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Boost required in domestic private sector credit

Published:Wednesday | May 27, 2015 | 12:00 AMMcPherse Thompson

Governor of the Bank of Jamaica (BOJ), Brian Wynter, said he remained concerned about the relatively low rate of expansion of private sector credit from the banking system, echoing sentiments expressed by co-chairman of the Economic Programme Oversight Committee (EPOC), Richard Byles.

He noted that the sustained economic expansion, which is among the objectives of Jamaica's programme with the International Monetary Fund (IMF), "that will generate growth, year after year, on a higher level than the roughly zero to one per cent that Jamaica has averaged over the years, ... will not happen without strong private sector credit growth."

Addressing the quarterly press briefing at the bank's downtown Kingston offices last week, the central bank governor added that "economic growth of that nature is driven by investment".

While foreign direct investment "is doing pretty well", Wynter said, "domestic credit expansion as a proxy for domestic investment needs to pick up".

In April, Byles, in releasing the 23rd communique of the private sector members of EPOC, the body monitoring Jamaica's programme with the IMF, said BOJ data show that, for the 11 months of the fiscal year to February 2015, credit to the private sector grew by 5.1 per cent.

"This is a slow rate of expansion and is less than the average growth of 9.5 per cent for the last five years," he said.

Wynter agreed that "that level up to February is too low."

Asked what was contributing to the slow rate of expansion, the BOJ governor attributed it, in part, to the economic conditions that existed in Jamaica before the government sealed the four-year extended fund facility agreement with the IMF in May 2013.

"The uncertainty, the high and rising level of public sector debt, all the issues when you look at the economic programme. We've said, well, 'debt is a problem and it has to be brought down, you say doing business in Jamaica is not friendly and it has to be improved'. A lot of things that you find in the programme are all aimed at that," Wynter said.

"That slow expansion, I think, is not driven by something new. It's driven by the delay in the reactions to reforms that fix problems," he added.

Wynter said they were in active discussions with the bankers. However, he pointed out that entrepreneurs, for example, have to make requests for loans and, usually, the banks require that they have viable projects and that can be an issue.

In addition, he said, interest rates that businesses can get from banks, as well as other terms of borrowing, may be higher than the borrowers need to move their projects and, hence, the solution is to lower interest rates.

"So you want interest rates to be as low as they can be, given the conditions in the economy. Our action in April lowered policy rates," he said, referring to the reduction in the rate offered on its benchmark 30-day certificate of deposit, from 5.75 per cent to 5.50 per cent.

"That should lower interest rates. If we want to sustainably lower interest rates, which we want to do, then we have to lower inflation," Wynter said.

The central bank governor said the fiscal authorities have made solid headway in putting the fiscal house in order and "this makes it easier for monetary policy to guide us to lower inflation and lower interest rates".

In this market economy, he continued, "private sector actors have to take us from here to where we want to go because real growth comes from private sector investment."

Wynter said expansion will largely come from increased exports of goods and services, and increased domestic production replacing imported items.

"The process of reform is not yet complete, but enough has already been done to build on so, as I said when we met in February, the stage has been set, the foundation is being laid and it is now time for the private sector to lead the way and build," he added.

Last week, Planning Institute of Jamaica director general, Colin Bullock, in reviewing the economic performance for January to March 2015, said the stock of loans and advances outstanding at commercial banks amounted to $382.2 billion, an increase of 5.6 per cent, compared with the end of March 2014. Of that amount, credit to the private sector accounted for $352.6 billion, representing an increase of 4.6 per cent, relative to the end of March 2014.