In 1973 Willard Cantelon’s book The Day the Dollar Dies was published. But it is Peter Tosh’s 1979 song The Day the Dollar Die which resonates with many of us.

Tosh was well informed, well read, and might have been inspired by the book. Tosh was railing against unfettered markets, wherever they might exist, with the US dollar being at the centre. Tosh would have celebrated 78 years of life on October 19, 2022.

Tosh sang that, “The day this ya dollar die, there be no more inflation.” There is much truth in those words, but money, the dollar, allows us to conduct economic activity efficiently. The Bank of Jamaica (BOJ) has an inflation targeting mandate, this article is underpinned by the view that greater focus on the volatility and value of the dollar is critical to the inflation fight.

When Jamaica Broilers lowered the price of its chicken products, three factors were identified as the reasons the company was able to so do: “increased stability in the grain market, stabilisation of the foreign exchange rate, and reductions in containerised shipping costs”. Of these three, the factor over which the Jamaican authorities have control is the exchange rate. Further, manufacturers use a significant amount of foreign input in their production processes. Of the approximately US$3-billion worth of imports of goods (merchandise) for the period January to May 2022, about a third of the total value accounts for fuels and lubricants and another third for raw materials/intermediate goods.

In keeping with the BOJ (Amendment) Act, 2020, the BOJ became an official inflation targeting bank on April 16, 2021. However, in September 2017 the minister of finance, in consultation with the BOJ, established the first official inflation target under a Jamaican inflation targeting regime — inflation targeting lite. This target became effective April 1, 2018, the start of the fiscal year. Also, in July of 2017 the BOJ changed its policy rate to the overnight rate on deposits at the BOJ and reduced its “footprint” in the foreign exchange market — it allowed banks and cambios to keep more of the foreign currency they bought from consumers, and the BOJ Foreign Exchange Intervention Trading Tool (B-FIXTT), through which the BOJ sells and buys foreign currency, was launched. Therefore, for all practical purposes, Jamaica became an inflation-targeting country as of 2017.

A central aspect of inflation targeting in Jamaica is to allow the exchange rate to be determined more by market forces, with as little intervention from the BOJ. Here is what the BOJ says on its website in regard to the exchange rate: “It is important to note that in the current reality of two-way exchange rate movements, the market will become more liquid, transparent, and favourable to innovation. Buyers and sellers now have to plan more carefully as there is no longer a safe, one-way bet on the direction the exchange rate will take. This uncertainty is expected to encourage further market development. Buyers and sellers of foreign exchange will desire protection from short-term fluctuations as they transact medium- and long-term business, so financial institutions will develop hedging tools to satisfy this demand.”

The performance of the exchange rate for the period July 2017 to December 2021 did not live up to expectations. The late Milton Friedman once said: “You very often bring out the logic of an argument by carrying it to an extreme.” The extreme example I give here is one in which the value of the Jamaican dollar moves in both directions by the same amount. See Figure 1 in which the data for the period of inflation targeting are numbers I contrived. It should be clear that in the inflation-targeting period (post September 2017) the Jamaican dollar is neither depreciating nor appreciating over the full length of the period, save for the short-term volatility of the rate moving both ways. This contrived example is closer to what we expected to happen.

The actual rates are depicted in Figure 2. In the period 2017-2021 we can see two things: the exchange rate does move in both directions in keeping with the flexibility that was expected; however, unlike what we see in Figure 1, the exchange rate continued to increase – the Jamaican dollar continued to depreciate, it continued to move in one general direction and at a material pace.

Domestic inflation was relatively low during 2017-2021, even dropping below four per cent. This is not surprising given that global inflation was hovering around two per cent. Given the relatively low domestic inflation rate, the BOJ continuously lowered its policy rate from 3.75 per cent in July 2017 to 0.5 per cent in August 2019 — the rate remained at 0.5 per cent until September of 2021. Lowering the policy rate was done to encourage faster economic growth. While the lofty goal of five per cent growth did not materialise, we must consider the counterfactual question. What would have been the level of growth with a higher policy rate? It is reasonable to assert that the level of growth might have been lower.

Growth aside, the continued depreciation of the Jamaican dollar was concerning, this time coupled with greater volatility. Were low interest rates partly responsible for the continued exchange rate depreciation? Additionally, while the BOJ was lowering its policy rate, the US Fed Funds Rate was steadily on the rise until the onset of the novel coronavirus pandemic; a falling Jamaican policy rate coupled with an increasing US policy rate suggests that people and firms would be encouraged to shift from Jamaican assets to US assets. Without making a definitive statement on whether there was a flight to US assets, the fact is, the Jamaican economy is highly dollarised; Jamaicans hold US dollar assets primarily as a store of value, earning a return is secondary.

For the year 2022 the BOJ has made a strong move towards stabilising the exchange rate, and successfully so. It was the day the US dollar fell against the Jamaican dollar – from a high of about $158 in February to a low of about $151 in August. The clearest indication of this increased focus on the exchange rate is evident in the fact that approximately US$700 million has been pumped into the market for 2022; this is the highest annual intervention in the inflation targeting period and the year has not ended. The second-highest annual intervention, 2017-2022, is US$400 million. During 2022 some firms lost millions of Jamaican dollars due to appreciation; however, for years many domestic firms have betted against the Jamaican dollar, their actions creating self-fulfilling prophesies. When the BOJ cautioned that the exchange rate will move in both directions, the lack of trust, the lack of faith in the system worked against the credibility of the BOJ.

Will this renewed focus on the foreign exchange market be sustained? Will there be greater confidence in the Jamaican dollar? Will the credibility of the BOJ improve with regard to the the exchange rate? Will the BOJ be able to keep up its interventions without compromising its reserves? Will the BOJ place greater measures of control on the use and the resale price of the foreign currency it sells into the market? Will the BOJ ramp up its use of moral suasion, directly engaging with banks and cambios and seeking their help to stabilise the Jamaican dollar?

Will the BOJ get into the market for forward contracts — a hedging tool — as is done in other jurisdictions? By helping to develop the market for forward contracts through its direct involvement in it, the BOJ could reduce the need for discretionary interventions into the foreign exchange market. Indeed, the BOJ would not want to compromise its reserves of foreign currency.

Dr Samuel Braithwaite is a lecturer in the Department of Economics at The University of the West Indies, Mona. Send comments to the Jamaica Observer or braithwaitesamuel@gmail.com.