Jamaicans, businesses deserve expert inflation management Published: Jamaica Gleaner, Thursday | April 9, 2009

Silburn Clarke, Guest Writer

Now abideth these three rates: interest, forex , and inflation; but the greatest of these is inflation.

- Apostle Silburn, Acts of the Economy, Knowledge Testatment.

In true Jamaican style, we have been generating much heat, reactions and focus on the results of poor inflation management on interest and foreign exchange rates, but with an equally deafening silence on the causes.

The focus of the business community, the policymakers, the technocrats, the citizens and the media should be on 'inflation'.

All things being equal; bring inflation down to single digits and the other two rates will recede. And note that 'recede' implies gradualism.

Maintain a double digit inflation environment and we will perpetuate a high interest regime and a galloping forex rate.

Don't blame the commercial banks. Lay full blame with the institutions, systems and processes responsible for managing and driving down inflation. They are clearly doing a dismally poor job.

Forget the circular argument about which came first - inflation or forex or interest.

Inflation drives the other rates.

Further, forget about the 'small, open economy' argument.

Small open economies

Jamaica has the worst inflation record of all the small open economies in the entire Caribbean. In the small OECS countries, inflation is typically one-three per cent; Cuba three-six per cent; Barbados zero to five per cent; and Trinidad four to eight per cent.

In Jamaica's case the outturn has been 8.5 per cent in 2006; 9.3 per cent in 2007 and 20.2 per cent in 2008 according to the World Economic Outlook 2008 published by the International Monetary Fund.

Think about it. If, as a lender, we know that inflation is hovering at 20.2 per cent, would any of us lend out money at less than 20.2 per cent? No we would not. An interest rate of 20.2 per cent is just maintaining the nominal value of your funds.

Add operation costs and profit and one is already at 25 per cent, at least.

However, consider this: with an inflation environment at four per cent, would strident calls for interest rates to be in the nine per cent range be an issue. Clearly not.

Interest rates in double digits would be clear and obvious anomalies in that context.

By a perverse logic, the Bank of Jamaica is correct on this one; their rates are in the correct range.

On the matter of forex rates, think about this. If the US annual inflation is 3.0 per cent and Jamaica's is 20.2 per cent, the minimum that the forex rate will slip in a year is 17.2 per cent.

It is as simple as gravity. If the dollar started out at 71:1 at the start of 2008 and the US-Jamaica inflation differential is 17.2 per cent, the expected value at end of 2008 would be 83:1.

Its not rocket science. Lower adjustments than that serve to overvalue the dollar by dynamically, and artificially, revaluing it upwards.

No amount of net international reserves, or moral suasion, or ministerial imploring can prevent the subsequent, inevitable, corrective devaluation.

As an adult country of 47 years, we should all have learned this lesson by now.

What can we justifiably blame the BoJ for ? ; it is for trying hard, as mandated by the Bank of Jamaica Act, to maintain artificially overvalued exchange rates.

The Christmas 2008 debacle is proof-positive of this. We can also blame them, and the authorities, for a long list of mis-placed priorities in the BoJ Act's five stated objectives; none of which includes price stability.

"The principal objects of the Bank shall be:

1. to issue and redeem notes and coins, 2. to keep and administer the external reserves of Jamaica, 3. to influence the volume and conditions of supply of credit so as to promote the fullest expansion in

production, trade and employment, consistent with the maintenance of monetary stability in Jamaica and the external value of the currency,

4. to foster the development of money and capital markets in Jamaica, 5. to act as banker to the Government."

In fact, and not surprisingly, the term price stability does not even appear in any part of the BoJ Act.

The country's price stability has been wandering aimlessly on auto-pilot since Independence. Any wonder then at the perpetual home-grown self-inflicted turbulence?

Forex rate

This inflation differential metric also explains why the rest of the Caribbean's currencies are stable, as their inflation is generally the same as, and sometimes lower than, that of the US.

The best determinant and protection of the forex rate is a well-managed low-inflation environment.

We should look at, and learn from, the sterling work that has been done on this by the Central Banks of New Zealand and Chile - all since the 1990s.

Their economies, businesses and citizens are more stable, productive and resilient as a result.

Nothing else but expert, targeted inflation management will do.

Our brightest and best minds should be focused on this task 24/7.

However, as we explore further as to why we keep under-achieving on the inflation metric, we will discover that some of our problems are more fundamental and deep-rooted than they first appear.

The world is rapidly transforming into a knowledge-driven economy.

The World Bank's recent global assessment of this transformation, reflected in their Knowledge Economy Index (KEI), shows Jamaica regressing since 1995 whereas, within the Caribbean, Barbados and the Dominican Republic have progressed.

There is a strong correlation between a country's KEI and economic growth. But somehow, we are on a trend in the opposite direction.

When the index is decomposed, it shows that we are rated very lowly for our economic incentive regime and our education regime.

Instead of all the recent distractions we should be ramping up:

a. Our stock of knowledge that can be applied to persistent value creation, that is, let education reign;

b. Incentivise knowledge-intensive industries, business and production, particularly for export;

c. Drive real productivity in firms;

d. A culture of competitive market pricing based on continuously improved internal processes, rather than passing costs along to the end-users; and

e. Expert, competent inflation management.

We need a national consensus built on tri-partisan engagement, to address these fundamental underlying issues.

That is where the heavy lifting lies.

Not in feel-good sound-bites about soon-coming, quick-fix, unsustainable revaluations based on other people's money.

Let the adult discourse on these fundamentals begin.

Our country, businesses and citizens deserve it.

Silburn Clarke is President/CEO of Spatial Innovision Limited.

silburn@spatialvision.com