Declining NIRs portend economic and financial disaster
The Bank of Jamaica, already weakened by its losing fight to "target" spiralling inflation, and stressed out by the difficulties of dealing with a devaluing Jamaican dollar, is impotent against a strong US dollar.

Amidst the gloom of what the International Monetary Fund (IMF) describes as a "significantly darkened" global economic outlook, in a world that may soon be teetering on a recession, perhaps the most serious and pervasive manifestation of the suite of interlinked existential crises Jamaica faces is the rapid deterioration of its net international reserves (NIR).

Bank of Jamaica (BOJ) data indicate that between October 2021 and March 2022 the NIR declined by 10 per cent from US$4.8 billion to US$4.3 billion; and that between April and June 2022 they declined a further 13 per cent to $3.8 billion. In the nine-month period between October 2021 and June 2022, the reserves fell by a massive 21 per cent, from US$4.8 billion to US$3.8 billion.

Much of the decline was due to vigorous intervention by the BOJ in the foreign exchange market to defend the Jamaican dollar against assaults from speculators, or to "lean against irrationality", as BOJ Governor Richard Byles put it.

From October 2021 to March 2022, the bank sold US$552 million to the foreign exchange market or more than twice the amount it sold for the corresponding period between 2020 and 2021. What this, in effect, meant was that the entire allocation of US$520.6 million of IMF special drawing rights (SDR) received by the bank in August 2021 has been squandered defending the Jamaican dollar instead of used to help build economic resilience, respond to the climate crisis and promote development, as was intended.

Meanwhile, a delusional governor recently claimed that the Jamaica dollar had appreciated.

But in challenging the spielers and flim-flam men who wield enormous influence on the economy, the governor has put the NIR at grave risk, as its painful fall from its once "comfortable" perch indicates. And while the bank may be able, for a time, to stoutly defend the debilitated Jamaica dollar from the depredations of scammers, scoundrels and scofflaws, as the global financial situation tightens, with grave impact on Jamaica, the bank's helplessness is being made plain.

The bank, already weakened by its losing fight to "target" spiralling inflation, and stressed out by the difficulties of dealing with a devaluing Jamaican dollar, is impotent against a strong US dollar. What a strengthening US dollar means, among other things, is even more inflation as soaring imports are invoiced in US dollars, increased capital outflows, more arbitrage, larger spreads, and greater costs for servicing foreign debt, the bulk of which is denominated in US dollars. The challenges become even more insurmountable, as already anaemic growth is dampened by constricting consumption, as remittances decline, foreign investment flows dry up and profit, in an economy, heavily dominated by foreign capital, gets repatriated.

Short of the nuclear option of capital controls, which the order would not permit and its proconsuls would never consider, it would be impossible to head off a sustained flight to the safety of the US dollar.

However, letting the Jamaica dollar slide would be politically suicidal for any government, to say nothing of the impact on the economy and society more generally that any such reckless decision would entail. Since currency predictability is critical to financial and macroeconomic stability, and indeed to fighting inflation, the excessive volatility in exchange markets, and the devaluing Jamaica dollar are clear indications of the failure of policy, firm evidence of macroeconomic uncertainty and a loud warning of impending danger. It would not be safe to rule out further deterioration of the NIR, a rise in non-performing household loans as money gets tighter and bubbles burst, bank meltdown and financial sector panic, conditions with which the country is not unfamiliar.

At the core of the problem is the dominance of the economy by corporate finance and the relative decline of manufacturing and agriculture. Since the financial sector produces nothing but profit for those who control it and economic misery for the rest; since distributors, wholesalers and retailers sell mainly imports, the prices of which have soared; and since exports have fallen, due to factors such as the expiration of preferential access agreements and greater competition in alumina and bauxite markets, there is a severe balance of payments crisis. There are, of course, historical and structural factors which help to explain the persistence of this crisis.

Between 2015 and 2019, a period of "monumental economic success", according to praise singers and sycophants, the visible trade deficit moved from US$3.79 billion to a massive US$4.75 billion, with imports in 2019 valued at a staggering US$6.40 billion and exports a mere US$1.65 billion. Due to the pandemic, the deficit fell to US$3.49 billion in 2020 but figures for 2021 showed that the trade deficit was on the rise again. For Q1 2022, Jamaica's total imports rose by 38.7 per cent to US$1,826 million from US$1,317 million for the corresponding period in 2021, while total exports declined by 5.5 per cent from US$360.3 million to US$340.5 million.

