Minister of Finance Audley Shaw last week attended the IMF/World Bank Annual Meetings where he provided reviews on the performance of the Jamaican economy and gave accounts of the damage done to the island by Tropical Storm Nicole.

The meetings with Jamaica’s multilateral partners were in Shaw’s view productive. In a tough five-day schedule he managed to pack in meetings with the Deputy Managing Director of the IMF for Latin America and the Caribbean region Naoyuki Shinohara; Vice President of the World Bank for Latin America and the Caribbean Pamela Cox; President of the Inter-American Development Bank, Luis Alberto Moreno; Caribbean and Commonwealth Heads of State, including St Lucia’s Stephenson King; the Deputy Assistant Secretary of the US Treasury, Nancy Lee; Vice President of the International FinanceCorporation (IFC) Jyrki Koskelo, and JP Morgan and Citigroup executives.

Shaw acquitted himself well on the international stage and with Jamaica passing both the March and June tests of its Standby Agreement with the IMF for US$1.3 billion, he remains confident that the country will pass the September test. The IMF team is due to be on the island from November 9-16 to carry out the formal review of the third quarter test and see whether Jamaica has met both qualitative and quantitative targets before making its formal recommendation to the board of directors.The banking sector Tropical Storm Nicole

The IMF made an upfront disbursement of US$640 million to Jamaica. After passing the first test, the country got another US$100 million from the IMF and subsequently smaller sums accordingly. The IMF deal has allowed Jamaica to generate funding from other multilateral institutions. It received US$200 million from the World Bank at 0.63 per cent and US$430 million from the IDB at interest rates of between 1.23 and 1.51 per cent per year.

At the recently concluded Annual Meetings, the IMF was most impressed with the success of the Jamaica Debt Exchange (JDX) and held it up as a model to perhaps be emulated. It drew attention to the courage demonstrated by all stakeholders to accept the proposal for a voluntary debt exchange. The multilateral agency regarded it as a homegrown initiative well executed and not seen anywhere in the world at this time.

“I don’t want to be bragging about it because things are cyclical, as you know. What is important is that we must preserve the gains and build upon them. So far what have those gains been? We now have sustainability. The government now has breathing room and the necessary fiscal space to deal with our obligations on a timely basis. It also sends a signal that we are able to cope with our challenges. The fiscal implication has been significant because the savings for this fiscal year when netted out comes to in excess of US$350 million. Then we see the exchange rate continues to be not only stable but is revaluing. It is now at J$86 to US$1 and in fact last Friday came down to J$85 to US$1. At the last auction,the Treasury Bill rate came to 7.75 per cent on the three-month instrument. Equally the Bank of Jamaica’s open-market operations are recording levels of sub 8 per cent which is telling the story that this is a 33-year low in government and central bank rates. We now have to look to the commercial banks dropping their rates on a more progressive basis in terms of bringing down the spreads between government and central bank rates and the rates that are being offered by the commercial banking institutions. Then there is inflation coming from double digits to a figure in the 6 to 7 per cent range though Tropical Storm Nicole may well impact that, but we shall see. Our Net International Reserves (NIR) are now close to a healthy US$2 billion,” said the Minister of Finance. He was speaking exclusively with Caribbean Business Report from the St Gregory Hotel in Washington DC.

The banking sector has come in for some considerable flak lately due to its reluctance to reduce interest rates and its ramping up a plethora of fees and charges as it attempts to make up for lost income incurred as a result of the JDX. The communications departments of many of these institutions must shoulder much of the blame here because they have demonstrated an inability to shield their respective finance houses from the tide of opprobrium. They should clearly and succinctly explain their institutions’ rationale for their operations and proffer reasons for the increase in fees and charges and why they have to be applied.

At it stands many Jamaican banks are reporting Return on Equity (ROE) as high as 22 per cent, with fees and charges going up by as high as an unpalatable 400 per cent. All at the same time when the Bank of Jamaica is progressively reducing its rates. There has been a public outcry to which the banks have turned a deaf ear. What does Audley Shaw make of it all?

“Well, the institutions say that they have to watch their balance sheets and endeavour to reduce rates on a more gradual basis. They are suggesting that the pace of it can’t be too fast because it will create imbalances that could destabalise the financial sector.

My own view is that it is a time when the commercial banking sector should become more efficient. I think that they have to realise that the future of commercial banking means that they must go back to core business. They must now work with customers who have good ideas. Sit down and work with them on their business plans. There are always market niches that can be exploited. We need to see more creativity from the banking sector. It is a time for venture capital and some of these banks need to set up a venture capital arm. The government is prepared to incentivise more capital venture enterprises in the country, we want to encourage that.

“But equally as the survey showed last week, the banks may be looking to recoup losses from the JDX and are heading towards additional charges as a way of getting back that money. I must say here that I am very concerned about that,” declared Shaw.

