Yes, there are opportunities in a depreciated Jamaican Dollar!

Public discussion surrounding the depreciating dollar have been one sided, looking only at the negatives associated with the decline. With the exception of Dr. Damian King (Senior Economist, UWI), I’m yet to see a different perspective on the implications.

Dr Damien King

Dr King views in summary:

Some Jamaicans (companies, individuals etc.) will lose from the depreciation in the dollar, while others will gain. Since both the winners and losers are Jamaicans operating in the economy, the country is not made worse off with a depreciated dollar.

 King went on to give an example, highlighting that Every purchase of foreign exchange is also a sale. Somebody is selling it. So if you have to pay me $150 for a US dollar, what you lose is exactly what I gain. You pay more, I get more. If the cost of haircuts suddenly rise to $1,500 a head, that is terrible for everyone else but it is great for barbers. The whole country is not worse off because barbers are part of the country. The identical thing is true for any other transaction, including US dollars.”

Chinese

Can we follow the Chinese? China has come under pressure from the United States (US), for supposedly manipulating their currency to gain unfair trade advantages – it is widely agreed that the Chinese dollar (Yuan) is undervalued. The argument is that the Chinese keep their dollar undervalued so their goods and services will remain ‘cheap’ and competitive in foreign markets. An undervalued currency also allows for lower cost labour which has resulted in some major US companies moving their manufacturing to factories in China (e.g. Apple & Nike) – outsourcing.

This Chinese example, presents a model for Jamaica. We need to increase production of goods and services and use the depreciated dollar as our competitive advantage. We’re unlikely to compete with China’s manufacturing prowess but services (BPO, Tourism, etc.) could provide superfluous returns.

Outsourcing to Jamaica: As I write, Sutherland International (a US base outsourcing company) is looking to launch its operations on the UWI Mona campus. This venture is expected to see over 13,000 students and other professionals being employed full-time and part-time. A depreciated Jamaican dollar is as much a ‘problem’ as it is an ‘opportunity‘. It is an opportunity for us to embrace a more modern approach in participating in the global world and improving our competitiveness.

Some Opportunities:

  1. A cheaper Jamaican dollar will attract more investors who are looking to take advantage of Jamaica’s educated, yet highly unemployed labor force.
  2. Increase tourist visitors – It will be cheaper for tourists to visit Jamaica and as such more will come (The Land of Usain Bolt & Bob Marley)
  3. We will import less (due to a depreciated dollar) and hopefully increase local production
  4. Local goods & services will become more competitive in foreign markets – locally produced goods/ services will become cheaper.

Tourism Jamaica

Jamaica’s tourism industry (one of our main foreign exchange earners) could also benefit significantly from a depreciated dollar, especially with the expected tax hike for US consumers – what has been termed the Fiscal Cliff. Tax increase will reduce disposable income of US consumers and since tourism is classified as a luxury it will likely be first on consumers ‘cut-back-list’. A depreciated dollar could help Jamaica offset any repercussions to the industry in the event that the US Fiscal Cliff is realized.

Looking at Solutions:

We need to embrace the opportunities associated with a depreciating dollar and look to increase production, exports and services offered globally.

I welcome your thoughts.

Luwayne

 

About the author:
Luwayne Thomas Bsc., Msc.
Founder @balcostics

Follow on twitter: @LuwayneThomas

 

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

 

5 Solutions to Jamaica’s Economic Problems

This discussion presents five ideas which will allow Jamaica to secure an IMF deal in the short-term, reduce Jamaica’s energy cost almost immediately and double Jamaica’s GDP in the next 10 years.

1. Sustainable Community and Skills Development Centre (SCSDC)    

Description: 

An actual SCSDC is a combination of a renewable energy (traditional) community center on steroids; a high-rise, renewable energy housing complex; and a renewable energy commercial center. Conceptually, the 24-hour security, gated community housing facilities should be made-up of 60 two bedroom units and 60 three bedroom units, encapsulated within the perimeter of the community center, which is itself within the perimeter of a forty (40) outlet commercial complex. The SCSDC will be equipped with three 1000KW solar generators to take advantage of Jamaica’s sunlight of 8 hours/day on average.

