#COVID19Chronicles-38: May 22, 2020: The Jamaican dollar is just fine

If you didn’t know better, you’d think the exchange rate of the Jamaican dollar (J$) to the US dollar (US$) was part of the navel string of many Jamaicans. Every time it depreciates, there’s a collective tug on the umbilical cord and a collective wince.

Well, it’s not connected to my navel.

I’ve no idea what the last rate quoted was as the closing rate of the J$ to the US$, but I saw 147 the other day. I only noticed because someone had written ‘another record…sigh 😩’.

I’ve given up trying to explain that the J$ isn’t running away. But, like their visceral fear of lizards, Jamaicans seem terrified of a depreciating dollar. Not for them the calm that should come from knowing that the price has been largely bouncing around a range of about 125-140 for a long time. Part of this fear stems from a belief that the depreciation will feed into higher prices. Well, it might, but for a long time now the pass-through of exchange rate movement to domestic prices has been muted. It could change, but it’s not inevitable. Economic agents in Jamaica may not be able to pass on exchange rate changes, not least because it’s been well-established by research studies that this is harder to do in a recession.

The arrival of COVID19 meant a few things would happen if the world spun on its usual axis. First, many people would rush to ‘safe haven’ financial assets. The US$ has long been that safe haven. Well guess what? The US$ has been the clear winner in the safe haven stakes.

So, if the US$ has been what most of the world wanted in this time of crisis, the other currencies must look weaker when traded against it. Guess what, again? They do!

Lummie! “Pass the Wincarnis, Delores!”

The pound has stunk in those stakes, because it’s suffering from Boris-can’t-get-it-right-itis; it’s trading around 1:20 now after a nose dive and rebound around the December ‘Brexit’ general election. It slumped again from March this year.

But the best measure of the general US$ strength is its index, which hit a high of 102.99 in late—March, and closed yesterday at 99.6.

Just read this article, by Chris Miller for the Foreign Policy Research Institute, a couple of weeks ago–The dominance of the US dollar during the COVID-19 pandemic:

‘the demand for dollars was not surprising: whenever the world economy seems riskier, investors gravitate toward greenbacks. the demand for dollars was not surprising: whenever the world economy seems riskier, investors gravitate toward greenbacks’

So, the J$ must trade worse against the US$ because people prefer the latter in a crisis. Even in a slower economy, people also have operational needs for FX. That’s the demand part. Jamaicans are just like most of the rest of the world.

The second thing that would happen is that the inflow of foreign exchange to Jamaica would suffer badly; and it did. The main sources were tourism revenues and remittances. Both represent money set to Jamaica from abroad by people confident and able enough to do that, whether strangers or friends and relatives. With that reduced supply of FX, the exchange rate must tend to suffer. Again, it did.

IMF estimates put projected tourism earnings at just under US$1 billion (from over $3 billion previously expected; down 68%) and remittances at about $2 billion (from $2.3 billion, down 17%). Financing of US$520 million approved last week by the IMF will bridge some of the lost FX, but clearly a large FX funding gap remains.

“Frankie, make that a double whisky!”

Put that global demand reaction in search of US dollars with the specific supply problems of Jamaica and the local FX market must be in a more-stressed position, and the rate must depreciate. It’s a market place, after all.

The Bank of Jamaica wrote a nice primer on floating exchange rates, last November, on Twitter, pointing out that a temporary shortage of FX is not a real shortage of FX for the country:

They could have stressed that Jamaica’s net international reserves are still at healthy levels in total (US$3 billion in April) and in terms of the weeks of imports they can cover–the standard measure of reserve adequacy. Which would not imply that those reserves should be spent to support the exchange rate.

Bank of Jamaica governor, Richard Byles said midweek the central bank is pacing its intervention in the FX market. Foreign currency liquidity assistance provided to the financial market since the onset of the domestic crisis in March up to May 15, 2020, amounted to approximately US$338 million, Byles said, adding that the central bank has undertaken several initiatives to assist financial market stability. He warned that at this rate, it “could end up selling more than US$1 billion to the market over the course of the fiscal year, which is unsustainable…Providing $300 million or more over the last two months, that’s not a small intervention, that’s a very substantial intervention. I think you can use that to mark how serious we are about providing liquidity and making sure that every Jamaican has access to goods and services that have to be paid for in foreign currency.”

I suggested to the central bank that they do a bit more to explain to people what would need to move/adjust if the exchange rate was not showing its flexibility, upwards and downwards; they agreed with this suggestion:

Many Jamaicans struggle to connect the dots. Most understand that a severe shortage will lead to sharp price increases, and even if they put some of that down to profiteering, they know it occurs. Yet, they seem startled when the same happens in the foreign exchange market, with US dollars being (temporarily) scarcer.

I’m hoping that the penny (or cent) drops soon, because it’s getting mighty tiring to see people go through what is really unnecessary anguish.

Author: Dennis G Jones (aka 'The Grasshopper')

Retired International Monetary Fund economist. My blog is for organizing my ideas and thoughts about a range of topics. I was born in Jamaica, but spent 30 years being educated, living, and working in the UK. I lived in the USA for two decades, and worked and travelled abroad, extensively, throughout my careers and for pleasure. My views have a wide international perspective. Father of 3 girls. Also, married to an economist. :)