Jamaican economy seen as moving closer to dollarisation
An increasing trend for Jamaicans to make deposits in United States dollars in commercial banks as well as non-bank financial institutions is a sign of the dollarisation of the local economy, according to co-chair of the Economic Programme Oversight Committee (EPOC), Richard Byles.
Noting that the Bank of Jamaica (BOJ) publishes the Jamaican dollar and the foreign currency deposits of commercial banks, Byles said, "What you see is a growing tendency for the foreign-currency deposits to equalise the local currency."
In 2013, he said, 40 per cent of the deposits were in foreign currency and now it is 45 per cent. "So what is happening is that more and more people are saving in US dollars, and I don't have to explain why people are doing that," said Byles at the EPOC press briefing earlier this month.
"At the same time, when you look at loans being made through the commercial banks foreign-currency loans are flat in that they are not growing while Jamaican dollar loans are growing. Pretty much all the growth that is happening in the loan portfolio is happening on the Jamaican dollar side," said the EPOC co-chair, who is also president and chief executive officer of Sagicor Group Jamaica, a financial conglomerate which owns Jamaica's third-largest commercial bank.
"It's two sides of the same coin," he said, adding that Jamaicans want to save in US dollars but reluctant to borrow in the foreign currency because of exchange rate movements "a little conundrum we as a country have to sort out at some point," he added.
Senior Deputy Governor, Research and Economic Programming Division and Financial Stability at the BOJ, John Robinson, said the trend in foreign deposits is something they have noticed and have looked at with some concern, but he understood the reason and the motivation behind it.
"I hope and expect that the fact that the dollar is now fairly valued and has a much stronger likelihood of moving in both directions that the motivation to hold savings in foreign currency will decline," he told Wednesday Business.
"If the policies are successful and well founded, then there will be less incentive to hold your savings in a foreign currency," Robinson said.
The central banker said people's experience over the last decade would lead them to diversify and hold at least a part of their savings in US dollars.
"There's a point beyond which economists and other observers describe an economy as being essentially dollarised when prices become quoted in dollars, contracts become denominated in dollars, there's a point beyond which you would say the economy is dollarised," Robinson said.
Asked the BOJ's view, Robinson said "we are not making up a unique definition", noting that the threshold internationally accepted is that if bank liabilities or the money supply is more than a given per cent in foreign currency then the economy can be described as either mildly or centrally dollarised.
Robinson said he did not readily have information about the proportion of foreign currency, liabilities that would make an economy considered dollarised.
But: "There comes a point when, if the proportion of the money supply passes a threshold, then you can say that the decisions that people make become more and more driven by the policies or the interest rates that govern foreign currency and less and less on the domestic monetary policy," he said.
The Jamaican dollar is now trading near $126.40 to the US dollar.
The reasoning behind the apparent reluctance to borrow in foreign currency is that, "when you borrow in US and the exchange rate depreciates you owe more from a Jamaican dollar point of view," said Byles.
"If you borrow in Jamaican you are paying back that said amount in Jamaican. If you borrow in US you are going to pay back more in Jamaican dollar terms," he added.
Byles said EPOC received the information about the level of deposits during the committee's last meeting, and that "it's data that I'm going to be watching going forward to see how that trend moves in terms of what amounts to the dollarisation of the economy".
Economist Dr Andre Haughton, in an article published in The Gleaner, has noted that unofficial dollarisation, or asset substitution, occurs where residents of a country hold a significant portion of their financial assets bank deposits, stocks and bonds in foreign currency instead of local currency.
Unofficial or financial dollarisation is normally a characteristic of developing countries like Jamaica. In these economies, assets denominated in US dollars will maintain value even if the exchange rate increases and domestic currency loses value, he said.
Byles said he has not seen the data, but has been told that in the non-bank sector the extent of US dollars to Jamaican dollars is even greater, saying percentage-wise "it's more like 60 US to 40 Jamaican".
He said the trend in foreign deposits is something that needs to be examined and considered in terms of the implications going forward.