A Mr. Williams in a letter to the gleaner on January 23,
2009, posited a solution to our currency
woes which involved the government fixing the exchange rate and reducing
interest rates. Unfortunately Mr. Williams is addressing symptoms and not the
illness, exchange rates and interest rates are not dictated by governments, but
by the relative strength of the economy.
The problem Jamaica
has, is that we are spending more than we are earning, and we are borrowing to
make ends meet, when you borrow money it’s the lender that determines what is a
fair rate of return, not the borrower.
So lets say the Government of Jamaica implemented Mr.
Williams’ proposal and offered a US$ bond at 3%, in the current global credit
crisis, and Jamaica’s risk profile, it would find no takers.
With around 60% of the government’s budget being debt
repayment, the government would then have to raise the interest rate offered,
till its gets enough buyers willing to lend us money to balance our budget.
This would also effectively set the tone for local interest rates as well.
Additionally, our exchange rate, if set below a fair market
rate, would actually make our core problem, a negative balance of payments,
worse. Since the cost of imported goods would drop and like good consumers we
would buy more. This would mean we would need to borrow more foreign currency to
cover our expenditure and push up the interest we would have to offer to get
more lenders.
So to cut to the chase, to fix Jamaica’s problem we need to
reduce our expenditure on imported goods and services, something that
successive governments since the eighties have been unwilling to do, can you
say ‘self reliance’.
This is not to say that the sudden rush on our exchange rate
is devoid of speculative involvement, but to cure it, sweeping policy changes
as was articulated, would not work and are not necessary. If the Government is convinced
that speculation is the root cause, all it need do is intervene aggressively in
the market and flood it with supply. This will bring the exchange rate down and
flush out the speculators.
