The Bank of Jamaica spent US$1 billion to defend the pandemic dollar! What on earth does this even mean?

I’m Kalilah Reynolds, a financial journalist and educator based in Jamaica, so just let me explain what this is all about.

So, as you know, COVID was a very challenging time; the entire tourism industry shut down, and Jamaica depends on tourism as one of our primary income sources and one of our major sources of US dollars.

Additionally, we were receiving less remittances. Remittances are monies that people aboard send back home to their families. Remittances represent 20-25% of Jamaica’s entire economy.

One of the main ways remittances actually come to Jamaica is through travel. Somebody is coming to Jamaica, and they bring some cash to give to their family. Well, travel was shut down, and it was difficult to send through traditional channels.

So, two of our major sources of US dollars were almost completely wiped out.

On the other hand, we still needed the same amount of US dollars to purchase imports. Jamaica is heavily reliant on imports; there is not a lot that we actually produce for ourselves here.

So, what does that mean? Supply and demand!

The demand remains the same, but now there is very limited supply because the country was not getting any money from tourism and very little money from remittances.

When supply is short and demand is high, the price goes up. Before the pandemic hit the Jamaican dollar was around J$150 to US$1.

Three years later, the Jamaican dollar is still in the $150-$155 to US$1 range, even though we had this major supply shortage during the pandemic.

Because the supply was short, it should have sent the price of the US dollar soaring. It should have ended up being more like $160 or $170, maybe even $200 for US$1. Because the few institutions that had US dollars would have been selling them more expensive.

BUT! That didn’t happen because the BOJ intervened. That’s where this headline comes in, where it says “BOJ spent US$1 billion to defend the pandemic dollar”.

The Bank of Jamaica has a few billion US dollars in reserve. So, that’s what they’re referring to when you hear about central bank currency reserves. So, what they did was to take out some of that money, and sent it out to the financial institutions that typically sell US dollars, so that the exchange rate didn’t change that dramatically.

Thanks to that intervention, the JMD to USD was maintained between $150 to $155, instead of rising all the way to $200 plus based on the extremely limited supply that we had during the pandemic.