Additionally, roof-tops will be equipped with a Gym consisting of 1000 pieces of equipment which transform the kinetic energy from exercises into electricity. All general entry points should have revolving doors which generate electricity. A police station manned by five (5)officers on each shift, including two senior cops, is to be situated within the SCSDC. Eight member JDF teams are to be brought in, on three separate shifts each day, to provide skills training to persons in the surrounding communities within the walls of the SCSDC. Other civic and corporate groups, as well as individuals may also provide training. The police officers and soldiers will be paid by funds from the electricity. These payments are the return on the government’s mezzanine financing, and will be paid as long as the SCSDC exist.

2. Staggered Billing, Taxes and Fees (SBTF)    

Description: 

The SBTF is a process to stagger the deadline date of payment for different agents in the economy. This will allow for less persons acting at the deadline on any one given day and therefore reduce the need for additional resources on artificially stipulated, coinciding deadline dates for significant masses of economic agents. As an example, Motor Vehicle Registrations (MVR) could be issued such that they expire with exact time reference to the day of issue – MVRs expire six months, or a year to the day of issue. This way, deadline dates for renewals and payment are only dependent on the day each person was first issued a license, the right, or privilege to operate. As another example, companies would be allowed to file taxes and fees at different dates depending on their date of incorporation.

3. 5-5-5 Rule (Debt Exchange and Fiscal Responsibility) 

Description:   

The 5-5-5 rule is a hybrid between a debt exchange and a fiscal responsibility framework. The three 5’s communicate: (i) the rate of interest on all existing domestically owned government debt will be adjusted to a rate of 5 per cent or less within the next five years; (ii) the government cannot accumulate additional debt amounting to more than 5 percent of the five year moving average of GDP in any five year period, except in a global or regional economic crisis; (iii) The government cannot borrow at rates of interest exceeding 5 per cent unless at least one of the world’s largest five economies is borrowing at a rate above five percent on equivalent debt instruments.

The usefulness of the 5-5-5 rule is that it would help to reduce debt-servicing cost, and help to preclude high debt burdens in future periods. Of course, high debt burdens crowd out government spending on important social, human and physical capital. The restrictions imposed on government borrowing will put downward pressure on interest rates, and, therefore, mitigate any upward pressure on interest rates. Upward pressure on interest rates is anticipated as a result of the general policy stance of tight monetary policy and expansionary spending (fiscal and private sector combined) policy, which is also prescribed under this arrangement, and is necessary to stimulate the economy while avoiding inflation. Of course, lower interest rates will promote private investments.

  4. The Labor Sale Rule (TLSR)

Description: 

The Labour Sale Rule (TLSR) is a novel process by which the government provides a zero cost to the government, retroactive discount on the first year of multiple years of labour services employed by firms. The process is zero cost to government because while it is essentially a discount paid for by the PAYE taxes that qualified employees would pay, the process is such that all qualified workers would under normal circumstances not be expected to be employed in the absence of TLSR.

5. Firms Absorbing Civil Servants Initiative (FACS)

Description:

The FACS is a plan which will see private sector entities receiving a discount (see the “labor sale” rule) to absorb civil servants in a transfer of labor from the public sector to the private sector. This will assist in the reduction of the public sector wage bill, while minimizing unemployment which arises from the public sector rationalization/retrenchment. Additionally, with a smaller work force in the public sector the government’s pension obligations will be reduced.

Download a copy of the full paper (pdf): Click here

 

About the Author:

Darron Thomas

Pristine Enterprises Limited

Email: darron.thomas@gmail.com

 

 

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

 

The Jamaica & IMF Equation

The Equation:

The following outline what I believe to be the most likely economic outcome if an agreement is not reached (soon), between Jamaica and the International Monetary Fund (IMF):

Further exchange rate depreciation

If the Government of Jamaica is unable to secure a deal – in short order – continued domestic concerns, weakening markets and lower investor confidence could result in increased volatility in the foreign exchange market and further slide (depreciation) in the Jamaican dollar. Note that a slide in the Jamaican dollar would make it more expensive for Jamaicans to transact businesses with U.S exporters – put another way, it would be more costly to buy the new Iphone 5.