He is suggesting that instead of having flat charges across the board for all customers,the banks should target charges at those using particular bank services and therefore building up additional costs. In other words, target the charges to the direct cost that are related according to the specific service that is provided.

Preliminary estimates indicate that it will cost the Government just over J$11.7 billion to repair damage across a number of sectors caused by the devastating rains associated with Tropical Storm Nicole. The lion’s share of the cost is for the restoration of the road network, including drainage systems, river protection and infrastructure works which will require J$10.6 billion.

Addressing a JP Morgan seminar as part of his IMF/World Bank Annual Meetings trip, Shaw said: “Had it not been for the setback of Tropical Storm Nicole, the economy for the first time since 2008 was set to grow in the December and March quarters of this fiscal year.”

The question remains, what will the impact be on the Standby Agreement with the IMF, and secondly, how does Jamaica put itself in a position to respond to the road repair requirements and helping to restore agriculture as quickly as possible?

And here the Minister of Finance wanted to make himself very clear . “There was a suggestion that I was coming to Washington to seek to borrow new money to deal with the problems caused by Nicole. That was not so. The truth is we have enough money programmed in the pipeline including existing resources. What was discussed with the IMF is not so much money to borrow but rather to look for fiscal space within which to expend the funds that are already in the pipeline. For example, we had programmed for this fiscal year the expenditure of US$60 million from the Chinese EXIM Bank Jamaica Development Programme. As long as we have the capacity to do it we are prepared to extend that programme from the US$60 million to let’s say US$100 million, depending on the capacity to fund it. Of course there are other programmes like the World Bank and IDB that are set aside for certain purposes to come on stream next year. We will now consider using some of those funds.

“I don’t have an exact figure just yet, but I would imagine that somewhere in the region of US$70 to US$80 million is what I would like to set aside to help us to begin to cope with these extraordinary damages. We would therefore be looking at an additional incremental sum of an additional J$6 to J$7 billion this fiscal year. The idea is to spread the cost of Nicole over this and next fiscal year. We are looking to see how the World Bank can assist us with this crisis. There is a Development Policy Loan, a second loan which we expect to come from them this year which will be for US$200 million. Also we expect another US$200 million from the IDB in December which should go some way in helping us recover from this devastating tropical storm. President Moreno has always been very supportive of Jamaica and has always been a very good friend to us.”

Tax Reform

Shaw has put on the table a number of proposed tax reform measures, and he discussed some of those with Nancy Lee of the US Treasury Department during his whirlwind trip to Washington. He wants to examine the issue of micro financing as well as the central treasury management system. Here the US Treasury department has shown interest in sharing with Jamaica its own experience with central treasury management, and Citigroup has come up with a unique proposal that is being considered. The IFC may well provide some funding for micro financing opportunities. There is a proposal on the table for the IFC to help with financing on another leg of Highway 2000. This will be the leg that goes from Sandy Bay to Williamsfield. The IFC also has a special equity fund of US$900 million set aside for the Caribbean region and Shaw will be looking to access that fund which will target private sector/ public sector partnerships as well as IFC and private sector partnerships.

Going for growth

Shaw believes that the bilateral meetings have been critical to advancing opportunities for Jamaica because the country has to recognise that it is very important that it begins to focus on growth.

“We have to go from stability to growth and the only way we are going to get growth is to get significant levels of investment in Jamaica. This cannot be placed on just the public sector. We have a number of projects lined up like the Falmouth cruise ship terminal and the revitalisation of downtown Kingston.

“I had a meeting with the Managing Director of the IMF, Dominique Strauss-Khan, and proposed that Jamaica is a good example of co-operation as seen with the Standby Agreement. Over the 27-month period of the Standby Agreement, Jamaica will get a level of support that is unprecedented. The total support is in the order of US$2.4 billion representing 20 per cent of our GDP. I asked the Managing Director on behalf of the Caribbean region that now that we have some semblance of stability, we now want a partnership for growth. Here we need to deal collectively with crime, more comprehensive solutions to natural disasters, answers to our energy problems, and investment promotion that targets new areas of opportunities. Here the capacity of the multilaterals can be expanded.

I have to thank in a special way Ambassador Audrey Marks who has been remarkable in helping and working with us in Washington.”

Watching the Minister of Finance at work in Washington last week, one was struck by his work ethic and his ability to be forthright yet amiable. He came well prepared for each meeting and sold the country extremely well. He is intent on establishing a modicum of stability that will set Jamaica on the path to growth and that remains his primary concern. Shaw is currently on a capital markets road show which sees him in four European cities in five days where he is seeking funds at no more than 7 per cent. He returns to Jamaica tomorrow.Click here for Part II