Sunday 26 May, 2019

IMF tells central bank to reduce footprint in foreign exchange market

The International Monetary Fund (IMF) has recommended that the Bank of Jamaica (BOJ) continue to reduce its footprint in the foreign exchange market. 

The central bank is also being encouraged to limit foreign exchange sales to disorderly market conditions and assess the need for further reductions in its reserve requirements. 

“The BOJ’s recent reduction in the reserve requirement on Jamaican dollar deposits will help make policy accommodative but further rate cuts are likely to be needed,” the IMF said in its fifth review of Jamaica’s performance under its Stand-By Arrangement (SBA).

The bank has recently come under fire for the sharp decline in the value of the Jamaican dollar, with recent calls by the President of the Private Sector Organisation of Jamaica (PSOJ) Howard Mitchell, for the Jamaican dollar to be pegged against its United States counterpart.

Last week, the bank sold US$40 million to authorised dealers and large cambio operators by means of its Foreign Exchange Intervention and Trading Tool (B‐FXITT).

According to the BOJ, “This foreign exchange market intervention aims to address temporary demand and supply imbalances, as happens in a free market environment.”

But in its latest review, a summary of which was published yesterday, the IMF recommended that the BOJ carefully assess all incoming data in deciding further policy loosening.

“Further monetary easing is needed to restore inflation to the midpoint of the 4–6 per cent target range,” the IMF said in a press release.

Commenting on Jamaica’s recent performance under the standby arrangement, the IMF said strong implementation of the reform program continues. 

Consequently, Jamaica’s public debt is projected to fall below 100 per cent of GDP for the first time since FY2000/01— to 98.7 per cent of GDP in FY18/19.

Unemployment is near all-time lows, business confidence is high, and the economy is estimated to have expanded by 1.8 per cent in 2018, buoyed by mining, construction and agriculture. 

International reserves are estimated to be comfortable under a more flexible exchange rate, the IMF added.

All quantitative performance criteria at end-December 2018 were met, and the structural benchmark to table in Parliament amendments to BOJ Act was completed in October 2018.

The IMF said strengthening coordination between the BOJ and FSC and increasing capacity in both institutions is paramount to maintain financial sector stability. 

“Risk-based supervision of financial conglomerates requires the methodical collection, sharing, and monitoring of data and lending standards. Joint work among the regulators will be required to draft legislation for the special resolution regime and to address AML/CFT deficiencies,” the IMF added. 

It said an ongoing commitment to strengthen domestic institutions is needed as Jamaica prepares to exit from the fund financial arrangement later this year. 

The Jamaican authorities continue to view the SBA as precautionary and to use it as an insurance policy against unforeseen external economic shocks that could lead to a balance of payments need.

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