Some degree of alarm in the business sector was created this week by a Gleaner editorial titled ‘Explain fully FX plan’, which asked whether a reference in the new International Monetary Fund agreement to the Bank of Jamaica (BOJ) on moving to an auction system for foreign exchange (FX) implied the dismantling of existing trading arrangements, with the BOJ becoming a central FX clearing house.

The editorial referred all the way back to the 1980s when the Seaga Administration used an auction arrangement which for supporters ensured “stability”, but to critics was at the price of moral suasion or muscle being used against large FX users to keep them out of the market and dampen demand. In short, a false price.

The whole debate appears to be much ado about nothing, however.

Page 12 of the new IMF Stand-By Arrangement, which had driven the Gleaner‘s concern, says: “In order to develop liquid and deep FX markets, with support from IMF technical assistance, the BOJ will institute a multiple-price auction system — where successful bidders are allocated at the price of the bid — to buy and sell FX in the market. As these auctions become effective, the BOJ will gradually phase out its use of surrender requirements. The auction system could be replaced by an interbank market, once the latter is established and becomes sufficiently deep to serve as the site for price discovery.”

The key point is that the reference to the word auction only refers to BOJ purchases of FX for its own needs. Multiple BOJ sources have confirmed that the proposed auction is designed only to gradually replace the BOJ’s current FX surrender requirements — currently roughly 25 per cent of commercial bank/cambio purchases.

Instead, the banks would bid for the BOJ’s FX requirements, rather than being forced to simply “surrender” it at the previous day’s exchange rate, as now occurs.

The proposed auction system will allow institutions to sell to the BOJ at a rate they decide.

The goal therefore is to create a deeper, more efficient FX market and not to return to the “managed” auction of the 1980’s which, amongst other things, acted as a tax on exporters.

While we are on the topic of the exchange rate, it is worth noting that the Jamaican dollar (JMD) is no longer overvalued, and the IMF does not have a target for further depreciation of the exchange rate. In a recent article, the IMF denied that the JMD is overvalued, arguing that, “the Jamaican currency is broadly in line with the existing economic fundamentals”, further explicitly observing that “We fully agree with the BOJ on that point.”

On the balance of risks, the IMF says the JMD is more likely (than not) to be modestly overvalued — not that it is overvalued. They clarified “However, such risks are linked to the speed at which the country intends to liquidate its external liability position. If Jamaica wants to liquidate its external liabilities faster, the currency is at the risk of being modestly overvalued.”

Essentially, the IMF is referring to Jamaica’s net international investment position, or put over simply, what we owe foreigners, which is significantly negative. However, the vast majority of this is the stock of foreign direct investment (FDI) owned by foreigners, which is extremely long term, largely equity investments with no repayment date. This can be financed indefinitely as long as Jamaica retains international investor confidence, particularly as we are now running a very sustainable current account deficit (only 1.8 per cent of GDP last fiscal year) which is covered several times over by FDI, and appears to be becoming a more attractive investment destination.

Business confidence has continued to improve, with companies dusting off projects, while consumers finally appear to be increasing their consumption, as evidenced by rising GCT receipts.

The next step is for the JMD to no longer appear a one-way bet, which requires it to regain a little more “credibility”.

The long-overdue upgrade this week by rating agency Moody’s is a step in the right direction, and particularly noteworthy when at the Latinfinance conference in Montego Bay last week, Jamaica was described by key overseas analysts as virtually the only country in the entire Latin American and the Caribbean region likely to be upgraded — with the vast majority having been downgraded in the last 12 months, and with many countries, notably in the Caribbean, likely to be downgraded further.

The whole issue of Trinidadian companies accessing our FX market is also overblown. While it is true that there is a major shortage of foreign exchange in Trinidad, the investment of Trinidadian trading companies in Jamaica are not of sufficient size for them to fundamentally affect our market — even if they decided to strip themselves of working capital to repatriate funds to their parents.

The main exception to this, Guardian, is already regulated by the BOJ, and any impact on the exchange rate by that company would more likely have come through NCB’s purchase of Guardian earlier this year, which NCB themselves have advised was “fully financed”.

The whole exchange rate issue has become overblown, especially as it is likely that the JMD is reaching a point where, at minimum, there should be a sharp deceleration in its rate of depreciation, particularly as we are now entering the tourism season. The main caveat to this projection is the possibility of an overshoot in the value of the US dollar globally, a point which we will address in future articles.