IMF: Crowding in not matched by credit creation
Published:Thursday | November 22, 2018 | 12:00 AM
More than a year ago, the Bank of Jamaica, BOJ, reported that the Government's crowding the private sector out of the capital markets was at an end, but the International Monetary Fund, IMF, is now saying that it is not matched by a crowding-in of private-sector credit creation.
The fund said the phasing out of fiscal dominance and the move to historically low interest rates have opened space for financial institutions to fund private-sector activity. However, financial intermediaries have been slow to reshape their business models towards lending to the real economy.
Fiscal dominance is an economic condition that occurs when a country has a large government debt and deficit such that monetary policy targets keeping the government from bankruptcy as opposed to economic targets such as inflation, growth and employment.
Jamaica Bankers Association President David Noel has not responded to requests for comment on whether the matter was being addressed by bankers and the group's response to the IMF's observations.
In February 2017, BOJ Governor Brian Wynter, at his quarterly briefing on monetary policy, said the financial data spanning several quarters pointed to a crowding-in effect, in which the financing needs of companies were being met as the State's appetite for debt waned.
"Years, and decades even, of feeding an insatiable appetite for borrowing by the government and its agencies diverted the flow of financial resources from the private sector and made investment harder and more costly, and this impeded growth," Wynter said.
However, the IMF, in its November 2018 country report on Jamaica, said necessary supply-side reforms continue to constrain private-sector crowding-in, particularly in accessing and pricing of credit.
Concurrently, capital market intermediation has been largely dominated by liabilities issued by financial entities, the IMF said.
"There is a need to better incentivise the system of financial intermediation to fund private investment and consumption, underpinned by a strong risk-management framework," the IMF added.
It recommended that steps in this direction should include further developing the primary and secondary debt markets, including with a liquid benchmark government yield curve, better market infras-tructure, and accompanying technical capacity.
It also suggested that with IMF technical assistance, the authorities should broaden the role of securities dealers as market makers for corporate debt and equity instruments to increase the liquidity of those instruments.
The IMF also recommended increasing access to small and medium enterprises by setting up microinsurance, utilising the existing land titling and legal frameworks to securitise future receivables to expand financial inclusion and intermediation.
It said the BOJ should continue the monitoring of trends from the credit reporting system, together with the broadening of acceptable collateral and addressing existing informational gaps, which it said can help increase benefits from the reporting system.
According to the IMF, economic conditions are ripe for the private sector to step up productive investment, noting that since 2013, the sustained effort of consecutive adminis-trations has delivered sound macroeconomic fundamentals and economic stability.
"The current economic environment is unprecedented for driving private sector-led growth. Yet, private lending and investment to support the productive economy has lagged behind. In addition, stronger growth will require policy-makers to remove obstacles to private investment in the real economy, including by supporting skills development, lowering red tape, and increasing policy predic-tability," said the Fund.
The report also noted that despite the favourable macroeconomic environment anchored by the entrenched fiscal discipline, private sector investment remains lukewarm, due in part to the inability of small and medium-sized firms to access affordable credit.
In response, the Government said that to address those concerns, it is "considering reducing the liquid assets requirement of banks and exploring ways to further develop the local capital market. Other measures being contemplated include a rationalisation of financial sector taxes in a manner that reduces the burden on the sector while protecting the GOJ's overall revenue stream".
The Fund's report also noted that private investment has not fully taken advantage of the unprecedented opportunities presented by macroeconomic stability and strong fundamentals, pointing out that structural impediments need to be quickly addressed to foster capital formation.