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2013, August 2 - FX study predicts 1.7% growth due to dollar slide

August 2, 2013
(Information Extracted from the Jamaica Observer (Caribbean Business Report) dated 02.08.13)

JAMAICA needs to boost exports to gain from a dollar projected to lose more than one-quarter of its value in 2013, says economist Dr Vanus James.

James made the observation while launching his report on the exchange rate on Wednesday. The study noted that depreciation of the projected amount, 28 per cent, would result in growth of some 1.79 per cent. That equates to the highest growth in years, but James indicated that it needs to be supported by real sector production.

"The data is saying that you have to set an exchange rate that facilitates what you have to do on the real side," he indicated in his address at the Edward Seaga Research Institute at the University of the West Indies.

James, a University of Technology professor, is known for his landmark 2007 study on the size of the local copyright industry.

"When you have a real exchange rate that is appreciating, that is going to bite you on the exports side. You have to be careful to allow some depreciation to discipline the market."

The 85-page technical report, entitled "Exchange Rate, Economic Structure and Economic Performance in Jamaica", answered three main questions on the exchange rate, but always returned to the issue of production.

"The story is right here," he stated, pointing to a letter strewn within several stacks of equations on the effect of the dollar slide on the economy over decades. It was a symbol indicating the importance of production.

"The problem you have here is on the real side. You have to solve that problem of how to industrialise," he said.

Currency depreciation cheapens exports and thereby increases the global competitiveness of products.

But the report found that the real exchange rate actually "appreciated" at a rate of 1.5 per cent per annum since 2000 (presumably factoring in US inflation).

Fast-forward to this current round of depreciation, the study found that the dollar nominally dipped seven per cent in 2012, with projections that it could dip by multiples by year-end.

"The current path of depreciation will lead to about 28 per cent depreciation over 2013," indicated the study, on page 76. However, importantly, the research found that the "net gain from a one per cent depreciation is growth of 0.064 per cent", which would translate to 1.9 per cent growth.

"Thus, while significant, both effects are highly inelastic and so very small compared to the effects of sound monetary policy and the industrialisation of the economy based on rising exports of output, especially from the domestic capital sector," he continued on page 76.

The currency surpassed the symbolic $100 to US$1 earlier this year, following a rapid double-digit depreciation over 12 months.

The study was commissioned by the Edward Seaga Research Institute and sponsored by a grant from PanJamaica Investment Trust and Jamaica National Building Society, and the ICWI Group Foundation.

The report, according to its author, examines the relationship between the exchange rate regime and economic performance such as inflation, restructuring and growth in Jamaica. It considers whether there is a performance cost of varying rather than fixing the exchange rate and seeks estimates of the cost. The report also seeks to determine an optimal exchange rate regime for Jamaica -- whether a floating rate or a fixed rate.

It also finds that instead of a crawling peg, the economic dynamics favour a fairly strict-managed float, complemented by solution of the real-sector problems of high energy and other import costs and structural change.

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