NIR Remains Relatively Strong – BOJ Governor

Governor of the Bank of Jamaica (BoJ), Derick Latibeaudiere, has said that the Net International Reserves (NIR) remained “relatively strong”, despite a drop in the level, due primarily to sales in the foreign exchange market to ease demand pressure and stem depreciation in the value of the dollar.
The reserves currently stand at US$1.7 billion and according to Mr. Latibeaudiere “continue to provide some cushion and insurance for the future,” primarily against factors such as the impact of the global economic downturn.
Speaking at the BoJ’s quarterly press briefing at its downtown Kingston headquarters on Wednesday (Feb. 18), Mr. Latibeaudiere said that having learnt from previous challenges to the Jamaican economy, efforts have been made to build a sound banking system and a responsive monetary policy framework, and “we have also been ensuring that we maintain a reasonable level of reserves for insurance.”
“There was therefore some cushioning, as we entered this period of global financial and economic downturn. The banking reforms of earlier years ensured that Jamaican banks were adequately capitalised, and were subject to strict regulatory requirements and oversight. Consequently, our exposure to the troubled global financial institutions has, so far, been minimal. In addition, our monetary framework enabled the Bank of Jamaica to take decisive action to maintain stability in the financial markets,” he informed.
Mr. Latibeaudiere pointed out that while the value of the Jamaican dollar depreciated by 12.2 per cent in 2008, it remained below the level recorded by some traditionally stable economies such as Brazil, Iceland, Mexico, Russia, and South Africa, which experienced exchange rate depreciations ranging between 20 per cent and 43 per cent.
Inflation rates in those countries also spiked upwards of 18 per cent and public sector debt to Gross Domestic Product (GDP) has increased to as much as 108.9 per cent.
“Our reserves have remained relatively strong in spite of the Bank’s intervention in the foreign exchange market, and inflation is now on a downward trend. Indeed, the International Monetary Fund (IMF), in its last report on Jamaica, commended the Bank for being proactive in its policy stance, as it recognised that exceptional developments require exceptional policy action,” the Governor said.
He noted that consequent on intensification of the crisis in the global financial markets in December, some local institutions were called on, at short notice, to repay loans that had been extended by international banks. This, he explained, followed increased tightening of global credit conditions, and investors’ decision to further reduce their exposure to risks, particularly emerging market debt. Global stock market indices, he added, also declined, and central banks in major developed countries reduced their interest rates. Heightened aversion to risks has, however, kept credit conditions tight, he further said.
“Consequently, interest rates in the private retail markets have not fallen in tandem with the central banks’ signal rates. These developments, along with unfavourable reports from rating agencies, had a negative impact on Jamaica’s sovereign bonds,” the Governor pointed out.
As a result, he said, demand pressures in the local foreign exchange market intensified, despite sales by the BoJ, adding that this was sharply reflected by the 9.7 per cent depreciation in the value of the dollar in the December quarter. These developments, Mr. Latibeaudiere explained, were largely influenced by the loss of credit facilities, the pay out of margin-call liabilities, and a slow down in tourism and remittance inflows. Additionally, that commercial importers were affected by the credit facilities loss, which heightened the demand for cash to repay outstanding lines, and pay for current imports during the “period of seasonably high demand.”
Consequently, the Governor said the BoJ implemented several measures in the December quarter to ease the demand pressures, and maintain stability within the financial system.
These were: intervention sales of US$432.1 million in the foreign exchange market; establishment of a special foreign currency loan facility in October, for security dealers and deposit-taking institutions with foreign currency needs to repay margin arrangements in Government of Jamaica global bonds; establishment of a foreign currency intermediation facility in November to open the flow of credit in the system, and extension of same to include deposits and loans in local currency.
Other measures include increasing interest rates across the spectrum of open market instruments in October and December; offering a special 15-day Certificate of Deposit to primary dealers and commercial banks in November; and increasing the statutory cash reserves requirement from 11 per cent to 13 per cent in December.
Mr. Latibeaudiere lamented that, despite these measures, depreciation of the exchange rate continued, with demand remaining strong while supply was below seasonal levels.
“The Bank has, therefore, implemented a temporary facility to satisfy the demand of public sector entities. By providing foreign exchange on a timely basis for payments such as oil imports, this measure should help to reduce some of the pressure in the market,” the Governor informed.
He added that the monetary policy continues to be tight, with incremental increases totalling three percentage points in the cash reserve requirement, being effected in January and February.
“We are going to have to be very careful about how we manage our external accounts. That’s why all of the monetary reinforcements that we have put in place, we can’t just start dismantling them, because any further demand for foreign exchange that is encouraged by bad policy, is simply going to mean a deterioration in the reserves,” Mr. Latibeaudiere stressed.