Implementation of the Central Treasury Management System (CTMS), whereby the Government now pulls its deposits from banks into a single account at the Bank of Jamaica (BOJ), has contributed to tight Jamaican dollar liquidity and restrained banks from extending private-sector credit as robust as expected.
With the Government being forced to contain borrowing under its agreement with the International Monetary Fund (IMF), it was anticipated that there would be a boost in domestic private-sector credit.
However, co-chairman of the Economic Programme Oversight Committee (EPOC), Richard Byles, said that "because there is a liquidity crunch, the financial sector is being very cautious about lending because they don't know whether people are going to come for their deposits and they have to be a position to be able to pay those deposits."
He added that "in a way, the (IMF) programme ... kind of hit a little pothole, in the sense that we should be seeing banks rushing to give credit. Instead, they are reluctant because the liquidity is tight and they are just making sure they can cover all withdrawals."
Byles, who is also president and chief executive officer of Sagicor Life Jamaica, was addressing a media briefing last week on the latest communiqué issued by the non-private sector members of EPOC, the body monitoring Jamaica's loan agreement with the IMF.
He said the liquidity problem has been going on for a while, but one of the contributing factors is the CTMS "where all the government institutions are now sweeping their deposits into the Bank of Jamaica".
According to Byles, "That can be quite traumatic because there are institutions with billions of (dollars of) government deposits." Explaining that financial institutions could be called on to pay millions or billions of dollars on maturing securities, he said that "in events like that, the banking sector is naturally cautious and instead of lending the money they are keeping the cash."
Negatives vs positives
He added that "this process we are going through have positive and negative effects. And one of the negative effects is some people have lost jobs ... exchange rates have moved and created inflation. And if you don't negate those negative things with positives - like businesses can get credit cheaper, can expand, can employ people - we find that the programme just runs aground."
The Government, in its request for the IMF loan under the Extended Fund Facility, said that a CTMS, with a single treasury account at the BOJ, has been tested and was fully operational for the ministries of finance, education, transport and works, and the Accountant General's Department as of end-March 2013.
It said CTMS for the remaining ministries, departments and agencies will be operational by March 2014.
According to information posted on the website of the Ministry of Finance and Planning, the current operations of government, in respect to how it manages money, were no longer viable.
The system, it said, was characterised by numerous bank accounts, lack of access to those accounts and idle balances sitting in those accounts while Government borrows to meet budgetary needs.
Not knowing the quantum of money available, or having access to the total amounts resulted in an inefficient cash-management programme, leading to unnecessary borrowing which burdens the Budget, and reduces Government's ability to spend for more productive purposes, the ministry said.
"The CTMS is a major change in fiscal management that is aimed at supporting improved cash and fiscal management," the ministry added.
The main objective of the CTMS is to allow the Government, through the Accountant General's Department, to centralise its cash-management function.
The BOJ will play a critical role as custodian of a treasury single account holding government cash, as well as the use of the national payment system to make "just-in-time" payment to suppliers/payees. The interim CTMS will also involve the consolidation of revenue systems with commercial banks continuing to facilitate the daily sweeping of funds into the single account at the BOJ.