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News Release
23 September 2003
Derick Latibeaudiere
Macroeconomic Policy and Trends
It should by now be well appreciated that the primary objective of the Bank of Jamaica is price stability.
This is a necessary objective for the preservation of the integrity of contracts, the formulation of plans, the
promotion of international competitiveness and an improvement in the general living conditions of
citizens, all of which are rendered impossible in an inflationary environment. Historical data for Jamaica
attest to the extreme difficulties faced by agents when inflation was high and Jamaicans have all come to
realize and appreciate the need for maintaining low inflation.
There are a number of aggregates which we must monitor in order to achieve our goal. These include the
monetary base, the money supply and the exchange rate. However, our goal is realized not just by what
we do as a country but the realization of our goals is also a direct function of what happens on the
international market. In essence there are certain things over which we have no control. Recent
developments on the international arena pose two threats to the realization of our targets. Developments
on the international capital market have significantly affected the cost to Government of raising the foreign
financing it requires. The increasing trend in international oil prices also poses a threat to our inflation
target. This section of the presentation will therefore focus on the trends in our objective variable and
some of the aggregates which have had an impact on the inflation out-turn since the start of the fiscal
The All Jamaica Consumer Price Index (CPI) increased by 2.1 per cent for the first quarter of the 1999/00
fiscal year. This out-turn was 0.9 percentage points below the out-turn for the corresponding period last
year. For the calendar year to June, the rate of inflation was 1.8 per cent, comparing favourably with the
4.6 per cent recorded in the corresponding period of 1998. The twelve-month point to point rate at June
1999 was 5.0 per cent, compared to 10.1 per cent in June 1998.
Core inflation for the fiscal year to June 1999 was 0.9 per cent relative to the 1.1 percent increase
recorded for the corresponding period of 1998. The 12-month point-to-point core inflation rate improved
from 5.1 per cent at June 1998, to 2.7 per cent at June 1999, while the annual average rate improved by
1.5 percentage points relative to the corresponding month of 1998. Recall that core inflation is a measure
that isolates the impact of monetary expansion from that of supply shortages or taxation and other
administered price changes. In essence, core inflation for the first quarter was 1.2 percentage points
lower than headline inflation and speaks to the commitment of the BOJ in achieving its major objective.
Following the 1.2 per cent increase in the CPI during the month of June, the CPI again increased by 1.2
per cent in July to achieve a fiscal year to July out-turn of 3.2 per cent. This out-turn was 1.0 percentage
point below the same measure for the corresponding period of the previous fiscal year. The two
consecutive months of increase resulted primarily from the effect of the increase in oil prices on the
international market which affected all sub-indices. The extent to which oil prices continue to increase will
pose a challenge to the achievement of the 6 per cent inflation target. However, the BOJ is continuing its
effort to contain inflation as evidenced by the low figure recorded for core inflation. With close
management of the aggregates and if there are no other adverse shocks the 6 per cent target should still
be met.
Money and Credit
The strategy used by the Bank in achieving the inflation out-turn has been the containment of the
monetary base within strictly defined limits. For Q1 1999/00 base money declined by 4.1 per cent relative
to a 1.2 per cent increase for the corresponding period last year. The fiscal year out-turn to June resulted
mainly from the policy initiative of the BOJ to reduce the cash reserve ratio of the commercial banks in its
continued effort to facilitate the reduction of lending rates in the commercial banks. The reduction in the
base was facilitated by a $1.6 billion reduction in the Net Domestic Assets which was countered by a
US$9 million expansion in the NIR.
During July, news of Governments withdrawal of a bond issue in July generated pressures in the foreign
exchange market. The Bank responded by selling additional foreign exchange into the market. At the
same time, we were faced with extraordinarily heavy debt payments amounting to over US$160 million.
The net result was a drop in the NIR of US$103 million in that month. The NIR improved during August
and has continued to rise in September to US$536 million as at September 21. At this level, gross
reserves are more than enough to cover 12 weeks of imports.
