Thu | Feb 21, 2019

IMF: Reformed BOJ will be good for businesses, households

Published:Friday | November 16, 2018 | 12:00 AM
IMF Mission Chief to Jamaica, Dr Uma Ramakrishnan.
The Bank of Jamaica building in downtown Kingston

In the past five years, the Bank of Jamaica, BOJ, has spent US$2.5 billion defending the local currency.

That's according to Dr Uma Ramakrishnan, International Monetary Fund, IMF, mission chief to Jamaica, who sees the central bank's refined mission as overseer of price stability through inflation targeting as the right step, with widespread benefits for the economy.

Its monetary tools are now to be deployed in service of maintaining a targeted inflation rate, which is currently set at four to six per cent for this fiscal period ending March 2019.

Legislation that captures the reformed operations is currently making its way through the Jamaican legislature. Its enactment into law will result in the BOJ gaining autonomy to operate monetary policy independent of the fiscal authorities.

The BOJ still intervenes in the foreign exchange market, but now the rates paid for the cash it is trading, whether buying or selling, are based on bids from the market through the auction system operated by BOJ, branded as B-FXITT - which means the forex rate is more prone to market forces and two-way movements.

Previously, the central bank would dictate price of the forex it was trading with its dealers, which it would do when it wanted to nudge the exchange rate in a particular direction.

B-FXITT effectively reclassified Jamaica's foreign exchange system from a managed float - and sometimes a 'dirty' float, based on the depth of the interventions - to a more flexible exchange rate regime.

"Targeting the movement of the exchange rate has cost Jamaica US$2.5 billion in the last five years, from wanting to hold the exchange rate at some level," said Ramakrishnan in a video press conference beamed into the IMF Jamaica offices on the Kingston waterfront.

"By focusing on price stability, you are going to make it better for Jamaica to be able to deliver on these economic outcomes," she said. "At the end of the

day, a focus on price stability will help anchor inflation expectations, which is going to help businesses, consumers, persons on the street, with not having the large price volatility which was seen in the past," she said.

The IMF representative said data gathered by the BOJ has shown that the pass-through from forex movements to consumer prices was now lower, as retailers no longer expect a one-way movement of the Jamaican dollar and so no longer tend to hike prices when the local currency depreciates.

In its fourth review of Jamaica's standby programme, the IMF agency reported that between April and August, the BOJ made market-based foreign exchange purchases of US$111 million to build its non-borrowed reserves.

But the report, which was released last week, also noted that Jamaica's reserve coverage had sufficiently improved, and that the standby programme would now target a "modestly slower" build-up of non-borrowed reserves.

The IMF in that report also recommended closer monitoring of authorised dealers and cambios, especially around hedging activity, through new regulations, and the adoption of a market code of conduct.

The central bank is planning to introduce a foreign exchange trading platform that the IMF Jamaica office says will complement the B-FXITT mechanism.

As to the BOJ's transition to an autonomous central bank, Ramakrishna said the IMF sees that as an important element of its reform.

"It improves people's confidence that the central bank is going to deliver on the price stability mandate. It is very important, and we sincerely hope that the law is passed and Jamaica is able to the move to the full-fledged inflation-targeting framework," said the IMF mission chief, while noting that the data show that inflation-targeting countries are able to deliver higher growth.