Foreign Exchange Uncertainty Hurts Businesses

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In a matter of 16 days between April 1 and April 16, 2019, the Jamaican dollar fell 6.5 percent against the US dollar. The value of the Jamaican currency moved from J$ 125.60: US$1 to J$ 133.79: US$1. That foreign exchange movement is a rapid and steep decline. The Opposition People’s National Party (PNP) is crying foul.

Foreign Exchange Devaluation Again

According to Mark Golding, shadow spokesperson on Finance, the FX market has suffered not only a severe shortage of the US dollar but a sharp devaluation of the Jamaican currency. This decline in the value of the Jamaican dollar has also caused major pain and anxiety for the business sector.

Not only couldn’t the banking sector adequately supply the normal demand for currency from businesses during the 16-day period, but business operators couldn’t plan their affairs effectively.

Golding notes that the recent disruption was “ the third such major disruption to the foreign exchange market in less than a year.”  Ironically, according to him, the decline happened even as the IMF confirmed Jamaica’s ability to use its “more than adequate foreign exchange reserves” in supporting a floating exchange rate system.

Uncertainty in the value of the US dollar has damaged credit arrangements with suppliers and caused havoc on business operations.

Golding called upon the Bank of Jamaica (BOJ) to end the disruption to businesses and Jamaica’s economy caused by an unpredictable currency exchange market.

BOJ Won’t stop Foreign Exchange Intervention

But the central bank continues with its Foreign Exchange Intervention and Trading Tool (B-FXITT). For example, the BOJ injected US$50 million on two occasions into the large cambios and authorised dealers to stave off the effect of the FX shortage. Meanwhile, Howard Mitchell, President of the Private Sector Organisation of Jamaica (PSOJ) has called for the pegging of the Jamaican currency against the US dollar.

Apparently, the central bank is not prepared to change its current FX management programme. Instead, it encourages business operators to use forward contracts with financial entities to reduce any risk. For the BOJ, a floating foreign exchange arrangement is normal in a free market economy. In such economies, the foreign exchange rate goes in both directions.  Under the previous FX regime, the value of the Jamaican dollar relative to the US dollar goes only in one direction – down.

Floating FX Rate adopted

The Bank of Jamaica has, since 2017, adopted a new approach to the foreign exchange market. Consequently, the foreign exchange market has behaved differently. No longer is the value of the Jamaican dollar relative to the US dollar expected to go only in one direction. Now, and the FX rate can go both ways. In a free market economy, it is normal for the value of the currency to fluctuate.

What businesses can do

Business operators can reduce the losses that might occur when the value of the Jamaican dollar changes. While fluctuations in the FX rate is a painful inconvenience, can minimise the fallout in the following ways:

  1. Plan ahead. Ensure that any transaction requiring foreign exchange in coming days, weeks, or months are accounted for. Identify adequate funds to cover the costs.
  2. Also, plan for the long term. With a floating foreign exchange market, there are no guarantees for short-term gains. Clearly, long term strategies are more advantageous.
  3. Use forward contracts for the management of FX transactions. With forward currency contracts, business operators can agree with counterparts on a fixed exchange rate on a pre-determined future date. Effectively, an agreed exchange rate is locked in and remains effective regardless of the direction of the FX market.

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