Maintaining a fit-for-purpose FX market

UNLESS IT is being done on the quiet, we expect the Financial Services Commission (FSC) to join the central bank in announcing a mutual understanding with the institutions it regulates to suspend the declaration and distribution of dividends to help protect their capital.

It is an initiative whose motive this newspaper understands and, broadly, has sympathy towards. We, however, believe that the matter should be openly and frankly discussed by the authorities to help the public determine whether the best policy tool was applied, including if the measure captured all that it should have. It would also be useful to know why the Bank of Jamaica (BOJ) went the route of moral suasion, rather than merely asserting its regulatory powers.

This newspaper has been a strong advocate of the liberalised currency market Jamaica has had for nearly three decades since the island removed exchange controls in 1992. We are, however, cognisant of the stress the system has been under in recent weeks as global economies ground to a halt because of actions by governments to slow the spread of the coronavirus responsible for COVID-19.

The collateral damage for Jamaica is that its vital tourism industry has imploded, with the likely loss of up to three-quarters of the more than US$4 billion it was projected to earn this year. Even before the pandemic, the bauxite-alumina industry was in a funk. COVID-19 has worsened it, while, at the same time, hacking deeply into the island’s second-largest source of foreign exchange – remittances from Jamaicans abroad. Last year, overseas Jamaicans sent home around US$2.3 billion.

At no time in Jamaica’s modern economic history has a fallout been so broad and deep so swiftly.

Against this background, the International Monetary Fund (IMF) expects the economy to decline by 5.6 per cent in 2020. Some economists say the slump could be greater.

In this context, and worse if the global decline is graver than predicted, the central bank’s US$3.2 billion in reserves – even if buttressed by some of the expected US$500 million in support from the IMF – could dwindle quickly. The recent slippage of the value of the Jamaican dollar against its US counterpart is a sign of what could happen.

The authorities’ unease over the exchange rate, therefore, would have been deepened by planned profit distributions by some of the country’s largest and most profitable companies: its banking/financial services conglomerates, some which have majority or controlling ownerships overseas. In other words, the bulk of these profits would have gone abroad, including to countries where the parent corporations are contending with distressed economies.

In this regard, the authorities’ apprehension over the balance of payments would probably be nearly on par with their concern for the capital adequacy and liquidity of banking institutions, although the central bank says these remain above “current regulatory requirements and established prudential norms”. That notwithstanding, the BOJ felt it prudent that banks keep their cash in the institutions, rather than pay it out to shareholders.

REGULATORY POWERS

In this respect, Richard Byles, the central bank governor, might have acted under his regulatory powers, at Section 27(2) of the Bank of Jamaica Act, “to ensure overall stability of the financial system”, and 27 (3) that allows him “to issue directions to individuals systems or participants”.

In skirting these provisions, on this instance, and enticing the banks to voluntary compliance, Mr Byles may have been shrewd to the possibility of the BOJ being accused by market liberals of back-door exchange controls, a policy for which there is still support in some quarters.

The conundrum faced by the authorities, however, is that the issue is larger than what is immediately apparent from the BOJ’s action in the financial sector. It isn’t only banks and other financial companies operating in Jamaica who may wish to repatriate dividends. There are a variety of other firms with foreign principals, who, up to now, have no restrictions. Some people may consider this an unfair advantage or a loophole.

At the same time, in periods of limited foreigncurrency inflows, the Government as well as many private sector entities have legitimate – and, in some instances, inescapable – foreign-currency obligations. Mr Byles obviously understood this, which, at least in part, is implicit in the central bank’s action.

The issue which is crying out for discussion and answer, therefore, is how the competing demands will be managed in the context of a liberalised FX market, where nobody wants chaos and, this newspaper hopes, can, over the long run, retain confidence.