There is a time for everything, when all the coordinates and variables come together in a favourable position. When that happens it is time for action.

The international financial crisis had been creating a meltdown of the financial system globally, but parti-cularly in the Organisation for Economic Cooperation and Development (OECD) countries, precipitating a recession and a fear of economic depression. The main feature is the unavailability of credit to revive the engine of economic growth, whether by the lubrication of increased consumer spending or increased investment fuelling.

Credit pipeline choked

The choke in the credit pipeline is being relieved, supposedly, by massive injections of government and central bank funds in major countries to buy out bad debt, or provide fresh capital. Either way, the liquidity of the financial system is improved. This works in most countries. But in the biggest economy where the problem started, the United States, the credit pipeline is still choked because the banking system, although relieved of much of its bad debt by government, is afraid to contract new loans which might end up, with the uncertainties of the American economy, as new bad debt. Hence, the credit freeze continues to be the most important problem.

Jamaica has not yet really experienced the fall-out of the US economy. That is to come, if the credit freeze continues and American consumers tighten their budgets or lose their jobs. Either way, with consumer spending down, vacation spending will be cut. The automobile industry, which is already showing a 30 per cent decline in sales currently, is indicative of the likely cut which will follow in aluminium production, about which I warned in a recent article. Both tourism and the mining sectors in Jamaica will be hit by these declines. But the impact from these reductions is not yet facing the Jamaican economy; it is around the corner. Other factors are now having an impact on the local economy which are of a different category of spin-off from the problems of the international economy.

Budgetary requirements

The investment market from which Jamaica depends for funding its budgetary requirements is very unlikely to be able to provide the full US$400 million - US$600 million required for next year. The shortfall will be substantial because not only is there a credit freeze, but also an investment freeze, particularly for lending to emerging markets which are not prime investments. Jamaica does not have "A" grade investment ratings for the bonds it issues to raise financing. Its "B" grade bonds will be less than prime and less than acceptable to a wary investment market where some of the biggest investments houses, including internationally renowned names like Lehman Brothers, Bear Stearns and Merrill Lynch have recently crashed or have been sold and Citigroup (Citibank) had to be bailed out.

Facing this dire prospect of greatly reduced foreign exchange inflows from tourism, bauxite/alumina, external borrowings and some remittance transfers, the Net International Reserves, which currently has a balance of US$1.802 billion, is facing a serious fall-out from dwindling inflows. The danger point is the balance of 12 weeks of payments for imported goods and services which amounts to US$2 billion, which have to be maintained at a minimum in the NIR.

But the NIR balance of US$1.8 billion is now below that threshold. It is in this context that the minister of finance is hinting that the International Monetary Fund (IMF) might have to come to the rescue of the Jamaican economy.

With declining inflows, the Bank of Jamaica has hiked interest rates to discourage Jamaicans from buying foreign exchange locally, in the view of the BOJ, to transfer to overseas accounts, or invest in US stocks and bonds. These outflows would be a further drain on the BOJ reserves.

Local demand for currency

There is a further problem yet. To the extent that the BOJ cannot or will not meet the local demand for foreign exchange, the exchange rate will come under pressure resulting in a rolling fall-out of the rate from the present US$1: J$77.87. This has already begun with small, but regular, depreciations of the Jamaican dollar over the last two months.

With all these potential and actual pressure points, a very substantial injection of external funding will be necessary to replace the fall-out in tourism receipts, reduced bauxite/alumina purchases, slow down of overseas borrowings, earnings and remittance transfer to replenish the NIR and provide crucial foreign exchange for the economy to import goods and services at the current level without returning to the days of shortages and import licences.

