FOREIGN EXCHANGE: PANIC? INDEED !

                                      FX   PANIC?  INDEED.

Somehow, I get the sense of “déjà vu.”  The feeling that a situation has existed before, but only appears to be true. No information from the concerned or other responsible parties.  I am looking at a photograph of two Ministers of Finance and a former Financial Secretary to the Government of Jamaica, in Sunday’s Gleaner, and the feeble responses from all three financial giants.

At this time, the exchange rate is a shade over 100 JMD to 1 USD.

A commodity or a currency will change from time to time depending on supply and demand, which are the market functions.  No Foreign exchange available means supply is inadequate to meet demand. If the supply is sufficient for current demand, then inflation is stable, and exchange rates will tend to strengthen.

Just a few weeks ago, prior to the conclusion of the IMF agreement, the rate of the JMD was over 100, (100.30 to 100.40), for a week or two. So there can be no surprise or exclamation when this rate goes over 100 once again.  I am being told that the going rate is around 100.50. It does not seem that the management of inflation and interest rate is keeping the rate down, but then there is not that much of an increase over 100.

 BOJ is slowly regaining foreign exchange, but its reserves can’t have grown significantly in such a short period and it is probably now the largest purchaser in the market, with the intent of strengthening the reserves. The tourism inflow has not met expectations; the foreign exchange producing earners have not produced any serious increase in earnings; hence supply growth is minimal but demand is not much better.

The demand for foreign exchange is also a function of required capital expenses to expand energy supply, and this demand has not yet been satisfied (as far as I am aware).

But I would suspect that imports of school supplies, clothing and so on, would shortly be required, and school supplying retailers would be preparing for their season, and this will mean the usual extra demand. Incidentally, I notice that a lot of motor vehicles (new and used) have flooded the market, giving me the concern that money has been spent on these insignificant yet costly items, and clearly this will affect the balance of supply and demand of foreign currency,  producing no growth.

To further aggravate the situation, the monitoring of expenditure has not been reported; leaving us to believe that the use of IMF funding for growth is not taking place in an orderly manner. The two variables, supply and demand have not shifted much and I estimate that 101.00 JMD = one USD will reach that level in another 2-3 months.

I envisage a solution, and I believe to some extent this is already in place. A forward or futures market, where buyer and seller can come to an agreed rate for a fixed amount at a fixed date, soon or within 30 days, needs to be created as exists in many other countries. Rules have to be created for the market to operate successfully, and for a tri- currency market, these might not be difficult. It may have the effect of curtailing larger, unnecessary foreign expenditures.

 

 

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