The central bank should also continue purchasing international reserves to provide insurance against external risks , particularly since reserves fall short of the Fund’s metric for reserve adequacy, the International Monetary Funds (IMF) states in the March assessment on Jamaica performance under the fund agreement.
The external risks are related to PetroCaribe inflows and the imminent U.S. monetary tightening, the IMF said.
“There was broad agreement on the need to replace, over time, borrowed reserves with owned reserves. The results from applying the IMF metric for Assessing Reserve Adequacy show that Jamaica’s level of international reserves, at 80.4 percent of benchmark in 2015, is still significantly below the suggested adequacy range of between 100 and 150 percent, pointing to the need for continued exchange rate flexibility”, the IMF report on Jamaica stated.
bringing the amount to 100 percent of the desired level would mean bring the amount close to US$3 billion and 150 percent would take it within the US$4 billion mark.
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[…] The International Monetary Fund (IMF) is saying that the Jamaican dollar could be overvalued by as much as 19 percent to a moderate rate of 2.1 percent depending on the methods used. The fund also suggest that other methods show an undervaluation of up to 13 percent as well, based on the fall in the price of oil on the world market. “Preliminary analysis based on the Fund’s EBA-lite and CGER models does not offer clear evidence ofeither over- or undervaluation, after two years of exchange rate adjustment and an important current account adjustment”. Safeguarding the gains in competitiveness will be critical in an uncertain global environment. The increased flexibility in exchange rate has been instrumental in improving competitiveness and strengthening the external position. Continued exchange rate depreciation remains necessary given the ongoing inflation differential with trading partners, the risks to competitiveness from a possible upswing in oil prices, and the recent strengthening of the US dollar. The IMF stated, “the macroeconomic balance (MB) and the external sustainability (ES) approaches suggest that the Real effective exchange rate (REER) is undervalued at 11.5 and 12.6 percent while, the equilibrium real exchange rate (ERER) and the purchasing power parity (PPP) approaches point to some remaining overvaluation of 19.4 per cent and 14.4 percent respectively. A key assumption for the MB and ES estimates is that oil prices will recover only gradually and partially from their recent decline, thereby supporting the projected improvement in the current account balance. The confidence intervals are very large for all the estimates and, statistically, zero misalignment cannot be rejected. The results of the EBA-lite methodology, which estimates the gap between the current account balance and its norm for 2015, suggest a slight overvaluation” of 2.1 percent. These overvaluation amounts would require adjustments for inflation differential between Jamaica and our main trading partners, which could mean roughly a 5 percent adjustment to the rate of exchange. […]
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