Thu | Dec 8, 2016

NIR much misunderstood

Published:Friday | February 6, 2015 | 12:00 AM

THE EDITOR, Sir:

The net international reserves (NIR) are defined as the difference between Jamaica's foreign-exchange assets and its foreign-exchange liabilities. Any amount that is borrowed by government, whether from the multilateral financial institutions or on the international capital markets, will result in an increase of the country's foreign-exchange assets.

But this borrowing will also increase the country's foreign-exchange liabilities by the same amount as the increase in the foreign-exchange assets. Consequently, such transactions will not increase or change the NIR.

A misunderstanding of this fact can lead to dubious consequences. Sometime ago, the minister of finance borrowed, on behalf of government, US$800 million on the capital market at the relatively favourable rate of 7.5 per cent. Five hundred million US dollars of this amount was to be used to refinance higher-cost debt that had been incurred previously. Three hundred million US dollars was, however, earmarked for increasing the NIR and providing some resources for stabilising the movement of the exchange rate.

As indicated, however, the NIR cannot be increased by borrowing. If this was understood at the time, it could have prevented the minister from undertaking the costly and unnecessary transaction of borrowing US$300 million at 7.5 per cent to hold in a financial institution at a rate that was probably no higher than three per cent.

Some analysts seem to accept the minister's explanation that the funds were used to increase the NIR. This reflects the misunderstanding that may still exist concerning this matter.

E.G. SHAW

Economist

edmundgordon35@yahoo.com