My Two Cents » Devaluation : A Jamaica Gleaner Blog

Devaluation

I have noticed with much concern that the Jamaican Dollar has fallen almost twenty percent in two months with no economic reason for the fall. This has come at a time of moderate demand for foreign exchange as businesses after a slow Christmas are not buying as much new inventories, the price of oil is the lowest it has been in many years and the winter tourist season has started better than expected. Initially it was felt that the financial sector was buying foreign exchange to meet margin calls but both the financial sector and the Financial Services Commission suggest that the exposure of the local financial sector to overseas entities is minimal. What then is causing this run on the dollar, as far as I have been able to determine the root cause is none other than speculation.
Once again people are buying the U.S. Dollar because they expect the Jamaican Dollar to devalue. This is what is known as a self-fulfilling prophecy, people expect the dollar to fall and rush out to buy the U.S. Dollars resulting in the value of the Jamaican Dollar falling. What is surprising is that once again persons are exchanging a short term one off gain for a long term loss. The majority of goods manufactured or purchased in Jamaica have a significant foreign exchange component. Whatever gain one makes on the small amount of foreign exchange purchased will be more than lost in the price to be paid for the items that one needs. We already see this in action because despite the fall in oil prices the price of gas at the pumps is actually going up.
Unfortunately this action will lead to increased inflation putting more pressure on the dollar resulting in higher interest rates being used or maintained to ease pressure on the dollar and if not contained will ultimately lead to the collapse of the Jamaican economy. We have already seen the result that speculation has had on the world economy and we seem to be headed in the same direction. It is worth restating that investing is not about getting something for nothing and should not be based on speculation. Investment is about putting aside money for the future years when one needs it, because you are no longer able to work, and should be based on sound principles.

Feedback question: Have we learned the lessons from Cash Plus and Olint?

Tags: budget, dollar, economic, economy, exchange, foreign, jamaica, minister, ministry, recession, tourists, U.S.

Older Entries

Newer Entries

The opinions on this page do not necessarily reflect the views of The Gleaner.
The Gleaner reserves the right not to publish comments that may be deemed libelous, derogatory or indecent.
To respond to The Gleaner please use the feedback form.

8 Responses to “Devaluation”

Donya says:

February 7, 2009 at 2:15 pm

Devaluation has really become an issue with the jamaican dollar approximately JA$88.52 toUS$1.00 with this hike certainly inflation will set in but within any typical economic model,Isnt it in times of an economic downfall prices fall since there is a lack of demand in the economy? My overall question is What kind of economic policy is Jamaica operating by? Instead of price cuts there is increase prices which ultimately will worsen the jamaican economy. we need new a change both in our monetary policies and fiscal policies or is it that we are burden by national dept bound to keep us down for centuries or maybe its ignorance
Steve says:

February 27, 2009 at 5:09 pm

I have noticed with much concern that the Jamaican Dollar has fallen almost twenty percent in two months with no economic reason for the fall.=—On what basis does the writer base this premise?

Whenever devaluation occurs it must be because of some economic factor. One of the main reason is the demand for foreign currency versus the supply of foreign currency. For a country with such a huge trade deficit that is enough of a reason for devaluation where demand for foreign currency is obviously greater than supply.

So until the productivity of Jamaica goes up and more foreign investments pour into Jamaica look for even steeper decline in the value of the $J.
Charlie says:

March 10, 2009 at 8:20 pm

There is a fundamental economic reason for devaluation of the dollar. “Demand for foreign exchange is greater than the supply flowing into the Central Bank”. This is partly triggered by the (a) Slow remittances via W/Union and other sources. (b)The collapse of the equity markets worldwide means reduced inflow of capital. (c) The increased cost of imported food triggered by the corn alcohol for fuel concept. (d) Jamaicas’ increasing cost of imported fuel (e) Speculators feeding on the herd mentality complex will dump the Jamaican dollar in these uncertain times. Add these together and the only sensible thing to do is make foreign dollars harder to get. Devaluation. Increased production, reduction of beuracracy a change of taste and appreciation of local products are some tools that could be used to minimize the impact of devaluation
Charlie says:

March 10, 2009 at 9:05 pm

Much said Steve
Charlie says:

March 11, 2009 at 8:20 pm

When the tide is in we can pretend to swim. When the tide goes out we realize that many swimmers were naked. (Warren Buffet) The memory of Cash Plus is at the forefront now but when the tide comes back in naked swimmers will wade in some other foolish venture
Steve says:

March 14, 2009 at 3:28 pm

Charlie

I think some aspect of Economics and Finance should be mandatory in high school. That way our citizens will be better able to navigate the ‘gobligoop’ that they hear and read daily.

Understanding the role that Interest Rate and Purchasing Parities play will go a far way in informing our local citizenry as to why currency rates change.
Charlie says:

March 16, 2009 at 5:01 pm

Great point Steve that is why I am majoring in Curriculum Development. History shows that no financial guru, king, or potentate can sustain growth beyond 10% OVER A LONG PERIOD.
If this lesson was taught in schools, we would avoid the debacle of Wall Street, the nightmare of Olint and the fiasco at Cash Plus.
Jay says:

April 19, 2009 at 4:44 pm

The problems we face today cannot be solved by the same level of thinking that was used to create them: – Albert Einstein.
While the problem that we face today, were not necessarily created by the Bank of Jamaica or the finance minister, the fact is we have faced these very same problems before.
The policies we continue use, remains the same and hence the results have been no different i.e. they simply have not worked.
It therefore calls for a radical departure from what we have become used to, to something different, something that is known as “change”.
The JMA president was recently chastised by the BOJ governor, who has presided over the monetary policies of the country for a long time for daring to suggest that he (the governor) changes his “tune”.
Not only was I shocked at his (the governor’s) outburst, but I came to the stark realization that Jamaica will never move forward with this level of thinking by those charged with the creation of economic policies.
Jamaicans have become too used to double digit interest rate and making money with very little effort, that those who share the responsibly for economic policies feel it is necessary to continue to feed this need for high returns from non-productive efforts. We simply cannot afford to reward laziness any longer.
The government now has the best opportunity in my mind to reverse this trend and put in place fundamentally sound policies, which will allow us to emerge stronger at the end of these global crises.
Economic students have said, it’s the market that dictates the interest rate, but from all that I have seen, it’s the BOJ that sets the rates in Jamaica. We must be weaned from high interest rate if we are ever to become productive again.
For this to take place the government must become bold enough to become unpopular by reducing interest rates on all new instruments, and break the back of speculators. They should follow the JMA president advice, which in my mind makes perfect sense.
The government should in tandem move towards the following:

* Import restrictions on all luxury/high vehicles.
* Import restriction on luxury consumer goods.
* Increase the duties on imported agricultural products such as, Irish potato, tomatoes. (List can be done by that ministry).
* Reduce duties on production tools, equipment and raw materials.
* Be merciless in the pursuit and imposition of heavy fines on persons found evading custom duties and false declaration. I am surprized (should I be) that there is not much outcry from the moralist in our country on this issue.
* Pursue self-employed professionals relentless and complete audits as is done by the IRS in the USA, to ensure they are paying there fare share of taxes. The compliant rate amongst this group is shockingly embarrassing and it’s really outrageous that they have been allowed to get away with this for so long.

The time has come for strong action and our weak kneed politicians needs to forget about retaining power and become focused on moving Jamaica out of its economic quagmire which will enhance the environment for both they and us to live in.