Friday 10 July, 2020

Jamaican economy may contract significantly – Byles

File photo of Bank of Jamaica Governor Richard Byles (left). Also pictured is deputy governor John Robinson.

File photo of Bank of Jamaica Governor Richard Byles (left). Also pictured is deputy governor John Robinson.

Bank of Jamaica (BOJ) Governor Richard Byles says the country’s economic outlook is characterised by significant uncertainty relating to the spread of the coronavirus (COVID-19).

“If the domestic and external responses to the pandemic have to be sustained for most of the next fiscal year, the Jamaican economy will contract significantly,” Byles stated.

He said the economy will shrink "somewhere a little more than three per cent” in the next fiscal year, April 2020 to March 2021.

In this context, the BOJ said it expects inflation to be at the lower end of the four to six per cent range over the fiscal year as well as the ensuing eight quarters.

Speaking to journalists via video conference on Thursday, Byles noted that growth would depend on the depth and duration of the economic impact of the virus.

In the near term, Jamaicans should expect some upward price pressures due to supply chain disruptions and weather-related increases in agricultural prices.

However, these will be offset by a sharp decline in oil prices and weaker consumer spending power, given the expected decline in economic activity.

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Nonetheless, the BOJ’s monetary policy measures, along with the government’s fiscal stimulus, are aimed at mitigating the impact of this pandemic on the economy and supporting a speedy recovery once the crisis has passed.

"The bank stands ready to deploy additional measures, including a reduction of the policy rate and the cash reserves requirement, to ensure the continued smooth flow of liquidity to all participants in the Jamaican financial system and to maintain orderly conditions within the foreign exchange market," Byles said.

BOJ maintains an accommodative monetary policy stance

The BOJ on Thursday announced its decision to maintain its highly accommodative monetary policy stance by holding the policy rate unchanged at 0.50 per cent per annum.

The policy rate is the rate offered to deposit-taking institutions on overnight placements with the central bank.

The BOJ has also placed a halt on investment transactions that require the purchase of foreign exchange.

“As Jamaica tailors its own response to the escalating COVID-19 pandemic, I think it is important to emphasize that Jamaica’s financial system remains sound, well capitalised and its current holdings of Jamaica Dollar liquid balances remain adequate,” Byles stated.

The BOJ has already taken several pre-emptive measures to assure financial institutions and the public of adequate access to both Jamaica Dollar and foreign currency liquidity during this challenging period.

There are a total of eight such measures, three in respect of foreign currency and five to do with Jamaica dollar liquidity.

In relation to foreign currency liquidity:

  • BOJ will continue to support the foreign exchange needs of businesses in the real sector through direct sales to authorised dealers and cambios, as needed.
  • With effect from March 19, the BOJ has temporarily increased the limit on the foreign currency net open positions (FXNOP) of authorised dealers by 5 percentage points. This effectively raises the limit on the positions of these institutions (either long or short) to 25 per cent of regulatory capital and allows authorised dealers to provide more foreign currency to their clients.
  •  BOJ stands ready to expand the volume of foreign currency swap arrangements with authorised dealers, thereby providing them with more FX liquidity. At 24 March 2020, the stock of outstanding swap contracts totalled US$86 million.

In relation to Jamaica Dollar liquidity, the BOJ said it will facilitate expanded access through the following channels:

  •  The central bank has commenced a bond-buying programme where it will purchase GOJ securities on the secondary market from financial institutions which hold these instruments. The bank is also prepared to early redeem BOJ securities. At 25 March 2020, the nominal value of GOJ instruments purchased by BOJ and the early encashment of BOJ instruments amounted to J$26.3 billion.
  • With effect from March 18, the BOJ removed the limit on the amounts that deposit-taking institutions (DTIs) can borrow overnight without being charged a penal rate. Liquidity support to DTIs will, therefore, be made available on-demand at the prevailing rate of 2.5 per cent, limited only by collateral.
  • Effective Thursday, March 26, the BOJ has re-introduced a longer-term lending facility, whereby Jamaica Dollar liquidity will be made available to deposit-taking institutions for periods of up to six months. This enhances the ability of these institutions to secure their liquidity needs over a longer horizon.
  • The BOJ will re-activate an intermediation facility where the bank will use its balance sheet to facilitate transactions between holders of liquid balances and others who require liquidity if needed. This facility should support a more even distribution of liquidity in the financial system in a context where institutions who could not access interbank loans because of the limits placed on them by lenders, can now do so indirectly with the central bank standing in the middle of the transaction.
  • The central bank has also taken steps to re-activate the Emergency Liquidity Facility that was established in 2015 upon application by any financial institution. As at March 25, the total value of liquidity assistance provided by the bank to the market via its short-term lending facilities and its asset purchase programme amounted to $57 billion.


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