Does a Sliding Dollar Bring Benefits?

Administrator on September 23, 2014, 1:25 pm 1187 3
Does a Sliding Dollar Bring Benefits?

In recent months, prior to the intervention of the Bank of Jamaica, the foreign exchange market was quite volatile with the decline in the Jamaica's dollar moving a blinding speed. Since the start of the year, the value of the Jamaican dollar depreciated by around 5% against the US dollar and is now inching closer to the $113 mark. Recent intervention by the Bank of Jamaica created a slow down of the rapid rate of the dollar's slide and for now, it appears that there is temporary relief. If one were to take to heart the opinion of the Managing Director of the IMF, Christine Lagarde when she visited Jamaica, one would think that dollar is not out of the woods yet and will slide some more. Is it a good thing for the dollar to slide?

Is Currency Depreciation Good?

The Caribbean Policy Research Institute (CaPRI) is among those who see currency depreciation as harmful, especially to the vulnerable who are teetering on the edge of the poverty line. With the depreciation of the currency comes higher prices against which the vulnerable would need an effective cushion. Jamaican businesses will also bear the brunt of increased costs of raw material and inputs and their ability to stay afloat will be badly compromised. Persons in favour of the slide in the Jamaican dollar believe that the country will benefit from a more competitive price for exports, as well as from easier servicing of Jamaican dollar denominated debt. Granted that the import costs will be higher as a result of the depreciation of the Jamaican dollar and this may cause consumers to switch to local produce.

Although technically Jamaica can benefit from the slide of its currency in these ways, there are too many structural and systemic weaknesses in the Jamaican economy to realise any net benefit in competitiveness internationally, reduced debt and increased exports. The country remains a net importer of goods and services resulting in greater expenditure on imports and the use of high cost foreign exchange. What would make this even more challenging is the accompanying hardships created by rising inflation.

With all that said, the person who continues to feel the full effect of the dollar's slide and inflation is the consumer. Yes, you are being asked to find another way to satisfy your basic needs using a weakened currency. As prices climb out of reach yet again, you will have to adjust your expectations and spending to survive. If you are in the vulnerable groups that must rely on social safety net initiatives for food and shelter, then the value of this safety net is hardly enough to cover your needs as long as the dollar slides.

It is not clear yet at what level the slide of the currency will be allowed to go and although the IMF's signal is that the dollar must slide some more, the exact point at which it will be allowed to drop is not known. Attention to the inflationary impact of a declining currency is also crucial as Jamaica certainly cannot afford to go the way of Zimbabwe which had to abandon its currency after it was devastated by hyper inflation that went to extreme heights.

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