Give junior market tax relief to end-investors instead - IMF
The International Monetary Fund (IMF) has suggested that the Government incentivise end-investors to fund companies listing on the junior market of the Jamaica Stock Exchange (JSE) by giving the tax relief to those investors instead of the firms.
That is among its recommen-dations to improve financial inclusion and reduce the cost of credit, which it said are essential to promote economic growth.
The IMF, which undertook a cross-country growth diagnostic to evaluate the relative constraints to private-sector growth in Jamaica, and included in its June 2016 country report on Jamaica, said the country's corporate bond market is quite deep compared to the rest of Latin America and the Caribbean, but financial market access and efficiency remain low.
In that regard, the Fund said, expanding the pool of institutional investors, including moving towards a fully funded pension system and the introduction of prudential limits to retail repo activity, could increase demand for corporate instruments.
"While the tax incentive for listing in the junior stock market has just been restored - which by itself opens the potential for abuse, unless well circumscribed - a better practice (done in the UK and Canada) could be to incentivise the end-investor to fund these companies by giving the tax relief to the investor instead of the listing company," the report said.
An end-investor is described as an entity that acquires or relinquishes securities for its own account (for trading, investment, or any other purposes) or invests on behalf of others, including asset pools, such as managers of mutual funds, managers of insurance company policyholder assets, and pension fund managers.
In making other recommen-dations, the IMF noted that historically, the lack of fiscal responsibility and high sovereign borrowing needs pushed up the lending rate and contributed to the phenomenon of high spread.
The interest rate spread is further elevated by the high operating cost of the banking sector, which is likely the result of a combination of factors, including high financial sector taxation - corporate income tax and asset tax amounting to nearly 50 per cent of bank revenue and insufficient competition within the banking sector.
The report said private-sector lending has been constrained to existing customers largely due to underdeveloped risk models and credit bureaus to assess creditworthiness.
"Moreover, the pass-through of interest rate cuts to the real economy is low in Jamaica, reflecting weaknesses in the monetary transmission mecha-nism. This partly reflects the highly segmented interbank market, as well as weak financial intermediation, resulting from banks' historical focus on providing low-risk financing to the public sector, rather than lending to the private sector," it added.
The monetary transmission mechanism refers to the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance.
Expanding financial literacy through enhanced information disclosure requirements on banks' financial products and improved dispute resolution mechanisms would allow clients to compare products and force banks to compete on quality and price of services, the report said.
"Developing a well-functioning interbank market, with higher turnover and depth, will improve transmission," said the IMF report, noting that the recent issuance of a banking licence to Jamaica's largest building society will help to improve competition.
"Additional competition could encourage consumer mobility, and make lending rates more responsive to policy rates," it said.
Referring to finance to micro, small and medium-sized enterprises (MSME), the IMF report said high informality levels, estimated at 43 per cent of gross domestic product, hamper credit access.
To help lower inequality and informality, and improve financial inclusion, solutions for micro-insurance, agency banking services, regular saving products, and factoring and leasing should be considered to help rural and MSME sectors.
"The high collateral require-ments ... , combined with weaknesses in land titling limit credit to a small portion of asset owners. The ongoing expansion of the partial credit guarantee of the Development Bank of Jamaica is a useful step to improve MSME lending. Expanding the use and reach of e-payment infrastructure, including by its use by the government to distribute social security payments, would help lower financial services costs," the report said.