While base money is well within the programmed target, the broad measure of money supply (M3) has
not conformed to expectations. For the first quarter of the fiscal year M3 grew by 8.4 per cent relative to
5.6 per cent for the corresponding period last year. The larger than programmed growth in M3 reflects the
consolidation of some merchant banks into the Union Bank group.
The credit aggregate has also not behaved as expected. Again, this is mainly due to the consolidation of
the Union Bank entities. While credit to the private sector has increased in some of the commercial
banks, the overall aggregate for the sector has declined. Again, as part of the continuing restructuring
process, a significant portion of the credit stock was transferred to FINSAC resulting in a fall in reported
private sector credit. We expect an increase in this aggregate as the banking system normalises.
Interest Rates
Nominal BOJ reverse repo interest rates have fallen during the review period from 20.75 per cent in
March to 18.85 per cent in June and further to 18.35 per cent in September. Treasury bill and other shortterm rates have generally followed suit with the Treasury Bill rate falling by 169 basis points for the
period. It should also be noted that during September the Treasury Bill rate fell below 20 per cent for the
first time in 2 years. In order to facilitate reductions in the lending rates of commercial banks the Bank Of
Jamaica also reduced the cash reserve ratio by a further 2 percentage points in May 1999 to 17% to
realise a total reduction of 8 percentage points in the ratio since July 1998. The cash reserve ratio is to be
further reduced by 1 percentage point for all institutions on October 1.
You will agree that the inflation out-turn for the last three years has significantly reduced expectations of
future price increases. This is clearly reflected in wage contracts and other price negotiations. The
interest rate, which is the price of credit, is no different in this regard. It is now very obvious that
expectations for interest rate increases have been dissipating. We have witnessed a reduction in
commercial banks’ average lending rates since the start of the fiscal year to the tune of 71 basis points.
The reduction in lending rates since the lowering of the ratio was effected, cannot be viewed as trivial.
Average lending rates were 44.17 per cent at the beginning of the process in July 1998 and had been
reduced to 37.89 percent as at end June, an average reduction of 6.28 percentage points.
Just recently, one commercial bank further reduced lending rates by 4 percentage points. Consumers
should note that we have fostered an environment conducive to competition and we can only encourage
you to shop around for all prices, including the price at which you borrow.
Real interest rates, that is, nominal rates adjusted for inflation have remained fairly steady over the past
six months as inflation has also been falling. Some real rates are, in fact, higher than they were a year
ago. The low rate of inflation which is now the norm means that old benchmarks for interest rates – such
as the often cited 20% for Treasury Bills – are now really quite high in real terms and leave a lot of room
for adjustment to be even equated with earlier notions of acceptable returns. For example, in June 1997
the nominal 6-month Treasury Bill rate was 17.9 per cent corresponding to a real rate of 8.7 per cent. In
June 1999, the nominal rate on a similar security was 20.2 per cent and represented a real rate of 15.2%.
Financial institutions should be careful not to be taken by surprise as interest rates continue downwards
as some appear to have been by the fall in inflation over the last three years.
Exchange Rate
The exchange rate depreciated marginally in Q1 from a daily average selling rate of J$38.28 at the
beginning of the fiscal year to J$38.97 at the end of June. The pressures which were experienced in the
foreign exchange market since June resulted in the daily average selling exchange rate depreciating to a
further 39.92 as at September 17, 1999.
During the latter period the foreign exchange market experienced some degree of instability resulting in
increased sales to augment the supply to the market. The Central Bank remains resolute in its stance to
maintain stability in the exchange rate and will continue to intervene in the market whenever the need
arises. The demand pressures which existed in the foreign exchange market up to August have abated.
Balance of Payments
For April to June 1999, the current account deficit widened marginally to US$53.6MN compared to the
US$51.0 observed during April to June last year. There was some deterioration in the balance on
merchandise trade but this was mostly offset somewhat by the improvements in the services balance,
income and current transfers accounts.
