The Minister of Finance and the Public Service Audley Shaw has been on a public campaign to encourage banks to lower interest rates. On Wednesday, that campaign was again on in earnest, but this time, the minister were reminded that Jamaica’s high interest rates was not the sole problem.

The finance minister was speaking at the Dialogue for Development Seminar put on by the Planning Institute of Jamaica (PIOJ) at the Jamaica Pegasus Hotel. Distinguished scholars, business persons, diplomats and the media had gathered to discuss whether the domestic financial and capital markets can enable Jamaica’s transformation. Many floors down, but not far removed from the issue, was the enquiry into the collapse of the banking sector in the 1990s. At that enquiry, former Minister of Finance Dr Omar Davies was in the hot seat, and the current minister used the opportunity to add some more fire.

“At this moment, downstairs from here, an inquiry is being conducted into the collapse of the financial sector during the 1990s. The question might be asked whether the theme of this morning’s discussion is not in itself to be discussed within the context of what has been happening in the Jamaican economy, in the capital markets over the past two decades,” Shaw said.

“I have a question to pose as one of the corollaries of this theme that we discuss today and the question is whether, to have a vibrant capital market, we need to have persistently high interest rates.”

“But then, we have seen where high interest rates led. It led to the collapse of the financial sector in the 1990s. And you might say, ‘since you know that already Mr Shaw, why are you having an inquiry’,” Shaw quipped. “Not as simple as that, but we know that it played a great role. Because the truth is, we had the collapse of 40 financial institutions in the banking, insurance and near-bank sectors. Over 40 financial institutions closed.”

Minister Shaw squarely pointed at the “persistently high interest rates”, which he says, during the 1990s, averaged 53 per cent, as leading to the current situation where Jamaica is ‘limping along’ on “0.8 per cent growth per year for the past 15 years”.

“Fifty-three per cent was the average commercial lending rate in Jamaica. No other minister of finance should ever preside over a situation where for 10 years you average interest rates of 53 per cent,” he said.

“It is not only unfortunate but disingenuous of the former minister to seek to simplify and to justify his own position by suggesting that the problem was a few bankers,” Shaw said, in reference to Dr Davies’ suggestion that the bankers were responsible for the crisis.

“Cannot be. Whose policies is it that drove those interest rates? Which central bank was it that set the Repo rates, and which Government was it that set the Treasury Bill rates that caused interest rates to be so high? And I hope they are asking him those questions, even as I speak now,” Shaw said.

However, Dr Wesley Hughes, financial secretary in the Ministry of Finance, who spoke after Shaw left, pointed out without much fanfare, that the focus on interest rates may be limited in scope. Dr Hughes, who has served as Financial Secretary for both administrations, was described as ‘a-political’, by Pro Vice-Chancellor of the University of the West Indies, Professor Alvin Wint, who moderated the seminar.

Dr Hughes steered clear of commenting on the commission of enquiry. He, however, said that Jamaica’s growth in the past was not directly tied to interest rates.

“I’m sorry the minister isn’t here but he would be very disappointed to learn that growth in Jamaica has very little to do with domestic interest rates because the main period of growth in our economy was driven by external capital inflows,” Dr Hughes told the gathering.

“So if you took a very long period, across 30, 40, 50 years, you would see very little relationship between economic growth in Jamaica and domestic interest rates. And because domestic interest rates were not so decisive in the periods of growth, the capital and money markets tended to focus more on lending to trade,” he said. “Trading, activities, quick turnovers, they were not putting a lot of money into manufacturing and heavy investments.”

“What is more important is access to capital, access to credit, and therefore the domestic business sector and banking sector were geared towards a focus on that aspect of life in our country’s development. But that has had to change in the period when capital became scarce.”

Dr Hughes suggested that the focus be placed on creating a stable macroeconomic environment and stable social structure, which would include social cohesion, low levels of crime, violence, and the enforcement of contracts, as things that the state should provide to facilitate growth.