Catching a falling knife: Look out, Jamaican dollar tumbling

I don’t want to give the impression that I do not care what happens to the Jamaican dollar exchange rate; nothing could be further from the truth. I just see things from a particular perspective: I am an economist and I used to trade foreign exchange. One of the first lessons I was given about foreign exchange markets as a trader was that traders are not good at picking tops or bottoms to trends. Also, markets tend to latch onto the prevailing direction more easily than go against it. Think also about metaphors concerning catching a falling knife. falling_knife I am not surprised that more comments appear to be coming about the current level and direction of the J$. Anyone living through a 20 percent decline in the value of their currency during the short period of two years or less should be worried. It’s like living in a period of rapid inflation: the loss in value of the money you hold is almost visible. In some sense, the exchange rate slide is just that, of course. Our prices have risen too fast relative to most of the countries with which we trade; or our costs have not been as well contained as theirs. Our competitiveness has declined. The exchange rate is a price, and it regulates the prices in our country in comparison to those overseas. If we fall out of line with our relative prices/cost, the exchange rate should move to keep the prices/costs the same for foreigners.

Several government politicians have noted recently that the exchange rate is an outcome that reflects fundamental conditions in the Jamaican economy. I would not disagree with that: at its base, that should be the case. But, fundamentals do not affect the exchange rate in any clear and simple way. More worrying, improving fundamentals need not show up in an improving exchange rate either quickly or fully. In that sense, markets are capricious. They also take account–sometimes, too much–of sentiment (call that confidence, or lack of it, in the policy makers). If markets do not believe that policies are credible, they tend to hammer an exchange rate. Despite the success in sticking to the current IMF programme, the government has not seen that translated into improved business and consumer confidence. Such confidence is rising in Jamaica, but still remains very low, according to the last set of data, for the first quarter of 2014Despite the increases for almost all areas, confidence levels are “nowhere near the highs” of previous periods and are coming from two quarters of extremely low levels, Don Anderson, managing director of Market Research Services was reported to have said.

But, people are often afraid when they see no end to things they dislike, and the exchange rate is no different. Well, it is different because people often put a lot of national pride in the level of their currency, and feel it personally when the currency seems to be weak. That’s no different for countries with large, strong economies, compared to those that are small or weak. Many of neighbouring countries are quick to see the Jamaican dollar rate as a clear indication of how far down the hole this country has fallen. Those with fixed exchange rates, such as The Bahamas and Barbados, often do not relish any notion of having a floating exchange rate, given the kind of slide that has happened with Jamaica’s currency. They also do not fully appreciate that they are living a lie–their economies have not stood still relative to the USA since the day the rates were fixed, so their currencies should have fallen too, more so, because they have not made policy changes to offset the differences that have occurred. They are paying for that in other ways–unemployment, for example. They also still need to deal with some of their core problems, such as the level of their budget deficits and a ballooning debt burden.

I don’t envy the Bank of Jamaica’s governor or our minister of finance. They are in a hard place sitting under a falling rock. The country does not have the means to ‘defend’ the exchange rate.

Slipping into darkness?
Slipping into darkness? (Courtesy of The Gleaner.)

Our net international reserves–the amount of foreign exchange available to finance imports–sit at about 14 weeks of imports (that’s close to an internationally accepted satisfactory level of about 3 months of imports), see a recent press report on that level, though for concern that they are slipping. I would rather see that stock used to help buy what the country needs, rather than trying to hold a price that may not be right. I suspect the government agrees. So, the ‘slide’ wont stop because the government throws foreign exchange at it.

Some press reports caught yesterday that the Inter-American Development Bank commented that the slide in the currency was affecting adversely business and consumers in the short-term. Well, sorry, that is part of the expected effect. Importers and consumers of imports are not supposed to feel good when the exchange rate falls; they are meant to consider changing their behaviour because the national demand for foreign goods is too high. Now, the current structure of Jamaican businesses and Jamaican consumer tastes may have a strong liking or need for imports, but that’s what has to shift. Of course, it cannot happen instantaneously. The businesses need to figure out if their inputs need the foreign content. The consumers have to consider if their tastes for foreign things cannot go down. I’m not into the drama scene of hand on brow. I read a tweet yesterday about no radishes and cilantro in the supermarket. Well, find another local salad vegetable and get growing with substitutes like mint leaves in the near-term, or if we really cannot live without those items, start growing them. But, then we get back to how well can we do that at prices that make us competitive. It’s not enough that our ground is fertile, but at what cost do we get the stuff out of the ground or off the trees?

