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 reported.
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.