Ja­maica’s de­posit dol­lar­i­sa­tion among the high­est

Jamaica Gleaner - - BUSINESS - Mcpherse.thomp­son@glean­erjm.com

WITH MORE than 45 per cent of de­posits de­nom­i­nated in United States dol­lars by June 2016, Ja­maica’s de­posit dol­lar­i­sa­tion was found to be one of the high­est in the re­gion, ac­cord­ing to the as­sess­ment of the In­ter­na­tional Mone­tary Fund (IMF).

That was ac­com­pa­nied by dol­lar­i­sa­tion of in­vest­ment port­fo­lios, said the IMF, sug­gest­ing that the Ja­maican au­thor­i­ties should take steps to counter the ris­ing trend.

The au­thor­i­ties’ ef­forts to dedol­larise the econ­omy should be founded on sus­tained macroe­co­nomic sta­bil­ity and pol­icy cred­i­bil­ity, the IMF said, not­ing that the dol­lar­i­sa­tion trend is con­tin­u­ing for both de­posit tak­ing in­sti­tu­tions and the se­cu­ri­ties-deal­ers sec­tor.

In the re­port on the 13th re­view of Ja­maica’s four-year eco­nomic sup­port pro­gramme re­leased on Mon­day, IMF staff also rec­om­mended “greater ex­change-rate flex­i­bil­ity, with two-way move­ments in­stead of one-way bets on the tightly man­aged ex­change rate”.

The Ja­maican dol­lar reached an all-time high of ap­prox­i­mately $127.92 to the US dol­lar in trad­ing on Mon­day.

Ac­cord­ing to the staff re­port, for de­posit-tak­ing in­sti­tu­tions, de­posit dol­lar­i­sa­tion is ac­com­pa­nied by dol­lar­i­sa­tion of in­vest­ment port­fo­lios, and net open po­si­tions re­main lim­ited.

Like­wise, it said, the se­cu­ri­ties-deal­ers sec­tor is show­ing con­tin­ued shift in the com­po­si­tion of the in­vest­ment port­fo­lios to­wards for­eign-ex­change de­nom­i­nated se­cu­ri­ties.

To counter ris­ing dol­lar­i­sa­tion, it said con­sid­er­a­tion should be given to mea­sures that foster the at­trac­tive­ness of lo­cal-cur­rency as­sets, in­clud­ing im­prov­ing liq­uid­ity man­age­ment in Ja­maican dol­lar in­stru­ments.

OTHER CON­SID­ER­A­TIONS

The au­thor­i­ties should also con­sider in­creas­ing the share of lo­cal cur­rency-de­nom­i­nated pub­lic debt, de­vel­op­ing cur­rency and in­ter­est rate hedg­ing in­stru­ments, re­con­fig­ur­ing min­i­mum re­serve frame­work to re­move the wedge be­tween Ja­maican dol­lar and for­eign-ex­change de­posits, and putting in place pru­den­tial reg­u­la­tions aimed at en­sur­ing proper man­age­ment of for­eign ex­change risks, such as lim­its on for­eign-ex­change net open po­si­tions.

The re­port said that with large bond re­demp­tions loom­ing, a liq­uid do­mes­tic debt mar­ket is essen­tial to re­duc­ing re­fi­nanc­ing risk and re­verse the re­cent dol­lar­i­sa­tion of pub­lic li­a­bil­i­ties.

To min­imise the re­fi­nanc­ing risk and re­duce dol­lar­i­sa­tion of the Gov­ern­ment’s debt port­fo­lio, a con­certed ef­fort should be made to up­grade the pri­mary-dealer sys­tem by in­tro­duc­ing for­mal pri­mary dealer com­mit­ments and priv­i­leges in gov­ern­ment bonds, so as to in­cen­tivise mar­ket­mak­ing.

The IMF said Ja­maica should also switch to an auc­tion-based mech­a­nism for pri­mary is­suances, ex­pand the is­suance of Trea­sury bills to an­chor the yield, pro­vide an ac­cu­rate bench­mark rate for other debt in­stru­ments, and al­low for more ac­tive cash man­age­ment.

In ad­di­tion, the Gov­ern­ment should con­sider steps to at­tract non-res­i­dents to the lo­cal­cur­rency bond mar­ket, par­tic­u­larly to long-term bonds.

Not­ing that de­posit dol­lar­i­sa­tion has in­creased in the fi­nan­cial sys­tem and pub­lic bal­ance sheets, the IMF at­trib­uted it to the 2013 cri­sis – when do­mes­tic bonds were re­struc­tured, re­serves de­clined, and the nom­i­nal ex­change rate de­pre­ci­ated – which weak­ened pub­lic trust in Ja­maican-dol­lar de­posits and bonds and raised the at­trac­tive­ness of for­eignex­change de­nom­i­nated as­sets.

By June 2016, more than 45 per cent of de­posits were de­nom­i­nated in United States dol­lar, the re­port said. Like­wise, the three-year-long freeze of the do­mes­tic bond mar­ket, which re­sulted in greater re­liance on ex­ter­nal cap­i­tal mar­kets, re­sulted in higher dol­lar­i­sa­tion of pub­lic debt.

“High dol­lar­i­sa­tion has eco­nomic costs. It re­duces the ef­fec­tive­ness of mone­tary pol­icy, con­strains cen­tral-bank ca­pac­ity to act as a lender of last re­sort, ex­ac­er­bates the ‘fear of float­ing’, makes greater ex­change rate flex­i­bil­ity costly, and could po­ten­tially fuel liq­uid­ity and cur­rency mismatch risks in the fi­nan­cial sys­tem,” said the IMF staff.

The IMF said that while lat­est for­eign ex­change and liq­uid­ity stress tests per­formed by the Bank of Ja­maica on March 2016 data sug­gest con­tin­ued re­silience of the de­posit tak­ing in­sti­tu­tions and se­cu­ri­ties deal­ers to those shocks, care­ful mon­i­tor­ing of the dol­lar­i­sa­tion trend and its risks is essen­tial.

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