I am not going to scream as the dollar declines. We have been very good at laughing and joking for decades about what needed to be fixed in Jamaica’s economy. Governments have lied about the state of affairs, and people have lapped up the lies like a cat with a bowl of milk, because it was much easier to do that. Change is a great source of fear. But, often when you don’t change voluntarily when you should have, then the forced change is often more drastic than it would have been and more sudden. We are going through that phase. It’s really painful, like tight shoes are, or even tight briefs, if you are a man. But, like with those sartorial problem, you can either wince and not get into something more comfortable, or make the adjustments to walk comfortably.

Government hasn’t quite got it right in making people see that they need to make those adjustments, I think.

Take your marks

News media should always be on the look out for good metaphors. Today’s Gleaner ran a leader entitled ‘What policymakers might learn from athletics‘, and had a wonderful sentiment: ‘As a country in economic crisis and with deep social problems, Jamaica’s athletic power matters. It, in a sense, stands in vindication of our worth and as a metaphor for Jamaica’s possibilities.’ Fraser-Pryce_2642119b

Let me try to take the baton handed by the Gleaner and run with the metaphor a little. I’m going to say that Jamaica needs to think of itself like Shelly-Ann Fraser Pryce, who won the women’s 100 metres final a few days ago in the Moscow World Championships, rather than Usain Bolt. The lady is nicknamed ‘Pocket Rocket’ for the power that seems to come from her small frame; as Jamaicans say, “Little but tallawah”–small but strong, not to be underestimated. That is more Jamaica’s stature than being Boltian, which suggests that we are faster, bigger and stronger than most. But, Jamaica is Boltian in its characterUsain Bolt: tall, brash, light on its feet, engaging, maybe also a real ginal–the Anansi in all of us.

But, we need to watch out. Jamaica’s economy, or rather management of the Jamaican economy, is also like some of its best athletes–full of promise, yet faltering at key moments. I’ve met Asafa Powell and found him one of the nicest persons I ever met: physically almost perfect, yet gentle in that giant’s frame. I love what Asafa Powell has done for the status of Jamaican athletics–held the world record for 100 metres during 2005-8; he has more (nearly 100) legal sub-10 second times for that event than any athlete in the world. Despite his winning big international individual events (100m and 200m), such as during the IAAF World Athletics Finals, however, he has come up short when put to the biggest tests–Olympic Games and World Championships. But, not only did he ‘underperform’, he did it in ways that cast doubts on his psychological make up. In his own words (after losing to Tyson Gay in the 2007 World Championships–my emphases): “When Tyson came on and gave me a little bit of pressure I just panicked. When I saw I wasn’t in gold medal contention, I gave up in the middle of the race. I just stopped running.” He did not embody the name of his running club, MVP (Maximising Velocity and Power). Try and fail, but don’t give up! He has had injuries at crucial times. Finally, after not qualifying for the national team for the current World Championships, he has come under scrutiny after a failed drug test. He (and another, female, star athlete) did not follow MVP club protocols, and now the club coach has cast them aside, saying he’s “they are on their own“. Asafa represents the image of ‘not taking the chances that are given to you’.powell Asafa runs the risk of people not believing that he will deliver his best. Some would say that is Jamaica, too, after a series of IMF programs and a stream of promises regarding economic policy actions.

The image of Asafa losing a major final or pulling up lame, or wilting when put under pressure, eyes downcast, stands large in front of me. Asafa makes us suffer!