The recent fall in the in the Net International Reserves (NIR) by more than US$ 236 million during the June 2012 quarter, could indicate that the movement to safer more stable currencies (US$ and CAN$) might be slowly underway.

Further delays in reaching an IMF agreement will undoubtedly cause an erosion in the value of the Jamaican dollar against the currencies of its main trading partners (US$, CAN$ and GBP). Immediately after, the previous IMF deal was signed in Feburary 2010, the foreign exchange market stabilize and the JMD$ strengthened. Currently, the exchange rate is hovering at and around the $90 JMD : $1 US mark (As Seen in above chart).

Increase Interest Rates / Higher Cost of borrowing

The slide of the local currency coupled with the Government’s high level of indebtedness would likely trigger increases in the domestic interest rates. Higher interest rates would be the only incentive for investors to lend the Government money.

Jamaica’s high debt to GDP ratio (seen in chart above), limits the Government’s ability to pay its bills without having to borrow. Additionally, our economy is not growing fast enough to generate sufficient spending for the GOJ to collect tax revenues and earn money to repay its debt. Without a new IMF deal, the Government would have to find alternative money to pay bills, in order not to default on its obligations. Recently it was made public that the Government borrowed money from both NCB and Scotia bank in order to repay foreign debt owing and had matured – not a good sign.

 Further downgrade of Jamaican bonds by Rating agencies

If Jamaica is unable to sign a new deal with the IMF, a downgrade of domestically issued bonds/debt as well as international debt instruments such as the GOJ Global Bonds (GOJGB) would be inevitable.

These Euro-denominated bonds, if downgraded, would signal to investors that these are risky debt instruments with high likelihood of default by the issuing government (Jamaica). In this context, the GOJ would find it hard to generate well needed capital on the international market as its debt instruments would be undesirable to international investors.

Any downgrade would further make a case for higher interest rates when the government attempts to borrow internationally/ locally given the high propensity for defaulting (low credit worthiness) on these debt repayments – as indicated by the rating downgrade.

 Even slower economic growth/ no growth

The global economy is still precariously positioned, with uncertainty surrounding the Euro-zone and China’s economic growth rate slowing. This all equates to even slower growth forecast for developing countries like Jamaica, who rely heavily on consumer welfare in the developed countries to keep their economy vibrant – tourism, bauxite and cultural exports.

Higher inflation rates

The direct outcome of a declining Jamaican dollar, compounded by higher cost for foreign goods – wheat/ flour price being the most recent to increase.

Further losses on the Jamaica Stock Exchange (JSE)

During the June 2012 quarter there was a decline across all four JSE indices ranging from 1.1 per cent to 7.9 percent. This fall in equity prices across the indices reflects the weakness in the domestic economy and growing concerns about the impact of the noted slowdown in the global economy.

Steven Jackson recently wrote an article in the Gleaner, which stated that “investors have lost close to J$73 billion of their wealth” on the JSE – Year to Date. This “bear” market will likely continue once an agreement is not reached.

The above arguments only highlight some of the economic possibilities/ scenarios that might occur in the event of further delays in signing a new IMF agreement. Note that the social and cultural impact was not examined, due primarily to the plethora of possibilities that can arise – one thing for sure though, we are a resilient people who have proven time and time again that we can rise above adversities.

Please add a comment and share your opinion on any of the points which were highlighted.

Visionary Entrepreneur

About the author:

Luwayne Thomas Bsc., Msc.

Co-founder  @balcostics

Follow on twitter: @LuwayneThomas

At Balcostics our mission is to empower leaders with the required data and information to make better decisions. Learn more about our full list of research outsourcing services for individuals and companies: Click here

 

Why Can’t We Come Together As One Caribbean? It’s All Legal

With recent developments surrounding West Indies Cricket, and calls for Jamaica to have its own international team, we have decided to revisit the Caribbean Integration project. Consider this a walk down memory lane, and a nostalgic look at what has been the main impediment to regional integration over the decades.

Establishing the Caribbean Court of Justice (CCJ)

Establishing the Caribbean Court of Justice (CCJ) and refusing to make the transition from the Judicial Committee of the Privy Council is the significant hurdle facing the judicial integration process. Read more of this post