IMF assistance, notwithstanding that the Fund today is not as rigid as it was years ago, and taking into account recognition that special circumstances prevail, is still likely to be onerous. The IMF is certain to insist on significant expenditure cuts to balance the fiscal budget which continues to be in deficit since 1997. This will entail cuts in the staffing of the public sector as there is no other area of expenditure from which major cuts can be made. Between 1984 and '85, the public service had to be cut by 27,300 positions to end the fiscal deficit created in the 1970s which reached a world leading 17 per cent in 1978. While the special circumstances may mitigate the IMF approach, it will insist on the right fiscal conditionalities to ensure repayment of its funds.

Pegged exchange rate

But is this the only scenario? It is not. For years I have been pressing for a pegged exchange rate for the Jamaican dollar instead of the managed rate of exchange. This has been the mode for 10 of 15 CARICOM countries for many years. Only Jamaica, Haiti, Suriname, Guyana and Trinidad do not have a pegged rate. Four of the five named countries have weak economies. Trinidad is the exception where a managed rate is needed to allow it to adjust to competitive levels from time to time, the pricing of its thri-ving export manufacturing industries. The other four countries have no thriving manufacturing exports and there is no benefit to be derived from depreciating their currency to make them more export competitive. In the case of Jamaica, export earnings are in US dollars, so too are the receipts from remittances and the export of bauxite/alumina. While devaluing the Jamaican dollar will increase the amount of Jamaican dollars on conversion, this will last for only a short time until the higher cost of imports and utilities resulting from the devaluation cancel out the benefit.

The IMF, in one of its Working Papers, while not in favour of pegged rates, admitted that a case can be made for small countries which have dominant dollar-earning export sectors. The 10 CARICOM countries with pegged exchange rates all fall into this category and have done excep-tionally well in creating stronger economies than Jamaica with bigger per capita incomes. While Jamaica was undergoing an epidemic of devaluations the OECS group of six countries which form part of CARICOM maintained their rates of exchange and developed their economies on a sustained basis. The Jamaican economy fits the model of a dominant dollar-earning export sector and does not benefit from a depreciating (or devalued) exchange rate.

Immense benefit

But there is a further immense be-nefit. With a pegged exchange rate, the BOJ will not have to issue local bonds to sop up the liquidity in the Jamaican banking system because there can be no speculative flight of foreign exchange from Jamaica, since the rate would be pegged.

At any rate, with the US dollar earning a fraction of the interest rate which a Jamaican dollar can earn in Jamaica, there is no incentive to convert Jamaican dollars for US investment. Currently, the Government of Jamaica offers a two-year 11.5 per cent indexed US bond to investors. The corresponding US offers is 5.22 per cent. This is the critical reason why this is the right time to make the change.

But there is another benefit of equal importance and value to the economy which has been suffering for years under prohibitive and excessive interest rates which discourage investment. If the BOJ does not have to watch the value of a pegged Jamaican exchange rate, it can allow liquidity to build up in the banking system which will pressure bank lending rates to decline. This would increase borrowings by all categories of borrowers, including small investors, a most welcome development for the economy. While bank rates would fall, borrowing would increase, compensating the banks for the narrower interest spread.

Credit controls

To prevent this liquidity being used for excessive consumer purchases which would increase imports and drain the reserves, credit controls on lending could be imposed to limit the importation of cars and other such items beyond the current limit (with a small growth factor annually).

Another big benefit to government, if not the biggest, is that with reduced interest rates, there would be no need to increase local debt to sop up liquidity. With less debt issues, interest and principal payable by government, projected at 38 per cent of total budget for the year, would decrease, leaving more re-venue to pay down the fiscal deficit and increase domestic spending.

Win-win formula

This is a win-win formula which can be used at this time because the US dollar offers no enticement which could disrupt an attempt to establish a pegged exchange rate model.

The Government needs to take this model into serious account to solve its problems and mitigate, or avoid, IMF intervention. It is not impossible; it was done in the last half of the 1980s, with a pegged exchange rate of J$5.50 which revitalised the economy.

The time is ripe, but like the fruit that ripens, or the flower that blooms, it can pass without a taste of the flavour or enjoyment of the scent, if delayed.