Both exports and imports declined for the period with exports declining by $51.5MN relative to a fall of
$42.1MN in imports. Export performance was influenced by the falloff in bauxite/alumina earnings as well
as a US13 million drop in free zone exports. The bulk of the decline reflected adverse price movements
for alumina as well as a 5% decline in volumes shipped. The data on imports show that the reductions
were mainly in raw materials (US$46.5 mn) and capital goods (US$9 mn).
On the other hand , the services account recorded a surplus of US$123.6MN, representing an increase of
US$2.2MN relative to the April to June period of 1998. The main difference from last year was a US$5MN
increase in private transfers. Capital flows remained strong and were more than enough to cover the
deficit on current account and allow for an increase of US$9.1 million in the NIR.
Overall, the macroeconomic indicators suggest the need for continued close management of the
aggregates. We cannot at this time allow for any inflation spirals caused by sharp depreciation in the
currency or simply allowing the monetary aggregates to expand beyond programme. In addition,
adjustments towards our targets must take account of international events outside of our control. The
Bank of Jamaica remains resolute in the commitment it has given the nation with regard to providing a
stable macroeconomic environment and is proud of the renewed credibility which the bank has developed
over the years with regard to meeting its targets.
Current Economic Issues
The current wave of national reflection and introspection has included discussion of the wisdom of our
development strategy since independence and the appropriateness of current macroeconomic policy.
Thankfully, these issues can be debated with some objectivity since we rely more on published data and
common experience. In any event, as far as the discussion of current economic policy goes, the most
important thing is coming to a common understanding of what the goals are and the plan to get us there.
The role of the BOJ in the process is to provide a climate of monetary and financial stability as a
precondition for real development and growth.
Bank of Jamaica has acknowledged, and indeed advocated, that there is a need to break with the past.
That past included recurring bouts of inflation, sharp changes in the exchange rate, an approach to
monetary policy that accommodated fiscal expansion, chronic balance of payments deficits and
international oversight. In the process, the vast majority of Jamaicans suffered real reductions in their
living standards which would have been worse but for the relief that foreign borrowing and private
remittances gave. That situation was not sustainable. External debt would continue to grow, the
conditions attached to new credit would become harsher while inflation would continue to ravage the lives
of people in Jamaica. A necessary condition for restoring order and predictability to the economy was the
establishment of monetary and price stability.
The stability observed over the past three years is clear for all to see. I have said on many occasions that
our goal is to reduce inflation to the level of our trading partners. The issue is partly about maintaining
competitiveness in global markets but it is more about enhancing and protecting the quality of life in
Jamaica by reducing uncertainty and the cost of being wrong about prices in a market economy.
Annual inflation has declined from the heady days of triple digit inflation to just 5% over the past 12
months. Some have argued that inflation came down too quickly – that it happened before the new reality
could be incorporated into wage agreements and before businesses and banks could adjust their
operations to reflect it. Hence, they argue, some wage increases which became effective during the past
three years may have been too high in a context where the business could not pass on the additional
cost. To the extent that a rise in real wages and interest costs seriously affected the cash flows of
businesses, it has been used to explain and justify defaults on loan obligations.
When the rate of inflation is built into a business plan or sales projections or property values, deviations
from those expectations are costly. This is true whether inflation is higher than expected or lower than
expected. Once the commitment was made to reduce and maintain inflation at single digit levels,
tremendous effort was made to minimize the fallout by seeking to forge a social pact where these cost
would be explicitly recognized and shared. The public sector has in fact kept to its word in pursuing the
macroeconomic policies that it had committed to in those discussions. To the extent that contracts,
agreements, credit arrangements and business plans ignore those commitments, it may reflect the
relatively low level of credibility that had come to be attached to public pronouncements. Thankfully, there
is increasing evidence that companies and financial institutions now rely more heavily on the policy
commitment to low inflation and exchange rate stability in the formulation of their corporate strategies.
