Dr Wayne Robinson, Senior Deputy Governor at the Bank of Jamaica (BOJ), Opposition Spokesman on Finance Julian Robinson, and Charles Ross, CEO of Sterling Asset Management Ltd, had a lively discussion about the drivers of economic growth and the outlook for the Jamaican economy at the company’s recent virtual event.

The discussion opened with the panellists generally lauding Government’s actions to combat and mitigate adverse effects of the coronavirus (COVID-19) pandemic.

Robinson commended the Government on following through on its governance reforms at the Bank of Jamaica. He did, however, express his view that a larger stimulus package could have been helpful to stimulate aggregate demand and to provide better relief to households in need.

Finance Minister, Dr Nigel Clarke, speaking elsewhere, has said that the Government is assessing whether it would implement a similar CARES package in the next fiscal year.

Real exchange rate ‘competitive’, deputy BOJ governor declares

When asked what needed to be in place for Jamaica to experience sustainable economic growth, Sterling Asset CEO, Charles Ross indicated that he was a proponent of the export led growth model and posited that Jamaican exports could become more competitive globally with a market-determined exchange rate.

Senior Deputy Governor at the Bank of Jamaica, Dr Wayne Robinson, defended the notion that the exchange rate is flexible and market-determined and that the interventions of the Central Bank are necessary due to the small size and thin volumes that are characteristic of the market.

He agreed that the real exchange rate has to be competitive, especially in countries with low productivity.  According to Dr Wayne Robinson, the Central Bank has sought to do this over the past few years and has permitted the Jamaican dollar to adjust to what it believes is a level where it is currently “fairly valued”. He encouraged the audience to look at the “real exchange rate” not just the “nominal exchange rate”.

Ross countered that at the height of the pandemic the Brazilian Real fell by almost 40 per cent. Despite the currency recovering somewhat, the Central Bank was largely prepared to allow the exchange rate to be market determined and absorb the shock to the economy.

Julian Robinson asked the Senior Deputy Governor “How do you determine what is a competitive real exchange rate and how do you decide when to intervene in the FX market?” 

The Deputy Governor explained that the Central Bank assesses the market conditions and how the market is performing. “Are you having excessive volatility that can create distortions?  Are flows drying up because of market volatility, is the market functioning as it ought to? Our role is to ensure that there is liquidity, that the market can function and that the exchange rate reflects market fundamentals”. He added that the declining current account deficit formed part of the Central Bank’s assessment of competitiveness.  

On the topic of economic growth, Julian Robinson indicated that price stability was important for growth but that the country needed to improve labour productivity and produce higher value-added goods and services.

Dr Robinson agreed with the Opposition Spokesman that, “Our low growth reflects our low productivity. We have low productivity because we have inadequate capital, and we have inadequate human and social capital. There is a need to drive private investment in the high value-added sectors.”

Ross expressed his view that while this was nice in theory – it would take many years to achieve.

He expressed his view that the country needed to find industries and activities that could employ the existing pool of labour with their current skill sets.

He added that 30 years ago, China was producing low cost manufactured goods, whereas today they are making components for Apple iPhones.

He reiterated the need to let market forces send the signals and absorb investment in the areas where Jamaica can be competitive. He commended the BOJ’s success in keeping Jamaican dollar interest rates competitive internationally, which is key to mobilising domestic capital to invest in productive enterprises that are export-oriented.

Dr Wayne Robinson stated the importance of a stable macro-economic environment – predictable inflation and interest rates – a statement which all the panellists could agree on. Dr Robinson emphasised the importance of reducing the country’s debt service payments to make “fiscal room to invest in growth producing areas”.

Higher US inflation causing local prices to rise

When asked if the rise in inflation would lead to higher prices in Jamaica, the Senior Deputy Governor expressed his view that the rising inflation in the US is likely to be temporary – he noted that US inflation rose to about five per cent, the highest in about 13 years. 

He added that the rise in inflation is a global phenomenon primarily resulting from the rebound in economic activity that accompanied the re-opening of economies as well as significant monetary and fiscal stimulus. In his view, demand bounced back faster than firms and the labour markets could increase supply, thereby causing the spike in prices. 

He noted that this will and has had a spill-over effect on the Jamaican economy. For example, the producer price index from STATIN (i.e., prices that manufacturers must charge on their products) rose by 13 per cent in May. According to STATIN, inflation in May was five per cent – bang on within the BOJ’s target range. 

He does believe that local inflation will be to the upper end of the range and there is some risk that inflation could even rise above this band. 

As supply chains normalise, the rate of increase in prices should moderate. The price levels may remain high, but the pace of increase should ease, for example – soy, corn, wheat.

The Senior Deputy Governor indicated that he was concerned about the rise in shipping costs which have increased by over 300 per cent and that it will take some time for this market to normalize. Nevertheless, the Central Bank expects inflation pressures to be temporary.