A toll on the NIR - Reserves projected to fall to US$1.49b
published:
Friday | February 1, 2008
Lavern Clarke, Business Editor
Left: Senator Don Wehby said in mid-January that Bank of Jamaica interventions were tagged at US$1.3 billion but noted that the reserves were still strong. Right:
Central bank governor Derick Latibeaudiere said in November that the Bank of Jamaica had spent US$1 billion in defence of the Jamaican dollar. - File photos
Jamaica's central bank flooded the foreign exchange market with US$1.3 billion or US$108.3 billion per month during 2007 to keep the Jamaican dollar (JMD) buoyant.
But while the local currency's fall was eventually contained to 5.2 per cent - having plunged by as much as 6.3 per cent when the currency dropped to its lowest point of $71.3981 on the spot market November 23 - the heavy cost to halt its slide is reflected in substantially depleted reserves.
Since then, the JMD has hit a new low of $71.6675 as at January 30.
The Bank of Jamaica began the 2007/08 fiscal year with Net International Reserves of $2.33 billion.
Set up force field
But a rapid slide of the local currency over the summer, due to what was perceived as speculative buying and hoarding of the U.S. dollar in an election year, saw the central bank reaching frequently for its shield, the NIR, to set up a force field around the market.
Jamaica's foreign exchange rate is, essentially, market determined. But the BoJ, which operates the foreign exchange system as a 'managed float', watches for signs of instability and runs interference in the market by selling big wads of hard currency to its dealers at a rate it sets, for resale to the market at a price it also stipulates.
Its source of cash is the country's foreign exchange reserves.
By the end of December, the NIR was down by a net US$450 million to US$1.88 billion.
To dig deeper
The central bank has signalled that it will be digging even deeper into the reserves and projects that the NIR will fall to US$1.49 billion by the end of March 2008, or just about 33 per cent below its original target of $2.22 billion.
If the new target holds, the NIR would have lost 36 per cent of its value year to year.
"Since the beginning of FY 2007/08, the foreign currency market has been displaying level of volatility reflecting increased portfolio switching by investors in a context of narrower interest rate spreads and higher Jamaican dollar liquidity," said the bank in its September 'Quarterly Monetary Policy Report'.
The swings, according to the BOJ, have been higher than seasonal trends.
In November, central bank governor Derick Latibeaudiere in a first time revelation, said he had invested about US$1 billion during the year to shore up the local currency.
On January 15, Senator Don Wehby, Minister without Portfolio in the Finance Ministry, told the 6th annual Bear Stearns Latin American and Caribbean Conference that BoJ had spent as much as US$1.3 billion to stabilise the forex market, during a broader presentation on the performance and health of the local economy.
Wehby assured the American investment bankers, however, that the NIR remained at 'adequate levels
fuelled by private capital inflows, tourism receipts and remittances."
It's not clear why Latibeaudiere spoke up in November.
The central bank has long maintained a stony silence about its forays into the forex market, and re-adopted that stance when the Financial Gleaner last week requested similar data going back three years.
"The BoJ does not publish details of its foreign exchange budget," the bank said in an email response that also refused comment on whether the US$1.3 billion spend was in line with annual trends.
Nor, the message added, does the central bank publish its forecast of the foreign exchange rate - this in response to where the BoJ projected the currency would have landed without its interventions in the market.
Its strong defence of the currency, the BoJ suggested, was to keep the reins on inflation.
"As with central banks worldwide, the bank's ultimate objective is price stability. For Jamaica, exchange rate stability is a key component in achieving this objective."
The currency's decline in 2007 was its steepest in four years, but was nowhere close to being its worst period.
That record, at least within this decade, belongs to year 2003 when the JMD lost 18.9 per cent of its value, having fallen to $60.62 against the $US from $50.97 at year end 2002.
Coinciding with that fall, headline inflation in 2003 was also at its highest for the decade at 14.1 per cent, a level last seen in the nid-1990s, and a performance that 2007 seems to be tracking. Calendar inflation is expected to round out the calendar year at more than 16 per cent, having hit 14 per cent in November.
The JMD's poor performance in 2003 was the main contributor to the average 6.6 per cent annual decline in the currency so far within this decade.
The central bank again refused comment on its look ahead for the currency, saying its forecast was limited to its quarterly monitoring reports.
But that publication - the latest issued was for the July-September period - in its forward looking statement only forecast to the next quarter.
The bank said it anticipated increased pressure on the currency in the high shopping season, December, when imports normally climb to feed demand for consumerables, as well as imported inflation from the mounting energy and food bill as world oil and grain prices climbed.
At the same time, "the attractiveness of unregulated foreign currency investment schemes", the report suggested, was fuelling private capital flight.
Part of the answer in easing the pressure, BoJ signalled, was to strip the market of liquidity.
"In the context of a projected decline in reserves an inflationary pressures, measures to effectively restrain domestic spending are warranted," the report concluded.
Since then the bank has continued to issue special debt instruments to banks and its dealers to sop up extra cash from investors, and has raised interest rates across all its open market tenors as an additional pull.
