Standby agreement targets reduced non-borrowed forex reserves
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.
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.