Econ­omy’s dol­lar­i­sa­tion still con­cerns IMF

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

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.

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