THE Governor of the Bank of Jamaica (BOJ) Brian Wynter took office a little over a year ago during testing times for the Jamaican economy. The currency had depreciated considerably, inflation was expected to hit the 15 per cent mark, the rating agencies downgraded Jamaica and declared that the country was on the verge of defaulting, the government announced a number of tax hikes that were most unpalatable and Jamaica returned to an arrangement with the IMF and other multilateral agencies.

It would have tested the mettle of any Governor, and would prove a baptism of fire for Wynter.

But as they say, “cometh the hour, cometh the man”, and Wynter presided over a number of fortunate events that enabled monetary policy to be a fillip to fiscal policy in 2010.

Inflation

With the global crisis still taking hold and the Jamaican economy in contraction mode, the BOJ announced that inflation would be in the 13.3 per cent range for 2010. This initially was greeted as too optimistic and that it would likely come in at above 15 per cent. The credibility of the BOJ was therefore questioned, but as Wynter said at a special press briefing held at the Bank of Jamaica’s headquarters at Nethersole Place in downtown Kingston last week, “The outcome for the fiscal year was 13.3 per cent and this was pretty much in the range that we indicated. Mind you, that was for the fiscal year ended March 2010. So what are we looking at for this fiscal year? The programmed range is between 7.5 to 9.5 per cent. We now have data for the December quarter and fiscal year to December; the inflation rate is already 7.3 per cent. We will end the year well within out targeted range of 7.5 to 9.5 per cent. The estimate for this quarter is between 1 to 2 per cent. We are planning for inflation to be in the 7 per cent range over the next couple of fiscal years.”

Over the years, the government has not factored in exogenous shocks into its financial planning, and invariably a natural disaster befalls Jamaica or it is subjected to the vagaries of rising commodities prices, which sees its oil price range well off target. This means that a close eye will have to be kept on inflation and in this respect Jamaica’s fate is not entirely in its own hands.

Interest rates

For decades now, interest rates have been the bugbear of the Jamaican economy, crippling businesses and proving to be the bane of the country’s ever-growing debt stock. This time last year, interest rates were 10.5 per cent, today the 30-day rate is at 7.5 per cent. Few would believe that could be achievable. That 7.5 per cent is in the context of where the market rates (T-bills, auctions and external US bonds) have all demonstrated adjustments in yields downwards greater than 300 basis points.

“The policy stance has influenced the downward movement, but it has also been validated by the market acceptance and reaction to it. This is part of what I would describe as the normalisation of Jamaica’s interest rate-inflation exchange rate nexus, and that process is not yet complete.

The normalisation of these variables in my opinion is resulting from a changing view of the sovereign risk of Jamaica. The very things we keep talking about -unsustainable fiscal and debt dynamics, macro-economic indicators, factors that the IMF Programme was designed to tackle, we are now seeing the benefits of those adjustments, but it is a process and we cannot be satisfied to stop where we are now. There are more gains to be made by continuing with these policies,” said Wynter.

Foreign Reserves

Today, by any measure the foreign reserves are in a healthy condition, so much so that some pundits are talking about using the reserves to honour US$400-million eurobond payouts due in May this year. However, that may well be a moot point as the Government has indicated that it may very well return to the international capital markets to finance repayments of this bond which was issued in May 2001 at a coupon of 11.75 per cent. Following on the heels of this eurobond is another seven-year US$200-million eurobond at 11 per cent and is due to mature next year.

In January last year, the Net International Reserves (NIR) stood at US$1.1 billion. Today, it has swelled to US$2.1 billion.

Here again, the Governor’s insight is most instructive. ” In the context of the Jamaica Debt Exchange (JDX) we had planned for the likelihood of significant capital flight and the IMF also made a contingency adjustment for that eventuality. However that did not happen, instead, confidence returned driven by the success of the JDX which in fact surprised a lot of people. There was consensus around what had to be tackled and that, coupled with our policies, led people to hang around rather than sending their capital elsewhere.”

As 2010 sauntered into the spring months, the events of Tivoli Gardens and the Dudus affair threatened to unhinge all the gains made and throw the country into an economic and crime tailspin. Strangely enough, during these turbulent times there was a stronger demand for Jamaican dollars, with the local currency appreciating significantly so much so that action had to be taken to abate it.

What we are seeing today is an exchange rate of US$85.79, a more palatable figure than what pertained this time last year.

A cause for concern at the end of 2009 was the number of bonds purchased by the BOJ from the Government of Jamaica. The Government found itself unable to sell bonds to finance its activities in the month of December. The BOJ’s willingness to assist the Government meant that inflationary pressures would possibly be created.

“Fortunately we were able to fully adjust for all of the extensions of credit to the Government that did occur in that period. The short-term monies were paid, but the long-term bonds we bought in December were sold to the market at a premium by April. What we sold were basically the JDX bonds that we had swapped those December bonds into and the market appreciated. I was surprised that we were able to make that adjustment so quickly. It may have taken nine months, but it was actually reached in about three months. People have had easy, steady access to the market with no reports of shortage.”

Post-JDX conditions

The JDX has been hailed as an unqualified success the world over, with other countries looking to emulate the model. But it should never be forgotten how potentially catastrophic it could have been for the local financial sector. In designing the JDX, all parties expressed concern about the likely dangers of the systemic impact that it posed. In the end, finance houses reacted positively and so the impact on the financial system was limited more to the direct impact of having less income, which is what many people are focusing upon now.

It would have proved rather worrisome if the administration had to deal with the impact of having confidence in the damaged financial system. And people taking their money out of the local banks thereby forcing them to go under.

Speaking on the post-JDX conditions, Wynter said: “What I can say is that the financial sector conditions post-JDX are stable and continue to be so. However, the sector is grappling with the rising bad debt that is coming out of the underlying economic conditions, where economic activity has been in decline.”

In the IMF’s third review, the Fund has accepted Jamaica’s decision to reduce the size of the Financial Systems Stability Fund because the country has a stable financial sector and so relying heavily on that fund is now not required. On the Balance of Payments side, Wynter said that the country has ample resources to deal with an unexpected crisis.

“The bottom line is, the position we are in today is significantly advanced relative to where we were in January last year. The IMF Programme has been very successful so far, but having said that there are still challenges ahead. We have weathered the storm but we have to be prepared to tackle the next wave,” said the Governor of the Bank of Jamaica.