#Thread Hear Dr Phillips explain the necessity of a flexible market determined exchange rate in his 2014/15 opening budget presentation.
Hear Dr Phillips inform Jamaica that the nominal exchange rate is not an indicator of whether the economy is “weak or strong”.
Subsequent to my post on Tuesday that provided a reminder of Dr Phillip’s exchange rate pronouncements while Minister of Finance, today he acknowledged his support of a market exchange rate. That is a good start.
Dr Phillips also knows very well that it is not the GOJ nor the Minister of Finance who makes decisions about interventions in the foreign exchange market. It is the BOJ Team.
With approx. US$3.6Bn in gross reserves, the BOJ, if it so chose, prob. has enough resources to keep the currency in a very narrow band for, maybe, a few years by stepping into the role of the market & resolving temporary demand/supply balances through excessive intervention.
That is what we used to do as a country & here is why this would be a big problem to repeat. If that choice is made Jamaica would once again end up depleting our reserves in a few years & we would once again lose our economic independence.
We would have to start all over again from where we were in 2013.
The reserves in your central bank are a public resource and belong to all Jamaicans.
We need our reserves to protect us against shocks in the external environment.
For example if there was a recession in the US which leads to a dramatic fall in tourism receipts or a natural disaster where we have to import every thing for six months as productive capacity has been severely reduced or if oil prices where to breach three digits for example.
If any of those circumstances arise and we are caught with insufficient reserves in central bank then we would be back to square one.
The BOJ has been reducing its use of reserves for intervention in the foreign exchange market, & relying on demand/supply market force to resolve those imbalances, in order to preserve our reserves for a genuine rainy day & so provide sustainable economic independence for Jamaica
Between March 2013 and June 2017 when BXFITT was introduced, BOJ intervened into the foreign exchange market to the tune of US$2.5 billion.
Between July 2017 and November 2019 BOJ interventions totaled approximately US$740 million.
BOJ’s footprint in the market has therefore reduced by approx. 50% measured on a monthly basis over both periods. This has allowed Jamaica to increase our non-borrowed reserves by approx. US$1 billion since November 2016, improving Jamaica’s sustainability for the long term.
All of this translates to improved credit ratings, improved credit terms and lower interest rates for businesses and households.
There is a stark choice. “Management” of the exchange rate as we use to do, with excessive intervention, compromises long term sustainability and economic independence.
Having said that the BOJ needs to accelerate the implementation of the FX Trading platform that will allow for greater transparency in prices and reduced spreads.
The BOJ needs to continue working with the banking and business communities to promote the use of forwards that allow demand and supply to be more efficiently rationed over the course of a year.
This transition can be difficult but we must not resile from doing what is in the long term best interest of Jamaica even in the face of politically motivated pressure.
It took commitment and resolve, on the part of the Jamaican people to break from the long standing bad habit of accumulating unsustainable debt.
In that same spirit let us all, with commitment and resolve, break from the long standing bad habit of calling on public resources to resolve short term pressures that should properly be resolved in the private sector (by banks and businesses).
BOJ is forging a path to a place where all businesses and by extension, the households they serve, have the products available to insulate themselves from exchange rate volatility without repeated calls on public resources.
This will allow for improved ability to plan without putting Jamaica’s sustainability at risk.
