Winston Williams, in a letter to your paper, published on January 23, posited a solution to our currency woes which involved the Government fixing the exchange rate and reducing interest rates. Unfortunately, Williams is addressing symptoms and not the illness; exchange rates and interest rates are not dictated by governments, but by the relative strength of the economy.

The problem Jamaica has is that we are spending more than we are earning and we are borrowing to make ends meet. When you borrow money it's the lender who determines what a fair rate of return is, not the borrower.

No takers

So, lets say the Government of Jamaica implemented Williams' proposal and offered a US-dollar bond at three per cent. In the current global credit crisis, and with Jamaica's risk profile, it would find no takers.

With around 60 per cent of the Government's budget going to debt repayment, it would then have to raise the interest rate offered, until it gets enough buyers willing to lend us money to balance our budget. This would also effectively set the tone for local interest rates.

Additionally, our exchange rate, if set below a fair market rate, would actually make our core problem - a negative balance of payments - worse. The cost of imported goods would drop and like good consumers we would buy more. This would mean we would need to borrow more foreign currency to cover our expenditure and push up the interest we would have to offer to get more lenders.

Reduce import expenditure

So, to cut to the chase, to fix Jamaica's problem, we need to reduce our expenditure on imported goods and services, something that successive governments since the '80s have been unwilling to do.

This is not to say that the sudden rush on our exchange rate is devoid of speculative involvement, but to cure it, sweeping policy changes as articulated would not work and are not necessary. If the Government is convinced that speculation is the root cause, all it needs to do is intervene aggressively in the market and flood it with supply. This will bring the exchange rate down and flush out the speculators.

I am, etc.,

PAUL DUNCAN

pduncan428@gmail.com