There is some good news coming out of the tourism sector. However, despite the recent rebound, tourism is yet to return to pre-pandemic levels. As global financial conditions tighten, inflation persists, household purchasing power weakens, particularly in the US, growth falls off and recession fears grip source markets, and social tensions increase in Jamaica, amid growing inequality, poverty and food and energy insecurity, the vulnerable tourism industry will face significant challenges.

Remittances, which were boosted by stimulus cheques paid at mainly North American sources and which saved Jamaica during the pandemic, are now on the decline. For May 2022, remittance of US$271.2 million, fell by 6.7 per cent or US$19.5 million compared to May 2021. Net remittance inflows for May 2022 of US$1,264.8 million decreased by 3.0 per cent or US$38.6 million, relative to the corresponding period in 2021.

The balance of payments crisis is being disguised and obfuscated by "good news" and by BOJ interventions in the forex market. The implications for the economy and society of a determined "flight to safety", as has happened in Jamaica before and in other places more recently, are legion. The BOJ's "buoyant" reserves could be easily wiped out. In fact, there is some evidence that this may be happening now.

In May 2022, the NIR fell to $3.76 billion. The slight increase in the international reserves in June has given rise to rumours that the BOJ is trying to strengthen the reserves at the expense of much-needed developmental spending. If true, it would be further proof of the deadlock and confusion of monetary policy.

The seriousness of this moment cannot be overstated for a Government that has spent most of the last two years in crisis mode and a people "reform fatigued" by endless austerity. The governor, his quiver filled with blunt arrows, has, in the midst of a hurricane, set out in a row boat without a paddle to slay Moby Dick. His captain, a deceptive denialist and an ideologue lacking in ideas, his boat sinking, stands on the bow at the edge of an event horizon, quixotically tilting at gale force winds. The economy is resilient, the fundamentals sound and the buffers are solid, he claims. "I am not a man for the turning," he insists. Row, governor, row!

Far too many Jamaicans go about their business parochially oblivious of, or can't be bothered by all that is happening in Jamaica and in the rest of the world, while our leaders put us to bed with fairy tales about a rebounding economy on the cusp of take-off to half a century of peace and prosperity. Yet some people are waking up to the deceit.

To warn of the tempest of civil unrest, as the UN, IMF, World Bank and the Bank for International Settlements have all done, is not to indulge in hyperbole and fear-mongering or to stir up trouble as toxic positivists have asserted. It is an acknowledgement of reality and a recognition of the need for the Government to take immediate steps to stave off the coming anarchy.

Jamaica has had close to a decade of austerity for the impecunious many and socialism for the wealthy few. In-between, there have been the tumult of the pandemic, declining standard of living and loss of trust and confidence in the political and economic system without a serious protest akin to those which have broken out all over the globe. What protest there has been, has been directed towards, and contained in, therapeutic, self-destructive violence. There was a time when it was fashionable to talk about political consensus on economic reform, aka austerity, and social peace.

The Minister of Health Dr Christopher Tufton once said that the deviant behaviour and extreme criminality the country is witnessing is a clear demonstration of a society in distress. The prime minister has described life for many people as "miserable". Public servants, for years demeaned, discredited, and disrespected, are champing at the bit. They have every right to be politically and morally outraged.

What causes me concern is that Jamaica's economic and political elite, having convinced itself that there is no alternative to punishing austerity and rampant inequality, is so ideologically blinkered and lacking in ideas that it continues to lead the nation on a slow march to certain anomie.

What is needed is a guided interest rate policy aimed at investment in the productive sectors of the economy, in MSMEs, in agriculture and manufacturing, in renewables, in education and health and in social infrastructure, to build resilience to climate change and to shore up the nation's defences against natural disasters. The IMF has warned that a natural disaster, if one were to occur, would cause protracted negative growth and large losses for banks and other financial institutions. The BOJ admits that the financial sector and its payments system would be badly harmed if a natural disaster were to occur. We have seen the enormous damage that a little flooding or drought can inflict and how vulnerable and unprepared the country is to weather events.

But then the IMF will be waiting with a bailout package of further austerity as it had been in Sri Lanka and Ghana, to deal with man-made disasters.

African proverb: There is no need to tell the blind man that the market is on fire.

Ambassador Emeritus Audley Rodriques served as Jamaica's head of mission in Venezuela, Kuwait, and South Africa.

Audley Rodriques

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