BoJ Endorses Government’s Economic Programme

KINGSTON — Despite challenges, the Jamaican economy is in the midst of a transition to enduring macroeconomic stability, low interest rates and sustained growth.

This was emphasized by the Governor of the Bank of Jamaica (BoJ), Brian Wynter, during a presentation to the recent economic forum staged by the Institute of Chartered Accountants of Jamaica (ICAJ).   

In a detailed account of Jamaica’s current economic strategy designed to “reverse the cycle of large fiscal deficits and unsustainable debt,” the Central Bank Governor stated that the Government embarked on a comprehensive economic transformation programme, beginning at the end of 2009 and supported by the International Monetary Fund (IMF) and other international development partners. 

“The objective of the programme is to secure long-term macroeconomic stability, thus creating an environment that is conducive to the low interest rates and long-term investment that are critical requirements for sustainable economic growth,” he maintained.

The main pillars of the transformation programme, he noted, are the elimination of the fiscal deficit over a four-year period and institutionalising prudent fiscal practices, “which will translate into sustained reductions in the debt to GDP ratio and enhance financial system stability while, creating an enabling business environment.

Mr. Wynter gave a positive assessment of the government’s economic programme. He said that, in the main, the Government has made a strong start to the programme, achieving most of the quantitative targets under the IMF Stand-By Agreement.

“This, which includes the extraordinary success of the voluntary Jamaica Debt Exchange (JDX) in February last year, contributed to a trend decline in market interest rates,” he observed. 

Another positive result, he stated, was the “substantially reduced” cost of capital needed to encourage increased long-term investment and growth.

“From the time that a programme was agreed with IMF Staff in December 2009, Bank of Jamaica’s 30-day signal rate has been reduced from 12.50 per cent then to 6.25 per cent now, a fall of 625 basis points.  The rate on market-determined 180-day Treasury Bills declined even more sharply by 1,024 basis points from 16.80 per cent in December 2009 to 6.56 per cent at the most recent auction, last month.  Interest rates in the private money market and on deposits and loans also fell,” Mr. Wynter explained. 

He said the decline in interest rates is also linked to the positive trends and outlook for inflation.

 “Annual inflation declined to 7.8 per cent in August from 12.6 per cent a year earlier and is expected to fall further during this fiscal year to settle within the target band of 6.0 per cent to 8.0 per cent.  For the medium-term, inflation is targeted to continue its fall towards the average inflation rate of our major trading partners,” he said.

He argued that, given the Bank’s commitment to price stability, “we have been gradually shifting our monetary policy framework towards an inflation targeting framework in order to firmly entrench the achievement of low and stable inflation, as the primary objective of monetary policy.”

Complementary to the Central Bank’s objective of stable prices, has been the Central Bank’s role of ensuring financial system stability. Notwithstanding the soundness of the Jamaican financial system, which was “well capitalized and liquid throughout the recent global financial crisis”, the Central Bank Governor believes there is a need to bolster the system against systemic risks. 

“The Government has, therefore, been preparing a series of legislative reforms aimed at enhancing the supervisory and regulatory framework of the financial system,” Mr. Wynter said.

These reforms are aimed at reducing systemic risks, strengthening the prudential framework of securities dealers, combating unregulated financial schemes and improving the regulatory framework for collective investment schemes, he stated. 

The changes also include amending the Bank of Jamaica Act, to give the Bank overall responsibility for financial stability. He noted that these reforms, together with the introduction of credit bureaus, will ensure that the financial system facilitates sustained economic growth.

While expressing optimism going forward, the Central Bank Governor cautioned that the current fragility in the global environment has “made the prospects for strong output growth in 2011 and 2012 more daunting”.  However, while continued fiscal consolidation may contribute to a moderation in domestic demand, the far-reaching economic reforms that have been set in progress, with exceptional levels of support from our multilateral partners, will provide a foundation for lasting growth."

He observed that already the economic programme is generating positive outcomes, which is being reflected in “an extended period of almost unprecedented stability in the macroeconomic environment and improving business confidence. In addition, economic growth was experienced for the first two quarters of 2011, reversing the trend decline over the previous 13 quarters."

With respect to inflation, Mr. Wynter said the Central Bank expects the rate to be lower in the second half of the fiscal year, given the projection for slower international commodity price increases, a relatively stable exchange rate and weak but improving domestic demand. 

He projected that further “deceleration in inflation” is expected going forward, resulting in interest rates following a “consistent path”. 

By Allan Brooks, JIS Senior Reporter