BOJ spent US$1 billion to defend the pandemic dollar
THE BANK of Jamaica (BOJ) spent US$1.0 billion in defending the local dollar since the onset of the pandemic, but the country’s outlook, like that of the Caribbean, remains very challenging, according to Dr Wayne Robinson, deputy governor at the BOJ.
“The outlook for the global economy and small island developing states is currently very challenging, with heightened uncertainties and elevated risks,” he said.
He explained that the risks included the lingering effects of the pandemic and the ongoing Russian war in Ukraine, which are causing commodity shocks.
Dr Robinson made the statements in his address at the Inaugural Macroeconometric Caribbean Conference in the Bahamas earlier this year. The report was recently uploaded to the BOJ website.
He indicated in his speech, entitled ‘A Confluence of Shocks & Structural Deficiencies: The Existential Challenges Facing Caribbean Economies’, that the views were his own and not necessarily that of the BOJ.
“In response to the pandemic, BOJ provided just over US$1.0 billion, over 7.0 per cent of gross domestic product (GDP) in liquidity to the foreign exchange market,” he said.
It wasn’t immediately known the figure that the BOJ spends to defend the dollar under normal circumstances. The US$1-billion figure spent during the crisis, however, represented roughly the same cost to GDP as Hurricane Ivan in 2004, at 8.0 per cent of GDP or US$580 million, based on data from the Planning Institute of Jamaica.
Ivan was the most devastating hurricane to hit the island in two decades.
Dr Robinson, separately, added that the BOJ further injected approximately J$76 billion or 4.0 per cent of GDP of liquidity into the financial system. The BOJ could respond “quickly” to the crisis due to the buildup of reserves and macroeconomic stability.
The dollar depreciated 12 per cent over the three years since the onset of the pandemic, from J$136.59 in early March 2020 to J$153.25 on Thursday.
That said, the bulk of the depreciation occurred between May 2020 to August 2020 when the dollar entered the $150 range for the first time. Since then, it has remained stable within the same band to the present day.
A consequence of the stability was higher than usual inflation which hit double-digit levels, peaking in April 2022 at 11.79 per cent over 12 months.
It equated to one of the highest inflation rates in a decade.
“Monetary policy has to be able to quickly respond to shocks in order to support recovery and hence resilience,” he said about economies like Jamaica with floating rates and inflation targeting.
To curb inflation, the BOJ raised rates 10 times cumulatively by 650 basis points from 0.5 per cent in September 2021 to its current 7.0 per cent.
“Central banks have to grapple with how to engineer a soft landing in this recovery period,” he said.
During the period, the US Federal Reserve also raised rates, which attracts funds to higher-yielding instruments overseas. This places pressure on currencies across the region, he said.
“Empirical estimates find that tighter global financial conditions generate strong spillovers to financial markets in LAC, with broad-based impact on sovereign debt markets, as shifts in US interest rates led to a more than one-to-one shift in US dollar and local currency yields, sizable capital outflows and depreciation pressures on domestic currencies,” he stated.
The average yields on global bonds for select Caribbean economies increased by 200-300 bps between end-December 2021 and end-December 2022, reflecting varied effects on individual economies, but suggesting material increases in financing cost in the international capital markets, he indicated.
“The main challenge for regional economies and policymakers therefore is to structurally adjust economies so as to build greater resilience, thereby promoting sustained growth. Building resilience requires properly sequenced and integrated structural reforms and critical investments that simultaneously address the macroeconomic constraints and climate risks within a tight fiscal envelope – an integrated policy framework,” he concluded.