Jamaica’s deposit dollarisation among the highest
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.
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.