Remove BOJ’s ability to lend to Gov’t

THE GOVERNMENT and its central bank have, in recent years, been disciplined in their management of the country’s fiscal affairs and its monetary policy. Under scrutiny from the International Monetary Fund (IMF), the administration hasn’t given in to any itch to turn up the spending spigot. If it has been asked, the Bank of Jamaica (BOJ) has resisted efforts of politicians to corral credit, including via advances from the BOJ.

The IMF’s rigid oversight of the past six years is only one part of the equation. The discipline has come, too, from a deepening appreciation of institutional best practices and the hard evidence of the harm caused by bad economic policies: low growth, high debt, too few jobs and underdevelopment. Some of it also has to do with the strengthening, in law, the governance of arrangements that lessened the ability for arbitrary action by public officials, including government ministers.

It is against this backdrop that we reiterate our endorsement of the plan, an obligation under the IMF agreement, to legislatively transform the BOJ into an independent central bank, whose core mandate will be the pursuit of low inflation. For while the BOJ has operated with relative independence in recent years that, mostly, is an outgrowth of convention, rather than radical legislative reform. Should it wish to use them, the Government, through the finance minister, retains powerful levers of authority over the bank.

As Finance Minister Dr Nigel Clarke observed in his recent speech on the Government’s reform plan: “A central bank under the control or influence of the political directorate can also be pressured into helping finance the Government, relieving it from the consequences of bad fiscal choices and policy, while imposing significant adverse consequences on the country over the medium term.”

PUBLIC INTEREST

In that regard, equally important as excising the power – residing at Section 41 of the BOJ Act – of the minister to give the central bank directions he deems to be “in the public interest”, must be the elimination of his ability to have the central government squish money to the treasury.

Barbados, now in the depths of a fiscal crisis, provides a compelling case study of the dangers of such a clause. At the start of the Great Recession a decade ago, Barbados debt to GDP was within the mid-80 per cent range. By 2017, that debt was 101 per cent of GDP, and 137 per cent when the central government’s obligation to the National Insurance Scheme was added.

In 2009, a year into the global meltdown, the government owed the Barbados central bank around BDS$400 million. It had spiralled to more than BDS$2 billion, or over US$1 billion, in 2017. The growth was by way of short-term advances and the purchase of treasury bills. In essence, the Freundel Stuart administration was able to avoid tougher fiscal choices by tapping the central and the NIS for loans.

Section 36 of the Jamaica’s central bank law appears to place greater limits on the short-term advances – 30 per cent of projected revenues – the BOJ can make to the Government than is the case with its Barbadian counterpart. However, based on his power at Section 41, and the stipulations Section 37, Dr Clarke could well have the BOJ purchase up to another 40 per cent of the administration’s proposed expenditure for a given fiscal year from any primary offer from the Government or any of its agencies.

Our view is that any acquisition of Government’s debt must be purely on the basis of the bank’s open-market operations, in a fully transparent manner as part of its inflation-targeting strategy. It must be so declared in law.