Central Bank says reserves higher than needed

United States' currency
United States' currency (Photo credit: Dmitry Demidko)

Central bank governor, Richard Byles, says the US$4.2 billion in gross reserves held by the bank is 28 per cent more than the US$3.2 billion which is needed. Further, this will be increased when the US$520 million allocation of Special Drawing Rights (SDRS) by the International Monetary Fund (IMF) is added.

He has, however, not explained why the currency fell by 8.7 per cent between January and 16 August of this year, although the central bank has excess reserves and the country’s inflation rate of 5.35 per cent in July was lower than the 5.4 per cent recorded by the USA, our major trading partner. The exchange rate is supposed to be based on the difference between Jamaica’s inflation rate and that of the US during the same period, according to the purchasing power parity theory (PPPT).

The central bank governor, however, refused to say how the excess reserves will be used to ensure exchange rate stability as well as to drive growth and why he is raising interest rates against this background.

                                                              Jamaica’s reserve position (US$B)

    Amount needed                                       Available before new SDRs                               Available after SDRs

          $3.20                                                                   4.20                                                              4.72

The erratic movements in the value of the dollar and high freight cost and low levels of productivity are some of the factors contributing to inflation and, as result, raising interest  will contribute to the problem, rather than helping to solve it.

The central bank is, therefore, going in the wrong direction. The governor should be managing the reserves more judiciously to help maintain exchange rate stability, while keeping interest low in order to facilitate higher levels of growth with price stability. This is the mandate of every responsible central bank – the promotion of the highest levels of employment and output possible with stable prices. This is what reputable independent international central banks such as the Federal Reserve Board (Fed); Bank of England (BoE); European Central Bank (ECB); Bank of Japan (BoJ) and the People’s Bank of China (PBoC) are successfully doing. This is why their economies are either back above pre-pandemic levels in the case of the USA and China or just below pre-pandemic levels in the case of the United Kingdom and the European Union (EU)

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