Persistent volatility in the exchange rate market affects price stability and the consistency of business planning in Jamaica

review literature on the relevant issues

FOREIGN EXCHANGE MARKET DYNAMICS: 1|l".|'HAT ARE THE FACTORS THAT IN FLUENICE THE ExCHAHGE RATE? Part 3 Hy Tony Morrison. rebruary 21318 LOOKING FCIRWARD: WHERE DO WE WANT TD GO FROM HERE\"?I CD MPGSfoCIN OF THE EIL'ZIUII'll'lllllll"III the bulk of the Jamaican economy is not engaged in coming foreign exchanger and this imbalance perhaps places same strain on our ability to consistently earn enough to "pay our way\" as a country. To become a strong economy driven and sustained by hard currency earnings. then either existing exporters need to export more, more businesses need to get involved in earning foreign currency. or perhaps both. on top of that. a significant portion of those entities not directly engaged in earning foreign currency [in addition to many who already are] should also be involved in saving foreign currency by concentrating on impartsubstitution. Sue-called "linkages' are also very important We speak of it often in tourism. referring to local suppliers wha produce goods and services to support that sector. but it is also very important to focus on those who can produce raw material and other goods and services needed by our local exporte rs. I{liar export sector is somewhat complicated by the fact that the inputs of some exporters are heavily dependent on imports. However. we are happy to note that in tandem with changing conditions and the ongoing economic reforms in recent years. several in this position have already creatively reexamined their business models. Some have found creative ways to produce more of their own inputs. thus lowering costs and increasing employment. so they are nov.I reaping the benets of the new environment with significantly increased experts. with more research and applied technology. hopefully more will follow this trend and more linkages will also emerge to assist them. the high cost of energy also has implications for the cost of local production as well as being a drain on our foreign exe hange market 1.while Jamaica has benefitted from a sustained period of lower oil prices. the country still re mains vulnerable to any future oil price shoclts and imported oil represents a disproportionate segment of our balance of payments. Ongoing public and private sector initiatives to mitigate our oil dependence and lower the local cost of delivering energy are therefore to be applauded. and continuing on the path to increased energy efficiency and selfsufficiency is critical to fuelling further economic growth. what we must lteep in mind. overall. is that o future of sustainable economic growth is dependent on being an exportled economy. ISlur ongoing structural reforms and current policies are therefore designed to facilitate and achieve this. because this is whot we want. CURRENCY STRENGTH IS NUT HEC EQSARIL'I' AN INDICATCIIR' 0F ECGNDMIC HEALTH Many Jamaicans tend to see the value of the Jamaican dollar as a criticol indicator of overall economic health. and this is not necessarily the case. the exchange rate is merely the price of a commodity. there are examples of very strong economies with relatively weak currencies. such as China and Japan. Japan is the 3'\" largest economy in the world in terms of GDP and a giant compared to Jamaica. yet it has an exchange rate of around llIIII to 1 against the US dollar. not much stronger than the Jamaican dollar. Historically. a long term exchange rate trend of a negative drift in one direction only was not a healthy sign. as it was a reflection of a large and persistent current account deficit. Moving to correct that problem. however. does not automatically mean that the ideal scenario is on exchange rate that either con sta ntly appreciates or remains sta tie at any particular level. We will always lane a relatively small economy. so no matter how well we do. it is a bit of a stretch to expect that our dollar can realistically become as strong as or stronger than the currency of larger and more advanced countries. Even if that were the case. then it may still suit as at times to have a weaker currency. like China and Japan. to give us an advantage in trade.