Editorial | Jamaica’s foreign exchange market and Groundhog Day
Observing Jamaica’s foreign exchange market and its management by the now “independent” Bank of Jamaica, brings to mind the 1993 Hollywood movie, ‘Groundhog Day’ staring Bill Murray. It featured a cynical TV weatherman who finds himself reliving the same day repeatedly whenever he goes to film the annual Groundhog Day event in the small town of Punxsutawney. His predicament drives him to distraction until he finds a way to turn the situation to his advantage.
As is the case with the local foreign exchange market, the country is driven to distraction at least twice each year as the exchange rate gyrates. Movements in the rate over the years inevitably bring out the same casts to pontificate about why and how to ensure it never happens again: Bank of Jamaica, politicians, academics, business leaders, and media commentators. Their views usually contain expressions of fear, hope, frustration or panic based on the degree and direction of the movement in the rate. Depending on how alarmed the politicians are, the Bank of Jamaica will either quickly intervene to cool off a sharp depreciation or remain more relaxed if the rate is appreciating.
We saw this ‘Groundhog Day’ like approach to the significant movement in the rate to over J$137 to US$1 in mid-August 2018; the panic and fear were evident. The BOJ then intervened by selling US dollars to reverse the slide. It appreciated by close to 10 per cent, or about J$125 to US$1 by end of February 2019. We are now witnessing another episode as the rate moved recently to about J$134 to US$1.
During the year, both the prime minister and the minister of finance have sought to assure the country that the current improved macroeconomic conditions will lead to a more stable exchange rate than in the past. While many would wish to believe, the history of such pronouncements in the past has made them skeptical. The country is aware that the foreign exchange market is very thin; with relatively small volumes, and with a few significant players who can drive the rate very quickly and sharply.
That reality of the market has not changed since exchange controls were removed in the early 1990s. While the volume of foreign exchange flows has increased since then, so too has the overall size of the economy.The liberalization of the Jamaican economy, which has attracted significant flows of foreign direct investment over the years, ensures that flows of capital into and out of the country – “hot money”, profit, dividends, portfolio changes – are long term features of life.
This reality requires that the authorities demonstrate deft management on a continuous basis.
While the Bank of Jamaica has primary responsibility for managing the FE market, it cannot prevent fluctuations in the rate. It can, and should, intervene to smooth out wide fluctuations. However, there are limits to how much it can do. Other market players, including banks, traders, speculators, and government, also have a role to play in the development of an orderly market.
Push ahead with the infrastructural support
The central bank and the government should push ahead with the regulatory and infrastructural support needed to allow for the adoption and use of the variety of foreign exchange hedging products that are available in other markets. This will require a much more open and transparent flow of information from all market players to allow for better price discovery.
This is an area for the private sector to lend its voice and support. Calling for the fixing of the exchange rate, while supporting reduced government intervention in the economy, is not tenable.
Fixing the exchange rate would mean returning to some form of exchange control, thus giving the central bank and the minister a dominant role over one of the key prices in the economy.
We are quite certain that was not the intent of the President of the Private Sector Organisation of Jamaica when he called for the fixing of the rate. The seasoned Mr. Howard Mitchell would have seen almost every imaginable foreign exchange management model tried and tested in Jamaica since the 1970s.
None has been perfect; some disastrous. What is now in place comes closest to giving us a market-determined rate. The market was not developed to prevent human frustration and irritation. It is simply a mechanism to facilitate trade, using price.