The recent sharp decline in the Jamaican dollar has apparently created a surprising level of confusion, consternation, even panic, in the society.

Some with selective memories have compared the decline unfavourably to similar episodes of devaluation in the past, others have called again for fixed exchange rates, while many have demanded that the government better “manage” the currency.

Finally, the catch all bugbear of “speculators” has been invoked as one of the possible culprits. Virtually all this criticism seems to have missed the mark, although better communication and perhaps some measures to anticipate and ameliorate the likely, even obvious impact of Jamaican dollar liquidity developments might have been helpful.

The first thing to note is that the recent spike in the Jamaican dollar appears to primarily be driven by a number of large corporate transactions over the past couple of months, where several tens of billions of debt financing has been raised in Jamaican dollars, and has then — perfectly reasonably — been used to purchase US dollars to pay down existing US dollar debt.

The first round of this re-financing was in June, taking advantage of already very liquid Jamaican dollar conditions, but July 11th saw a huge new round of Jamaican dollar liquidity entering the market ($51 billion) primarily due to the repayment of National Debt Exchange restructured debt, with corporates continuing to borrow in Jamaican dollars to replace their US dollar debt.

This would also have been anticipated by local players, and was undoubtedly the principal reason for the spike in the dollar during that month.

A second reason is that the fundamentals — namely the current account deficit — have deteriorated somewhat over the last six to nine months (we only have first quarter figures for this year so far) almost entirely due to the rise in oil prices. From a situation where foreign direct investment covered our current account deficit several fold last year, we are likely to now be near balance.

http://www.jamaicaobserver.com/business-report/time-for-the-jamaican-dollar-to-revalue_141712