Dollar slide adversely affects business, consumers in near term — IDBWednesday, May 28, 2014
THE Inter-American Development Bank (IDB) described the depreciation of the Jamaica dollar as adversely affecting consumers and businesses in the short-term.
Concurrently, the lending institution weighed in on the local interest rates returning to pre-debt exchange levels.
"The real depreciation should improve competitiveness, which is central for the long-term sustainability of the external accounts. Nonetheless, it adversely affects the import-dependent industries and consumers in the short term," stated the bank in the bulletin posted on its website.
The Jamaican dollar depreciated by 14.4 per cent in 2013, which resulted in a real depreciation of four per cent over the same period.
"A long period of real appreciation has recently been reversed," said the IDB in its Caribbean Region Quarterly Bulletin released this month. The bulletin reviewed the island in a chapter entitled 'Jamaica Steady as she Goes'. "The Jamaican dollar has been appreciating in real terms over extended periods of time, which cheapens import prices for consumers and import-dependent industries, but hurts international competitiveness because it makes domestic products more expensive.
"The real depreciation should improve competitiveness as it supports consumption switching to domestic goods and supports local producers. Nonetheless, it adversely affects the import-dependent industries and consumers in the short term."
The IDB noted the currency depreciation caused the fall of business and consumer confidence to record lows in 2013 towards its current state of a thin recovery.
"Depreciation poses a major difficulty for businesses. Jamaican businesses depend heavily on imports, including for fuel, machinery and intermediate goods," said the report. "The depreciation causes anxiety as reflected in the decline in the business confidence index, which fell in the third quarter 2013 to one of the lowest levels since the inception of the survey in 2001.
"Despite the improvement, job prospects remain low, and the depreciation of the dollar overtook crime as a major concern. As such, the improvement reflects a recovery from a very low level rather than a resurgence of optimism."
The IDB also indicated that interest rates continue to trend upwards since the National Debt Exchange in 2013. The debt exchange in February 2013 reduced the spread above the benchmark T-bill on variable rate debt, as well as interest rates on fixed-rate debt.
The benchmark 90-day T-Bill rate has been increasing since its low of 5.5 per cent in February 2013, reaching 8.3 per cent as at March 2014, which means that interest rates on variable rate Government of Jamaica securities are now higher than immediately before the National Debt Exchange.
"The increase was expected and should stop or even reverse with improvements in investor confidence," said the IDB. "Almost 40 per cent of Jamaica's domestic bonds, which are equivalent to around 20 per cent of direct public debt, have a variable interest rate, making interest rates a major factor for fiscal sustainability."
In February the IDB approved two new 20-year loans for Jamaica with a combined value of US$140 million.
Both loans have a grace period of five-and-a-half years.
The first loan of US$80 million will support a project entitled 'Fiscal Structural Programme for Economic Growth' designed to help Jamaica achieve fiscal sustainability and promote higher economic growth.
This policy-based loan (PBL) is to provide support for institutional and policy reforms by means of a fast disbursement of resources.
The goals include supporting key macroeconomic aspects of the (IMF) agreement, including tax reform (particularly strengthening revenue collection through the broadening of the tax base and reducing tax rates), enhancing the Government's control over expenditure, improving the sustainability of the National Insurance Scheme (NIS), and strengthening Jamaica's Fiscal Responsibility Framework (FRF).
The second $60-million loan aims to finance the third phase of the "competitiveness enhancement programme" designed to support Jamaica's macroeconomic sustainability, continue implementation of a national competitiveness framework, simplify tax administration, reduce the government's budget support for state-owned enterprises (and overall reduce the Jamaican government's participation in inefficient enterprises and projects), improve the private sector's access to financial markets (particularly credit), and lower business costs through more efficient land titling and registration.
The programme's direct beneficiaries are stated to include private sector companies, especially small-and medium-sized enterprises (SMEs) that are the most adversely affected by the current framework for doing business and accessing finance, the informal sector that lacks incentives for participation in Jamaica's formal economy, and individual entrepreneurs that will benefit from direct access to finance.