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BOJ: Jamaican dollar stability not hurting export competitiveness

Officials of the Bank of Jamaica, BOJ, have put up a stout defence, pushing back against criticisms in some quarters that the relative stability in the exchange rate of the Jamaican dollar, particularly against its main US dollar counterpart, is hurting the competitiveness of the country’s export sector, including tourism.

Tourism is classified as a service export.

On the contrary, the BOJ has argued that there have been appreciable competitiveness gains when the real exchange rate, and not the nominal rate, as well as the economic reform programme pursued over the past decade by successive administrations are taken into account.

The nominal exchange rate is set by the local currency market, as determined by demand and supply for foreign currency and displayed by banks and other money changers, while the real, or effective, rate measures the actual purchasing power of the local currency in foreign markets.

The central bank has been deliberately utilising policy tools and active interventions in the foreign exchange market to ensure its stability — evening out periods of decline in the value of the JMD with periods of the currency’s appreciation against the US dollar. The endgame, the central bank has repeatedly pointed out, is bringing down inflation, which for months has overshot the targeted range, resulting in continued price increases for consumers.

Annual inflation fell to 10.2 per cent in July, but is still well outside the 4 to 6 per cent target band.

During last week’s quarterly briefing on monetary policy, BOJ Deputy Governor Dr Wayne Robinson emphasised that the central bank constantly monitors factors, including the inflation and exchange rates in Jamaica’s major trading partners and rival tourism markets, to gauge the competitiveness of the local export sector. He added, too, that maintaining and increasing local export competitiveness required increases in productivity, rather than depreciation in the local currency.

“In principle, if inflation exceeds that of our major trading partners or competitors, the exchange rate will have to depreciate by that difference so as not to hurt the profitability of our domestic exporters; in other words, in order to maintain competitiveness,” said Robinson.

“So routinely, every month we look at how these two variables are moving. We look at how our trading partners’ inflation is moving, and we look at how our trading partners’ exchange rates are moving against our own inflation and exchange rate.”

He conceded that there have not been any major competitiveness gains based on the inflation and exchange rate measures, but added that here have not been any losses in competitiveness either, saying Jamaica has seen a 1.3 per cent increase in real exchange rate-measured competitiveness.

“If we should look at a shorter time horizon between October and June, which is when we adopted a stronger monetary policy stance, there would have been no change in competitiveness. The real effective exchange rate would have been basically flat,” Robinson said.

“One may argue that we need to continuously improve competitiveness, and we agree on that, and as such, the movement in competitiveness has not been a lot or has been slow. But we also must bear in mind that if we look over the past 10 or so years, because of the adjustments that we have had under the economic reform programme, we would have gained a significant amount of competitiveness in terms of the real effective exchange rate of about 14 per cent,” he added.

The central banker underscored the need for continued monitoring of the competitiveness metric, but stressed that similar focus must be placed on productivity improvements to achieve competitiveness enhancement.

“Maintaining competitiveness is best assured when we have two critical factors. The first is when inflation itself is brought down closer and more consistent with the inflation in our trading partners, and the bank is committed to that objective. The other factor that underpins the competitiveness of our export sector is improving productivity,” said Robinson.

“The bottom line is that we are not seeing any fallout in the competitiveness of the exchange rate from the stability, but this is something that we have to continue to watch very carefully,” he added.

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