Editorial | NIR, FX market and growth
While the auction component of the central bank's proposed new foreign-exchange system is the subject of substantial scrutiny and some apprehension, another pertinent and, on the face it, potentially positive element of its future engagement has engaged significant attention. It has to do with how the Bank of Jamaica (BOJ) will go about the business of building up its net international reserves (NIR).
The NIR is one of those acronyms that have, over the past two decades, become seared into the consciousness of most Jamaicans, even those of us without any clear understanding of what it is, or its specific value. People have a sense that it is associated with the country's seemingly perpetual agreements with the International Monetary Fund (IMF) and that the more you have of it, the better. Indeed, prime ministers, finance ministers, as well as central bank governors, are in the habit of trumpeting the level of our NIR as a measure of economic stability.
And, fundamentally, they are right. For, having a fair bit of foreign currency, net of shorter-term foreign obligations, in the central bank, means that the country is able, in a pinch, to pay for the goods and services it buys from abroad, or that the central bank can sell foreign currency into the FX market to ease pressure on the domestic one.
Enough to cover imports
The Bank of Jamaica now has around US$2.5 billion worth of NIR, which is enough to cover the country's imports for nearly half a year, if there are no more inflows. That is a far cry from the days in the 1970s, '80s and early '90s when there was none, reaching, at one point, as low as minus US$800 million. Which brings us to how the NIR targets will be monitored under the Government's new three-year standby arrangement with the IMF. By the end of the agreement, Jamaica is to have more than US$3 billion of net reserves.
In the past, a fair bit of the reserves was raised by the central bank issuing debt for foreign exchange. In fact, of the US$2.5 billion in NIR the BOJ had on hand at the time of the prior IMF pact, 40 per cent, or around US$1 billion, represented acquisitions from domestic banks, through the issuance of seven-year, US-dollar-denominated certificates of deposit. But under the new programme, the BOJ is to acquire more of its NIR through market purchase of foreign exchange, while reducing the proportion that accumulates with debt.
Says the IMF: "Accordingly, the programme targets will be set in terms of the stock of non-borrowed NIR. The central bank intends to ensure that gross reserves reach at least 100 per cent of the (reserve adequacy) metric by the end of the programme period, with the share of non-borrowed reserves in NIR increased from about 60 to nearly 80 per cent by the end of the programme."
Whatever the technical drivers, or other implications of this move, we apprehend a number of outcomes that are likely to be beneficial. The central bank is never driven merely by impulse to make purchases in the FX market. But being forced to buy more with its own resources will insist on even greater technical soundness for its interventions. Perchance our assumptions are right; there are two possible virtuous consequences.
One is the availability of more foreign exchange in the market for private players, which would have a moderating influence on rates. Second, if there is less propensity for the central bank to vacuum Jamaican dollars from the market to build its NIR portfolio, more cash will be available to banks for lending, at lower rates. This should help to drive investment and economic growth.