Oran Hall | What the foreign exchange rate means for you

It is quite normal to hear these days that the Bank of Jamaica, BOJ, has intervened in the foreign exchange market. It has good reason for doing so – to stabilise the market by bringing supply and demand into balance.

There are winners and losers when the exchange rate fluctuates.

Jamaica operates a floating exchange rate system as opposed to a fixed exchange rate system: the price of foreign currency is, basically, market-determined, so it is based on demand and supply. The truth, though, is that the central bank tends to intervene in the market when it sees fit.

The BOJ sells foreign currency it holds in its reserves to boost the supply to match demand, thereby putting a brake on the price of the foreign currency. It does the opposite as well – buys foreign currency if demand is less than supply, for as much as there is good and bad when the price of a currency is low, there is also good and bad when it is high.

Although the exchange rate affects the economy overall, it also affects you and me as individuals, but some people more than others. It affects international trade and investment, income, prices, and interest rates, as increasing the returns on Jamaican dollar-denominated interest-earning securities tends to reduce the demand for foreign exchange to invest in foreign currency-denominated securities.

Foreign exchange comes into our country from several sources. Exports. Investment income from abroad. Remittances from abroad. Business and private loans from foreign lenders. Government loans and grants from foreign sources.

When exporters sell their goods to buyers residing in other countries, they earn foreign currency, which they may convert to Jamaican dollars or keep in foreign currency – in their foreign currency accounts, for example. This makes them suppliers of foreign exchange to the local economy.

Jamaicans who have investments in foreign countries – stocks, bonds, real estate, and businesses earn income in the form of dividends, interest, rent, and profit denominated in foreign currency. These forms of income add to the supply of foreign exchange when they come into the country.

Foreign exchange also comes into Jamaica from other sources. Jamaican businesses and individuals who sell services earn foreign exchange. Similarly, businesses and individuals add to the supply of foreign exchange when they borrow abroad.

And don’t forget foreigners who come to Jamaica to study, our musicians, and our sportsmen and sportswomen who earn money abroad. Nor can we afford to forget the many Jamaicans who rely on remittances from family and friends living and working abroad. Neither should we forget Jamaican residents who receive a pension from abroad.

But there is also the flip side. Businesses import goods, raw materials, and services from abroad, and people import goods and services that require payment in foreign currency, thereby increasing the demand for it.

To invest abroad, whether in stocks, bonds, real estate, or businesses, Jamaican businesses and people need foreign currency for the Jamaican dollar has no use in foreign countries. This increases the demand.

Jamaicans who borrow abroad must pay interest and principal – generally in instalments to the lenders – so they also add to the demand for foreign exchange.

The Government gets grants from abroad – which it is not required to repay. Not so with loans – which must be repaid with interest.

Do you believe Jamaicans send remittances abroad? They do, but not to the same degree as we receive from overseas.

People who receive foreign exchange from the various sources gain when the value of the Jamaican dollar depreciates as they receive more Jamaican dollars upon conversion. On the other hand, those who have to pay out foreign currency must source more Jamaican dollars to meet their commitments.

The opposite is true when the Jamaican dollar appreciates in value – not that we see that happening much. While this is good for those who must pay foreign currency, it is not so for those who receive it as they get fewer Jamaican dollars on conversion.

It suits the Government, through the central bank, to maintain a stable exchange rate – a major reason being that it facilitates better planning as both the public sector and private sector are better able to gauge their costs, especially where foreign currency is involved.

While people and businesses earn more when the local currency loses value, there is, however, the downside. Consumers pay more for imports, which may cause demand to decline, thereby negatively affecting living standards but also the profits of businesses and the Government’s tax revenue.

People who neither earn nor receive foreign exchange have no protection when their currency loses value, and those who do, thereby having some cushion, also suffer some negative consequences because of the higher prices they must pay for the goods and services that are imported or have imported inputs.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com