Prime Minister Bruce Golding was refreshingly frank in his speech in Montego Bay this week about the state of the economy, the depreciation in the value of the local currency and the raging debate over high interest rates.

Whereas his ministers have attempted to sugar-coat the reality and sell a mirage of success, the PM left no doubt that these are difficult and uncertain times, which could grow worse before they get better. He let the numbers speak for themselves.

During January, he reminded, remittances declined 10 per cent and exports by 13 per cent when compared with the same month in 2008. Income from tourism was down five per cent.

With government revenues in decline - they are likely to be around $30 billion below projections at the end of the current fiscal year - and with most sectors in retreat, the economy is projected to contract by more than two per cent in 2009, following last year's slide of 0.4 per cent.

Order to the dialogue

It is in that context that Mr Golding sought to bring some level of order to the dialogue and, hopefully, clarity to the discourse to the relationship, in Jamaica's environment, between interest and exchange rates. It has been an argument that, so far, has been characterised mostly by noise than constructive discourse.

Low interest rates and a stable exchange rate are good things which we all want and which some people have loudly demanded. When interest rates are low, it is more likely that people will borrow to invest and that jobs will be created and consumption increased. These are recipes for growth.

If there is disequilibrium in the foreign-exchange market, with demand greater than supply, it is obvious that the market will clear at a higher price. In other words, there will be devaluation - the effect of too much (Jamaican) dollars chasing a commodity that is in short supply, in this case the US dollar.

It is, of course, possible - in the absence of the ability of monetary authorities to intervene in the markets sufficiently to defend the currency - to allow the Jamaican dollar to find its level in the market. That, in an economy that is more than 70 per cent dependent on imports, will come at a price: high inflation. And around this, there is no consensus.

Raising interest rates

The central bank, in the circumstances, has resorted to the orthodoxy of raising interest rates, leading to a debate which Mr Golding equates to people attempting to ride a horse in different directions at the same time: an insistence on low interest rates and a stable (cheap) dollar.

The prime minister has said that the monetary authorities will attempt moral suasion to induce investors to take lower rates on capital, which will influence the central bank to pull back its benchmark rates. The Government also wants owners of foreign exchange to bring it to the market rather than bet against the Jamaican dollar.

This might work, but only temporarily. Fundamentally, as Mr Golding indicated, the basis of long-term stability rests with the Government taking the tough decisions to bring its fiscal house in order. It has to be less greedy for credit, which means requiring each sector to run a surplus rather than a deficit.

Relieving the public-sector bloat would include the removal of perhaps 20,000 jobs.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.