(Reprinted from my report done in September 1, 2006)
I hear it being said on a consistent basis by many a writers, public speakers and people of influence, that the Jamaica dollars is overvalued.What does this really mean for the average person, and who decides ultimately what the “price” of the Jamaican dollars is, in comparison the benchmark currency which is the US$.
Firstly, what is value and how is value arrived at. As some would say , value, like beauty is in the eyes of the beholder. My favorite definition is however taken from the compact oxford dictionary, which defines value as follows: “the regard that something is held to deserve; importance or worth”.
So, is it that those who stand to benefit most from the “devaluation” of the local currency are the ones consistently calling for its devaluation? The argument is, as the holder of the foreign in question,” I think it is valued more that the current quoted market price”.
From a historical perspective the local currency has been battered and bruised over the years, as those with influence, as well as market forces has driven the dollar from its highly “valued” position of US$ 1.00 – J$0.77 in 1972, to the present “overvalued” rate of US$1.00 – J$88.9. This means the US dollar has appreciated over 11445 % in just over 37 yrs. ( If I said devaluation the figure would not look so grave)
This is an astounding arithmetic average appreciate of the gren back against the Jamaican dollar of 309% per annum. Note I said arithmetic average, as it does not look at periods of relatively stable exchange rates or mild devaluation.
Now how is value really arrived at, and what conditions define whether the local currency is indeed overvalued.The mere annunciation by a few without definitive quantitative and qualitative analysis of the economic conditions in Jamaica cannot be therefore taken very seriously. The proponents of the devaluation of the local currency have consistently failed, in my opinion to provide any evidence to the effect that the local currency is indeed overvalued.
The supportive argument being put forward has been, the Government via the Bank of Jamaica has consistently sought to “defend” the local currency. The Government in my opinion has tried to prevent the manipulation of the local currency for the benefits of the few in this country who stands to gain more from currency devaluation.
Let us follow for a minute, the argument, which supports the devaluation of the local currency, and what that policy over the years has had on the local economy.
In each of the last 37 years, it has taken on an average, 309% more of local currency to purchase items manufactured outside of this country, and in particular items manufactured in the states. (This of course does not take price reduction due to technological advanced etc. into account).
It has cost the country the similar percentage amount in increase local currency to repay loans acquired in US$ from overseas lending agencies.
During the last 20 years (1985 – 2005), the arithmetic average inflation rate has been in the region of 19% per annum, peaking to an astounding 80% 1991.
In the one-year period Jan 1, 1991 through Dec 31, 1991, the local currency moved from $8.17 to $21.57 or 164% devaluation. Ironically at the close of the calendar year (1991) the inflation rate had moved to an all time high of 80% as stated above.
During the period Dec 1988 to Dec 1991, the inflation rate in Jamaica moved from 8.8 % culminating in the one of the largest if not the largest inflation rate ever recorded in modern Jamaica of 80%.
The local currency during the same period had moved from US$1.00 – J$6.50 to US$1.00 – J$23.57. This correspondence to a % devaluation of just under 232% during that three year period.
From the above few points, it is clear to me that the Jamaican economy has nothing to boast about in terms of gains from the devaluation of the local currency. In fact, from all that I have seen, the country’s economy has been dealt some of its most severe blows during the periods of high devaluation of the local currency.
The people of this country have suffered tremendously from policies of those, who are of the opinion that the local currency is overvalued when compared to its trading partners.
Jamaicans do not stand to gain any significant benefits from currency devaluation in the near future as the policy direction take by the Government in the last fourteen years have virtually assured this.
The largest businesses now in Jamaica are foreign owned, which means there is greater movement of dollars being repatriated as dividend etc. to the parent companies overseas. Therefore the more profits earned locally, the more $US which will be leaving the shores of this country.
There are few investments taking place in Jamaica today which is bring in foreign exchange, another point which points to the fallacy of this “devaluation” cry.
Jamaica is a “net importer” as seen by our trade data and hence, is using more foreign dollars than it can and will ever generate and therefore will never really benefit from continuous declines in the exchange rates.
Bauxite, which is one of our key earners of foreign exchange, will not last forever, and will probably run out in the next 20yrs.
The new immigration bill being put forward in the United States could also deal a devastating blow to the Jamaican economy. We all know that remittances from the United States has been for the last few years been the main stay of many local families and is a huge contributor to the country’s’ foreign currency coffers in terms of NIR increases..
There is no doubt that quite of bit of Jamaicans who have called the USA home have been there illegally and could be asked to leave the Country with the passage of this new immigration law.
So once again, I see us losing a lot more from currency devaluation that we stand to gain.
Now for the greatest irony of all.
The Islands of Bermuda with a population of just 65,773 people enjoy an average per capita income of
$ 69,900. This from an April 20, 2006 report from the CIA, is the highest in the world. So what is the exchange rate of the Bermuda dollar to the US, well BMD$1.00 = US$1.00.
The British Virgin Island comes in at number 8, with an average per capita income of US$38,500 per annum.
Just for the records, Jamaica comes in at position 144, out of 232 Countries with a per capita income of just US$4,200 per annum. This is the worst in the English speaking Caribbean with the exception of Guyana which hold position 148, with a per capita income of US$3,800 per annum. If Cuba with a per capita income of $3,300 (position 156) and Haiti with per Capita income of US$1,600 (position 194) are included then we are the forth from the bottom.
I guess if we continue on this path as being suggested by other, we will take the place of Guyana shortly and will have the dubious position of the worst per capita income in the English speaking Caribbean with an exchange rate of close to 200:1.
Now of course this is just my humble opinion, as I am sure many would disagree with my position.
Filed under: Uncategorized | Leave a Comment »