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Wynter dismisses claims central bank has depreciation policy

Bank of Jamaica (BOJ) Governor Brian Wynter has rubbished arguments put forward by some economists of a central bank depreciation policy that, they claim, places Jamaica in a worse-off economic state by allowing the local currency to reach its fair value.

“First, let me say this, the central bank does not have a depreciation policy. The Government’s policy, which is the policy we operate, is for there to be a flexible market-determined exchange rate, which means that the price of the US dollar will change based on supply and demand conditions like any other good,” Wynter said.

He was speaking at the Jamaica Chamber of Commerce Breakfast Conversation on Wednesday at Knutsford Court Hotel in Kingston.

In July, BOJ introduced the Foreign Exchange Intervention Tool (BFXITT) as a new system to facilitate the buying and selling of foreign exchange. It is aimed at levelling the playing field for all market participants by being a competitive multiple-price tool and has been touted by some as the reason for depreciations in the local currency.

In fact, some economists consider the system to be predictable, which, in the case of heavy market demand and limited supply, drives the rates higher and at a faster pace of devaluation. The background noise is that the system has been introduced with insufficient supply and a guarantee of selling to the highest bidder, both of which lead to a one-way bet.

But the governor argued that the market has clearly moved away from a chronic one-way system to a more normal and flexible market that is characterised by two-way movements.

Up until Friday, Jamaica had experienced appreciation in its local currency for 10 consecutive days. Wynter, in further defending the new system, said for the 12 months to October 13 the exchange rate had appreciated by .04 per cent, compared with a depreciation of 7.7 per cent for the same period a year earlier.

Still, investment strategists hold that the increase in local currency was due to a one-time event involving the portfolio repositioning of a financial institution which sold large quantities of currency to the market.

“We know that Jamaica has postponed adjustments in the exchange rate in the past. It has done so by borrowing the money that it needs to make up the shortfall, but we need only glance at our history or study the current experience of some of our neighbours to remind us of the consequences of trying to dictate an exchange rate that is at odds with underlined economics or market conditions,” the governor said.

He added that while there is no debate that depreciation benefits exporters and hurts importers, if a larger proportion of businesses in the economy are importers then, certainly, business in the country will at first suffer when depreciation occurs.

“Improvement for business comes later from a change in behaviour that leads to a reduction in the proportion of import-dependent businesses,” he said.

Wynter noted that numerous media reports have suggested that the change in behaviour has already occurred, as businesses that were once uncompetitive are now able to produce profitably for the domestic market or penetrate export markets. He contended that some have even replaced foreign inputs with local substitutes, or in some cases, import raw materials and finish the goods locally before using those goods in productive processes.

“Those companies must have contributed to the more than 30,000 net new jobs created last year and more than 20,000 created this year. Therefore, for the first time in our independent history we can sustainably earn enough to pay our bills instead of perpetually borrowing money,” he reasoned.

“If we are seeing high quality export in goods and services and competitive import substitutions, then do you think it’s working? We are partners and stakeholders in this transformation and therefore we must be careful of the messages that we send. We need to have frank and open dialogue of where we are, where we are going, how we are going to get there, the remaining challenges we face and how we are going to address them,” the governor warned.

He reckoned that what has distinguished economic management for the last two years, compared to the periods before, has been the genuine participation of our stakeholders in the dialogue which will also create the atmosphere for the country’s success going forward.

“The central bank remains committed to consulting with you,” Wynter said.

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