Economy’s dollarisation still concerns IMF

PART OF the reforms to be undertaken by the Government under the standby agreement with the International Monetary Fund (IMF) is to put in place measures to address the high and rising dollarisation of the economy, according to the organisation’s November 2016 country report on Jamaica.

Noting that medium-term priorities are required to strengthen financial sector resilience, the report suggested that among the measures to be used are a mix of macroeconomic and macro-prudential policies, pointing to a staff report on dollarisation that was addressed in the Fund’s 13th review under the extended fund facility (EFF).

According to the standby agreement, the successor programme to the EFF, addressing dollarisation will help build resilience to foreignexchange shocks and reinforce the interest rate channel of monetary policy.

In the staff report under the EFF, the IMF had said that deposit dollarisation has increased in the financial system and public balance sheets.

It said the 2013 crisis – when domestic bonds were restructured, reserves declined, and the nominal exchange rate depreciated – weakened public trust in Jamaica dollar deposits and bonds and raised the attractiveness of foreign exchange-denominated assets.

By June 2016, it said, with more than 45 per cent of deposits denominated in US dollars, Jamaica’s deposit dollarisation is one of the highest in the region, accompanied by dollarisation of investment portfolios.

Likewise, the staff report said, 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.

MONETARY POLICY

According to the standby agreement, strengthening the monetary transmission mechanism is an integral part of the authorities’ reform efforts. The ability of monetary policy to influence the economy, however, critically depends on how quickly and completely the Bank of Jamaica (BOJ) policy rate is transmitted to the lending and deposit rates.

“Staff analysis points to weaknesses in Jamaica’s monetary transmission mechanism, with the pass-through from changes to the policy rate to bank lending rate being particularly low, especially following the two debt restructurings,” it said.

The report said there could be multiple explanations for the weak monetary transmission in Jamaica. These include fiscal dominance, high and rising dollarisation of public and private balance sheets, limited competition in the banking sector, uneven excess liquidity among banks, and underdeveloped interbank foreign exchange and money market.

“The pursuit of multiple, often conflicting monetary policy objectives, in part due to gaps in BOJ governance and autonomy, hurts credibility and mutes the policy signal. Finally, the bond market is yet to fully recover from the two debt restructurings, and secondary market trading remains shallow, resulting in poor price discovery,” it added.

The report said a range of reforms under the standby agreement will be tasked with improving the monetary policy transmission mechanism by addressing those challenges.

It identified the main pillars of the reforms as liquidity management, policy signalling, bond market liquidity and macro-financial stability, the latter including a reduction in dollarisation.

“To lessen the risks of dollarisation of our financial system, we intend to equalise the reserve requirements for foreign currency and domestic currency bank deposits by December 2016 and conduct a cost-benefit analysis on introducing stricter reserve requirements for foreign currency deposits,” said the report the Government submitted to the IMF.