Standby agree­ment tar­gets re­duced non-bor­rowed forex re­serves

Jamaica Gleaner - - BUSINESS - McPherse Thomp­son As­sis­tant Ed­i­tor – Busi­ness mcpherse.thomp­son@glean­erjm.com

AREDUCTION in the stock of non-bor­rowed net in­ter­na­tional re­serves (NIR), which cur­rently stands at about US$1 bil­lion, and in­fla­tion band lim­its have been re­placed as the key mon­e­tary tar­gets un­der the Standby Agree­ment (SBA) with the In­ter­na­tional Mon­e­tary Fund (IMF).

Un­der the Ex­tended Fund Fa­cil­ity (EFF), which has now been sub­sti­tuted by the SBA, mon­e­tary tar­gets un­der the quan­ti­ta­tive per­for­mance cri­te­ria were min­i­mum ac­cu­mu­la­tion of for­eign ex­change re­serves each quar­ter, and a ceil­ing on net do­mes­tic as­sets.

IMF Mis­sion Chief to Ja­maica, Uma Ra­makr­ish­nan, said that rel­a­tive to the EFF, the IMF has made a few changes with re­spect to the SBA ap­proved for Ja­maica more than two weeks ago.

On the fis­cal side, she said, the fis­cal re­spon­si­bil­ity law that was passed in the con­text of the EFF man­dates that the pub­lic debt-to-gross do­mes­tic prod­uct (GDP) ra­tio reach 60 per cent in fis­cal year 2025-26.

“That has been the an­chor for the EFF and that re­mains the an­chor for the cur­rent ar­range­ment also. That re­quires that the pri­mary sur­plus tar­get re­main at seven per cent for the du­ra­tion of the pro­gramme and that is a com­mit­ment that the Govern­ment is mak­ing for the next three years. So in that sense, the an­chor has not changed in terms of macroe­co­nomic sta­bil­ity,” she said.

“Many of the other quan­ti­ta­tive per­for­mance cri­te­ria on the fis­cal side are broadly the same,” Ra­makr­ish­nan told Wed­nes­day Busi­ness dur­ing a video­con­fer­ence from Wash­ing­ton, DC last week. “There are a few tweaks here and there, but pri­mar­ily the fun­da­men­tal struc­ture re­mains the same,” she added.

On the mon­e­tary side, the IMF has made what she said were a few changes to shift the mon­e­tary frame­work un­der­ly­ing Ja­maica’s mon­e­tary pol­icy even­tu­ally get­ting to an in­fla­tion-tar­get­ing frame­work.

“We are look­ing at some­thing new called the mon­e­tary pol­icy con­sul­ta­tion clause, which pro­vides an in­fla­tion tar­get, with de­vi­a­tions around that tar­get that will be al­lowed un­der the pro­gramme,” the mis­sion chief ex­plained.

Ac­cord­ing to the November 2016 IMF coun­try re­port on Ja­maica, breach­ing the in­fla­tion con­sul­ta­tion band lim­its at the end of each June/De­cem­ber test dates would trig­ger a

con­sul­ta­tion with the ex­ec­u­tive board on the rea­sons for the de­vi­a­tion and the pro­posed pol­icy re­sponse be­fore fur­ther pur­chases could be re­quested un­der the SBA.

MON­E­TARY POL­ICY

Specif­i­cally, the con­sul­ta­tion will ex­plain the stance of mon­e­tary pol­icy and whether the Fund-sup­ported pro­gramme re­mains on track; rea­sons for de­vi­a­tions from the spec­i­fied band, tak­ing into ac­count com­pen­sat­ing fac­tors; and on pro­posed re­me­dial ac­tions, as deemed nec­es­sary.

The up­per and lower con­sul­ta­tion band lim­its range be­tween nine per cent and one to two per cent re­spec­tively for the pe­riod De­cem­ber 2016 to June 2017.

The mon­e­tary pol­icy con­sul­ta­tion clause is linked to an in­fla­tion band of 5.5 per cent, +/- 3.5 per cent for the June 2017 and De­cem­ber 2017 test dates, which then nar­rows for the rest of the pro­gramme to 5.5 per cent +/- 2.5 per cent.

For the De­cem­ber 2016 test date, an asym­met­ric band of 5.5 per cent, +3.5/-4.5 per cent, is pro­posed to take into ac­count that in­fla­tion is cur­rently very low.

“We are re­plac­ing what used to be the net do­mes­tic as­set tar­get with some­thing that is more rel­e­vant and op­er­a­tional for Ja­maica,” the mis­sion chief said.

She said that un­der the new pro­gramme, the IMF has also shifted from look­ing at the floor on the NIR to a floor on non­bor­rowed NIR.

“The idea be­hind that is to en­cour­age the Bank of Ja­maica (BOJ) to re­duce its stock of bor­rowed re­serves and move more to­wards buy­ing its own re­serves from the market,” Ra­makr­ish­nan said.

“So the idea is to grad­u­ally phase out the stock of bor­rowed re­serves and hence, the idea is that the floor will be mon­i­tored on how much of the non­bor­rowed re­serves are be­ing ac­cu­mu­lated,” she added.

Ac­cord­ing to the coun­try re­port, of the US$2.5 bil­lion in NIR, around US$1 bil­lion are bor­rowed from lo­cal banks through the is­suance of BOJ US$de­nom­i­nated CDs (cer­tifi­cates of de­posit), with out­stand­ing ma­tu­ri­ties of up to seven years.

It added that the cen­tral bank is com­mit­ted to con­tinue ac­cu­mu­lat­ing NIR through market pur­chases of for­eign cur­rency while re­duc­ing the share of bor­rowed re­serves. Ac­cord­ingly, the pro­gramme tar­gets will be set in terms of the stock of non-bor­rowed NIR.

“Those are the two big de­vi­a­tions in terms of the quan­ti­ta­tive per­for­mance cri­te­ria,” Ra­makr­ish­nan said of the changes from the EFF to the SBA.

The Bank of Ja­maica build­ing in down­town Kingston.

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