Columns

Devaluation, inflation, and the hedge insurance

Canute
Thompson

Monday, August 13, 2018

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Over the past four weeks the country has been fed with what I regard as a diet of confusing information about the devaluation of the Jamaican dollar, inflation, and the price of fuel. There have been charges and countercharges about misinformation, but in the meantime the working middle class and the poor continue to suffer.

The information about inflation and devaluation appears self-serving, theoretical, and divorced from the harsh reality of the majority of workers, as Helene Davis-Whyte of the Jamaica Confederation of Trade Unions (JCTU) has asserted. In furtherance of her assertions, Davis-Whyte has indicated that, given the erosion in purchasing power of workers, the JCTU would like to go back to the bargaining table, but going back to the table can only be triggered by inflation above four per cent. With the inflation for the one-year period ending June 2018 at 2.8 per cent, the reality feels otherwise.

Devaluation

Former Prime Minister Edward Seaga is said to have guarded the dollar zealously and, according to some analysts, artificially kept the dollar low during his reign. By August 1988, as the 5th anniversary of the December 1983 election drew near, many people predicted that regardless of the outcome of the election the dollar would begin to devalue afterwards.

The election was held in February 1989. Having remained in the region of $5.50 to US$1 from late 1985 to mid-1989, the dollar entered the $5.60 range later that year and, in October 1989, reached the $6 to US$1 mark. In early 1990 it reached $7 to US$1 and by the middle of March 1991 was trading at over $9 to US$1. With the frightening $10 to US$1 mark approaching the society was in panic.

After a few weeks of respite via revaluation, the official $10 to US$1 mark was reached May 24, 1991 when the dollar traded at $10.31 to US$1. Thus having remained in the $5.50 region for over four years to late 1989, the rate of exchange doubled in two years. In another six months, by the end of November 1991, the $20 to US$1 marked was reached and the society was in full crisis mode. Gordon “Butch” Stewart and Leachim Semaj then launched the “Save the Dollar” initiative.

It was not an easy time. At the same time regular lending rates were in the high 20s to low 30s.

Businesses which did not earn US dollars, but had to purchase goods using US dollars, were at a distinct disadvantage as they needed increasing amounts of Jamaican dollars to buy the US dollars. In a similar vein, the country's US-dollar debt became more and more expensive to service with every upward movement in the dollar as more Jamaican dollars had to be used to purchase US dollars to service the debt. The upshot for the consumer, with merchants having to spend more dollars on goods, was obvious price increases. These consequences spread across all areas of the economy when fuel prices rise and the dollar devalues. By the time the dollar broke the dreaded $100 to US$1 mark in June 2013 the society was numb, but a year later, when the dollar was trading at $111 to $1, then Leader of the Opposition Andrew Holness saw the situation as a major crisis. So strong was his concern that he wrote to the head of the International Monetary Fund, who was on a visit to Jamaica, to convey his concerns. A report carried in the Jamaica Observer, dated June 27, 2014, quotes a Jamaica Labour Party release of Holness's letter as expressing the Opposition's concerns on the:

“…depreciation of the Jamaican dollar, the need to build stability in the Jamaican economy, and the challenges which ordinary Jamaicans are experiencing as a result of the movement of the Jamaican dollar.”

So the question we must ask is: Should the movement of the dollar from $122.45 in April 2016 to $135.59 on August 8, 2018 be a cause for concern?

Finance Minister Nigel Clarke has called for an end to the practice of playing politics with the devaluation of the dollar, but no one will forget the song and dance his predecessor, Audley Shaw, made (when he was Opposition spokesman on finance). Shaw's sickening lyrics of “dollar slide, dollar wine, and dollar grind” was the epitome of playing politics.

One hopes that under Minister Clarke's leadership we will not have a mere rebuke of the conduct of his peers, on both sides, but a clear official statement on the Government's perspective on the sliding dollar. One hopes that that perspective will include an analysis of the impact on the “…stability of the Jamaican economy…and the challenges which ordinary Jamaicans are experiencing...”

There are two classical reasons given by governments who favour currency devaluation. These are:

(a) it boosts exports because the cost of the country's goods falls, and

(b) it shrinks the deficit as imports become more expensive and so people consume less foreign goods.