Jamaica also reminds me of the 400 metres runner: after trying to sprint hard for most of the distance, lactic acid builds up and the muscles begin to feel like lead weights in the legs. The arms pump and legs try to push, but it feels like you are running in wet cement. The feeling is worse, if others in the race are not so badly affected, and pass you in a way that makes it seem that you are going backwards. Kirani James suffered that way, it seems, as he faded badly in the 400m final this week. Shock! In truth, the flagging runners could not maintain their form while others did not drop off so drastically. When you run this race, you feel sick to your core at the end of the race. Spent. Drained. Never again. Till the next time.

Eventually, the athletic body’s basic strength cannot give any more and, on bended knees, it stays motionless: the Jamaican economy, with its potential to do many great things, has been stagnant and underperforming, according to official statistics. Anecdotes and what the eyes see, however, do not support that picture fully. The body has moved better than seemed plausible. Have drugs been injested and are they flowing through its veins to enhance its performance? That’s literally and figuratively very likely. It has had its cocktails of old-style, over-the-counter ‘performance enhancing drugs’ (IMF loans, World Bank loans, Inter American Development Bank loans, Caribbean Development Bank loans, bilateral grants). It has had ‘acupuncture’ too (Chinese investments). It has tried mysterious ‘herbal remedies’weed (supplied by many local ‘collie men’ and foreign dealers). It has rubbed itself with different oils (Ecuadorian, Mexican, Trinidadian, Venezuelan), all of them work a little, but still don’t give enough energy and flexibility; joints are still stiff. It’s tried some local solar treatments, but finds that it prefers to be bathed in oil. It’s performance could be improved if it made better use of the wind, but it often blows in the wrong direction. What to do?

An IMF team is due to arrive in Jamaica today to review economic data and government policy implementation under the latest arrangement. I found it quite ironic that yesterday it rained all day and into the night–a flash flood warning was issued. I couldn’t help but think of the comments attributed to Madame de Pompadour, official chief mistress of France’s Louis XV (15th), in the mid-1700s: ‘”Au reste, après nous, le déluge” (“Besides, after us, the deluge”). France had just come out 2nd in a devastating war, losing its American colonies to the British, its status diminished and virtually bankrupt.

Jamaica never had any empire, but it stood head and shoulders above other Caribbean countries and acted imperiously in 1961 when its people supported the idea of leaving the West Indies Federation. That led to the famous statement of Dr. Eric Williams, the then Premier of Trinidad and Tobago that, “One from ten leaves nought”. Jamaica then decided to stand up alone, for its independence from Britain, over 50 years ago, in 1962. Jamaica has since become bankrupt, in some senses, with its public debt now standing at an unsustainable level–150 percent to GDP–its status diminished.

But, once again, Jamaica has found herself qualified for a major event and a chance to get it right, to win the race that will vindicate its promise. She’s had lots of time to prepare and training went well. She has not reported any major injuries to hamper performance. The time on the warm-up track looks to have been well spent, and she is relaxed. The crowd waits patiently as she approaches the stadium and then heads to the blocks laid out for the start of the final race. She takes up position in the starting blocks. Eyes seem focused. Some sweat beads form on her brow, as anticipation builds and nerves start to jangle. She’s like Bolt, not known for her fast start, but knows that a good start is really important. Oh, if only she could be like Shelly-Ann, and blast out and be leading from the first stride. So, which performance will be we see? All hands are clasped in prayer, and voices can be heard whispering: “Don’t stumble out of the blocks. Don’t false start and end before the race begins. Hold your form till midway. Finish strongly through the tape.” The eyes of the people standing in Half Way Tree look up at the big screen. How will this race be run?Start

Jamaica started as a sprinter, then turned into a middle distance runner, and now, aged, it is trying its hand at the marathon. No matter what the event, to succeed in each takes a lot of hard work and dedication. Can Jamaica take on the Olympics motto of “faster, higher, stronger”? Or, has it adopted the Olympic creed, The most important thing in the Olympic Games is not to win but to take part, just as the most important thing in life is not the triumph but the struggle. The essential thing is not to have conquered but to have fought well“?

My eyes will be glued to how Jamaica performs in the IMF version of athletics over the next few days.