Having made the adjustment, it is disconcerting to hear reputable analysts suggesting that our inflation
targets should now be relaxed and the clock turned back a little. Jamaica has paid dearly for inflation and
those losses will take many years to regain. In the meantime, very few of us who live here can gain from
more inflation but all of us stand to gain from having little or no inflation.
As far as the management of inflation and the financial system is concerned, the BOJ has been
reorganized along modern lines and is fully prepared to carry out its mandate. I am especially proud of
the transparency with which we operate and the internal and external focus on accountability.
The other aspect of monetary stability which often comes up for discussion is the exchange rate – the
appropriateness of the current rate, the determination of the rate and discomfort with its flexibility. Two
separate issues arise here:
- the maintenance of a flexible system versus a return to a fixed rate; and
the ability of BOJ to maintain order in a free market for foreign exchange.
A fixed exchange rate system relies heavily on the credibility of the rate and the ability of the system to
support it – both in terms of fiscal policy and reserves. Once that credibility is lost or there is sufficient
doubt about its life span, it can be a very expensive system to maintain. We have all seen what
speculation can do to even strong economies when their currencies come under attack. The point that I
want to make, however, is that setting an exchange rate at the wrong level or failing to maintain the peg
for long periods is more destabilizing than managing a flexible rate. Fixed rates sometimes need to be
adjusted as objective circumstances change. Once they are adjusted they are seen to be adjustable – i.e
no longer fixed. Expectations change, speculation takes root and the system is besieged until it breaks
down. Remember, we have had fixed rates in Jamaica. The issue is one of credibility and establishing the
factors that support it.
A fixed rate can be maintained if the country has sufficient reserves to ride out the severe shocks which
inevitably affect small countries; or if the population is prepared to undergo swings in real income and
activity when shocks arise. Starting from where we are now, the reality is that rebuilding credibility takes
time and even if we were to adopt a fixed rate at some time we do not now have the flexibility in fiscal
policy nor the level of reserves that could comfortably support a long term peg. To move quickly to that
point as suggested by the Money Bills proposed earlier this year, the country would need to accept sharp
adjustment in the short term or forego other public goods in order to acquire foreign exchange for reserve
Quite apart from that, there is good reason to maintain a flexible, managed exchange rate. When
fundamental shifts in demand or supply take place, the exchange rate can adjust without it becoming a
political decision. It can adjust orderly with limited dislocation because there are sufficient reserves to
support seasonal and speculative ebbs and flows. And importantly, external competitiveness can be
maintained by small adjustments without setting off the spiral of inflation and devaluation that follows
adjustments to fixed rates. Bank of Jamaica is comfortable with the evolving structure of the network of
dealers. We continue to take steps to strengthen the integrity and the flow of information in the system
and to be transparent in our own interaction with the market.
There are real challenges which the country must overcome if it is to move beyond stabilization. Putting
our monetary and financial polices in order has been a first priority. Building institutions that are effective
in carrying out their responsibilities must be another. How we design these is a matter for all of us to
participate in – from administrative reform to road safety. Public discussion of these should be
encouraged with a focus on the future rather than the past.
Past inflation has been costly to the society, and not only in terms of undermining the living standards of
the average employee. It has eroded the means, the status, and ultimately the honour and integrity of a
broad stratum of the society. In the course of this process, the effectiveness and responsiveness of
critical institutions was also damaged.
Now that inflation has been tamed, we need to look carefully at the institutional support that is required to
accelerate and sustain a process of economic expansion. The motivation and direction of our human and
capital resources into competitive pursuits requires the kind of change in short term expectations, training,
application, production standards, interpersonal relations and marketing that is not spontaneous. The
process of creating or rejuvenating a sense of order, of integrity and of equity is assisted by a stable
macroeconomic environment but needs to be extended to include a strengthening our institutional
framework as a matter of priority.