Get comfortable with the floating exchange rate — Duncan

Business reporter

Friday, October 19, 2018

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As firms' expectations for economic growth waned and their willingness to invest in new plant and equipment dipped — primarily because of the depreciation of the Jamaican dollar against the United States currency — co-chair of the Economic Programme Oversight Committee Keith Duncan, is adamant that Jamaica must get comfortable with the floating exchange rate.

He believes that Jamaica should be focused on remaining within the inflation target range of 3.5 per cent to 6.5 per cent as set by the International Monetary Fund (IMF).

His remark comes against the backdrop of the latest available results for the period ending August 2018, which note that the Government of Jamaica (GOJ) has met the targets for the quantitative performance criteria, and indicative targets for the IMF stand-by agreement as at end-June 2018, with the exception of the inflation target.

Bank of Jamaica continues to pursue the Government's policy of a flexible exchange rate which reflects changes in market fundamentals. The exchange rate since October 2017 has reflected more normal two-way movements, relative to the historical trend where the movement has been in mainly one direction.

At 16 October 2018, the exchange rate (at J$132.17 to US$1) reflected an annual point-to-point depreciation of 3.1 per cent, compared with an annual appreciation of 0.5 per cent a year earlier, but lower than the average annual depreciation of 4.5 per cent over the previous three years.

“Historically, Jamaica has really had a fixation on the dollar and exactly where it is. Right now we are seeing the dollar move in several cycles over the last year. This is consistent with how most modern economies operate and it is something that, as a country, we will have to get comfortable with,” he told journalists during the EPOC quarterly press briefing at the JMMB Haughton Avenue headquarters on Wednesday.

He noted that as the country gets accustomed to a flexible exchange rate, there will be no reason for Jamaicans to be perturbed when the dollar moves in one direction or the other.

“The key index that we need to pay attention to, which affects consumers and businesses, is inflation,” he reasoned. “That is what impacts purchasing power of all Jamaicans. That is what is equal to price stability.

“We know that the BOJ has set targets for range of inflation between four and six per cent. Once we are able to maintain that range, we do have some level of predictability and certainty that, through the BOJ using its monetary policy transmission channels, it will keep inflation within target. The dollar can fluctuate and it will move depending on international flows and what occurs in the domestic market, but the most important indicator that hits us in our pockets is inflation,” he said.

Although not meeting the inflation target, the GOJ has met all seven macroeconomic structural benchmarks for the November 2016 to August 2018 period and has also met all 14 structural benchmarks for public sector transformation, public bodies and public service reform through end August 2018.

EPOC is of the view that the country's economic programme with the IMF remains on track, with growth set to continue.

For the review period, April to August 2018, Jamaica's fiscal performance continued to show a solid trend, with total revenue and grants climbing 2.8 per cent above the GOJ's target of $223.8 billion.

Tax also continued to outperform budget, coming in at $207.9 billion, 3.6 per cent above target. The performance was as a result of approximately 6,080 new people that were brought into the tax net as at July 2018.

According to Duncan, total expenditure was below budget by $5.9 billion, while capital expenditure at $24.4 billion was ahead of target by $2.8 billion.

“It is important to note that the capital expenditure of $24.4 billion, was $10.7 billion greater than the $13.7 billion expended for the same period up to August of 2017,” he said. “It is clear that economic activity is significantly increasing, all indicators, growth in credit, point to economic expansion.

“It is important that Jamaicans look at the opportunities that are opening up in all the sectors, value-added and otherwise, to determine where they are to participate in this upswing,” Duncan reasoned.

The outturn of tax revenues and expenditures contributed to a primary balance surplus of $42.1 billion, exceeding GOJ target of $34.3 billion. Spending on social programmes was $11.5 billion as at June 2018, which was $5.1 billion ahead of the budgeted floor of $6.4 billion.

“For the past two years we have observed robust growth in tax revenues year over-year and significantly ahead of budgeted targets. This growth allows for greater expenditure and notably so in capital expenditure and social spending,” Duncan said.

Non-borrowed reserves came in at US$2.479 billion as at end August 2018, significantly ahead of the programme target. The 12-month point-to-point inflation rate at August 2018 was 3.9 per cent, just below the Bank of Jamaica's target range of 4 per cent to 6 per cent but within the IMF programme range of 3.5 per cent to 6.5 per cent.

Earlier this month, BOJ announced its decision to hold the policy rate unchanged at two per cent. According to Duncan, the decision reflects the bank's assessment that inflation, currently below target, will be within the target range by March 2019.

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