NIR, FX mar­ket and growth

Jamaica Gleaner - - OPINION&COMMENTARY -

WHILE THE auc­tion com­po­nent of the cen­tral bank’s pro­posed new for­eign-ex­change sys­tem is the sub­ject of sub­stan­tial scru­tiny and some ap­pre­hen­sion, an­other per­ti­nent and, on the face it, po­ten­tially pos­i­tive el­e­ment of its fu­ture en­gage­ment has en­gaged sig­nif­i­cant at­ten­tion. It has to do with how the Bank of Ja­maica (BOJ) will go about the busi­ness of build­ing up its net in­ter­na­tional re­serves (NIR).

The NIR is one of those acronyms that have, over the past two decades, be­come seared into the con­scious­ness of most Ja­maicans, even those of us with­out any clear un­der­stand­ing of what it is, or its spe­cific value. Peo­ple have a sense that it is as­so­ci­ated with the coun­try’s seem­ingly per­pet­ual agree­ments with the In­ter­na­tional Mon­e­tary Fund (IMF), and that the more you have of it, the bet­ter. In­deed, prime min­is­ters, fi­nance min­is­ters, as well as cen­tral bank gov­er­nors are in the habit of trum­pet­ing the level of our NIR as a mea­sure of eco­nomic sta­bil­ity.

And, fun­da­men­tally, they are right. For, hav­ing a fair bit of for­eign cur­rency, net of shorter-term for­eign obli­ga­tions, in the cen­tral bank, means that the coun­try is able, in a pinch, to pay for the goods and ser­vices it buys from abroad, or that the cen­tral bank can sell for­eign cur­rency into the FX mar­ket to ease pres­sure on the do­mes­tic one.

ENOUGH TO COVER IM­PORTS

The Bank of Ja­maica now has around US$2.5 bil­lion worth of NIR, which is enough to cover the coun­try’s im­ports for nearly half a year, if there are no more in­flows. That is a far cry from the days in the 1970s, ’80s, and early ’90s when there was none, reach­ing, at one point, as low as mi­nus US$800 mil­lion. Which brings us to how the NIR tar­gets will be mon­i­tored un­der the Gov­ern­ment’s new three­year standby ar­range­ment with the IMF. By the end of the agree­ment, Ja­maica is to have more than US$3 bil­lion of net re­serves.

In the past, and up to now, a fair bit of the re­serves held by the cen­tral bank was raised by the BOJ is­su­ing debt. In fact, of the US$2.5 bil­lion in NIR the BOJ had on hand when Ja­maica signed its lat­est agree­ment with the IMF, 40 per cent, or around US$1 bil­lion, rep­re­sented ac­qui­si­tions from do­mes­tic banks, through the is­suance of seven-year, US-dol­lar­de­nom­i­nated cer­tifi­cates of de­posit. But un­der the new pro­gramme, the BOJ is re­quired to build a greater pro­por­tion of its NIR through mar­ket pur­chase of for­eign ex­change. It, there­fore, has to re­duce the pro­por­tion that ac­cu­mu­lates with debt.

Says the IMF: “Ac­cord­ingly, the pro­gramme tar­gets will be set in terms of the stock of non­bor­rowed NIR. The cen­tral bank in­tends to en­sure that gross re­serves reach at least 100 per cent of the (re­serve ad­e­quacy) met­ric by the end of the pro­gramme pe­riod, with the share of non-bor­rowed re­serves in NIR in­creased from about 60 to nearly 80 per cent by the end of the pro­gramme.”

What­ever the tech­ni­cal driv­ers, or other im­pli­ca­tions of this move, we ap­pre­hend a num­ber of out­comes that are likely to be ben­e­fi­cial. The cen­tral bank is never driven merely by im­pulse to make pur­chases in the FX mar­ket. But be­ing forced to buy more with its own re­sources will in­sist on even greater tech­ni­cal sound­ness for its in­ter­ven­tions. Per­chance our as­sump­tions are right, there are two pos­si­ble vir­tu­ous con­se­quences.

One is the avail­abil­ity of more for­eign ex­change in the mar­ket for pri­vate play­ers, which would have a mod­er­at­ing in­flu­ence on rates. Se­cond, if there is less propen­sity for the cen­tral bank to vac­uum Ja­maican dol­lars from the mar­ket to build its NIR port­fo­lio, more cash will be avail­able to banks for lend­ing, at lower rates. This should help to drive in­vest­ment and eco­nomic growth.

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