poignantly, it’s interesting to note that economies all over the world are trying to decrease the value of their currency and consume fewer imports. Historically, this has been one of the “easier” ways to generate economic growth. China for example, has long been criticised by other developed nations for purportedly suppressing the value of its currency. The Chinese population has one of the world’s highest savings rates and is widely recognised for their fiscal prudence. According to the IMF, China has experienced economic growth of roughly 10 per cent on average per annum since 1996 and has helped to lift over 400 million people out of poverty .

Costa Rica, an economy that experienced growth of five per cent in 2012, recently increased its tax on foreign investment. Increased foreign investment usually results in an increase in demand for the local currency of the recipient country (the Colon in the case of Costa Rica). The higher tax is aimed at decreasing the demand for the currency and thus preventing the value of the Colon from rising. Brazil imposed a similar tax to ensure that its currency, (the Real) did not appreciate excessively during its highest growth period.

Most notably, in December 2012, Japan’s new prime minister took a bold step in the direction of aggressive monetary policies which ultimately had the effect of devaluing the currency. In March 2013, Japan reported economic growth of 0.9 per cent for the first quarter, which annualises to 3.6 per cent.

For the reasons outlined above, most growing economies across the world view a strong currency as an inhibitor to economic growth.

Marian Ross is AVP – Business Development at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, email us at: info@sterlingasset.net.jm