There is no evidence that either of these strategies has worked in Jamaica.

Inflation and the problem of averages

We are having record levels of low inflation with the 12-month period ending June 2018 showing 2.8 per cent. I struggle to accept this, even as I do, given that most of the items I purchase in all of the categories (in which I have purchased) have seen more than a 2.8 per cent increase. While there is a range of items which make up the Consumer Price Index (CPI) the movement in gas prices (the single biggest purchase for many consumers) was 40 per cent between January and June 2017, with gasoline 87 moving from a low of $96.16 in January 2017, to a high of $113.66 as at June 1, 2017. At the same time, gasoline 90 has jumped from $97.82 to $116.50 over the same period; this according to a Jamaica Observer report of June 1, 2017, which quoted Opposition spokesman Phillip Paulwell. A July 31, 2018 story in the Observer reported that the ex-refinery price of gasoline was $137.51, a 20 per cent increase over the June 2017 figure of $113.66, while gasoline 90 was $140.35 per litre, a similar 20 per cent increase. Though these figures fall outside the June period the major point is that the increase is quite substantial over the 12-month period.

While the inflation rate for the 12-month period ending June 2018 was 2.8 per cent, the CPI for the month of June was 0.4 per cent (an annualised rate of inflation of 4.8 per cent). In the 'transport' division the CPI move at 0.8 per cent (an annualised rate of 9.6 per cent) if the rate continues on the same path. 'Food and non-alcoholic beverages' moved 0.3 per cent. Significantly, in the 'housing, water, electricity, gas, and other fuels' division the index recorded a 1.2 per cent increase for an annualised rate of 14.4 per cent.

The divisions showing negligible movements were 'clothing and footwear', 'alcoholic beverages and tobacco', and 'furnishings, household equipment & routine household maintenance' each of which recorded inflation of 0.1 per cent in June 2018. These low increases suggest that demand for those services are low, thus prices have not moved significantly. The net effect is that the low demand for services in these non-basic areas, and the consequential negligible to non-movement in prices, drag down the overall rate of inflation to give a false picture of what is really happening to people's pockets.

The year-to-date rate for 2018 is -0.3 per cent has come about despite sharp increases in critical areas such as transport, fuels, water, housing, and electricity; thus the concern of the JCTU. The truth is that averages can be misleading and the CPI is an averaging of the movement in prices of several goods and services and a -0.3 per cent rate of inflation year-to-date or a 2.8 per cent increase over the last 12 months does not tell the real story of the reality at the cash register, the taxi stand, or the gas pump.

Hedge insurance

In 2015 the Government of Jamaica introduced a $7 tax on fuel for the purpose of purchasing insurance to protect the consumer and the economy against increases in fuel prices above $66 per barrel. That hedge was for 18 months in the first instance from June 2015 to December 2016. The new Government decided not to renew the hedge, which if it were in place would be of help to consumers and the Government at this time. According to Minister Clarke, the former Administration used on 52 per cent of the funds collected to purchase the hedge. But now the current Administration is not purchasing the hedge; that is spending zero dollars of the funds collected. This is a morally improper thing to do and I am calling on the legal fraternity to bring a class action suit on behalf of citizens to challenge the Government's decision to continue taking this tax while using the money for a purpose other than that for which it was intended.

In light of the foregoing, I submit that the Government needs to address the country on the issues itemised below. (This address may be combined with the statement on the science, energy, and technology portfolio). The issues are:

(1) Its perspective on the sliding dollar. Is the slide consistent with the Government's policy or should it be a cause for concern as it was in 2014?

(2) Its moral and legal position on the continued $7 per litre tax on fuel which was intended to pay for the hedge, given that it has taken the decision to discontinue the hedge.

(3) The outlook for the economy given the sliding dollar and the rapid increase in fuel prices. What are the implications for inflation, despite the low levels at this point?

Dr Canute Thompson is head of the Caribbean Centre for Educational Planning, lecturer in the School of Education, and co-founder and chief consultant for the Caribbean Leadership Re-Imagination Initiative, at The University of the West Indies, Mona. He is also author of three books and several articles on leadership. Send comments to the Observer or canutethompson1@gmail.com.

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