Densil Williams | Institutional reform and Jamaica’s economic future
Jamaica’s economic performance over the last 58 years has made for uncomfortable reading, especially as it relates to economic growth. Since 1962, we have grown at two per cent or more on only about 21 occasions. The major part of our economic life has been characterised by contraction or anaemic growth in the range of 0.1 – 1 per cent. Bad internal macro-economic policies, and in some cases, external interference in our local economic affairs, have led to the chequered performance over the years.
However, since 2013, with the strong partnership of the local private sector, trade unions, public-sector workers, and the international financial community, led by the International Monetary Fund (IMF), significant discipline has been brought to our economic policy environment and a hard stake put into the ground that no more will Jamaica manage its economic affairs in a cavalier manner. The leadership of Prime Minister Portia Simpson Miller and her Minister of Finance, Dr Peter Phillips, took some of the most far-reaching decisions and implemented some of the most austere reforms in our economic sector to lay the foundation for robust and sustained economic growth for the next generation. While that proverbial heavy lifting was done in the 2013-2016 period to set up the game for the economic benefits that Jamaica is now enjoying despite the pandemic, there were still missing elements to entrench those gains.
It is, therefore, not surprising that Prime Minister Andrew Holness and his Finance Minister, Dr Nigel Clarke, have moved to strengthen the country’s institutional framework to ensure that the hard-earned gains from the reforms are not reversed but entrenched and guarded from the capricious nature of the political cycle. To this end, during November-December of 2020, the Jamaican Parliament passed two far-reaching pieces of legislations to establish a) an Independent Central Bank; and b) an Independent Fiscal Commission. Both institutional arrangements are critical to ensuring that the stability in the macroeconomy, which Jamaica has been enjoying consistently since 2013, is not short-lived, but can continue into the foreseeable future irrespective of political administration.
For macroeconomic stability manifested in low and stable inflation, exchange-rate stability, strong external balance, low fiscal deficit, low interest rates, among others, is a key foundation for driving economic growth and generating jobs in any economy. Economic instability leads to unintended costs for doing business, and as such, becomes a disincentive for investors to invest in the productive sector of the economy and, therefore, hinders robust and sustained growth and job creation. Jamaica cannot afford macro-instability at this point in its development, especially now when unemployment has climbed to over 12 percent since the onset of the pandemic.
While both institutional arrangements are critical to entrenching stability in the macroeconomy, the independence of the central bank is a big development that needs further analyses.
Why an independent central bank?
The role of a central bank is to manage the monetary policy arm of the Government. It focuses on issues such as interest rates, exchange rate, inflation rate, and supervision of the financial sector. The bank normally takes direction on monetary policy from the political bureaucracy, and the governor generally has full control for implementing same. However, history has shown that when this happens, the line between the independence of monetary policy and the wishes of the political directorate is blurred.
The most troublesome of the control of the central bank by the political directorate is when it engages in fiscal dominance. Fiscal dominance simply refers to a situation where the minister of finance writes to the central bank governor and instructs him/her to draw a cheque to finance the operations of the Government even when there is no money in the consolidated fund. In other words, the Government borrows heavily from the central bank and builds up high levels of debt and runs high levels of fiscal deficits. Fiscal dominance is the major driver of instability in the macroeconomy. Jamaica’s experience in this regard is quite telling. Of the 58 years since Independence, Jamaica ran fiscal deficits for 36 of those years. Our anaemic growth performance of this reckless behaviour is quite evident.
No place for fiscal dominance
Under an independent central bank, the Government will not be able to borrow from the central bank unless there is an extraordinary event such as a national emergency. It, therefore, means that the Government will have to run a very credible fiscal operation. Otherwise, it will run out of money and will not be able to service basic items within the country. No government will want to face such a scenario, so credibility in the management of the fiscal affairs of the country will be a major objective on the fiscal side. This will be important to entrench stability in the macroeconomy.
The BOJ Amendment Act will allow for temporary borrowing in case of national emergencies but not before ministerial order after affirmation from the Parliament. This is where I have a slight issue with the act. For a government can declare something as a national emergency and then use its parliamentary majority to gain an affirmative resolution then instructs the minister to send a ministerial order to have the temporary borrowing go-ahead. We want to prevent this possibility. So a better alternative is to have the Monetary Policy Committee (MPC) be that body that provides the affirmative resolution on national emergencies before the ministerial order is made and not the Parliament. The MPC, which is expected to have independent persons, with two being appointed by the governor general, would lend stronger credibility to this process of removing fiscal dominance.
Another critical area that must be examined for true independence of the bank is the chairmanship of the MPC. It should be chaired by one of the members appointed by the governor general and not the governor. For with a five-member committee and three of those are ex-officio (within the bank) and the governor as chair, you may always have voting decisions going the route of what the bank desires, so the independent minds may not be in a position to influence monetary policy in the pedantic sense of independence. This area needs further thought.
In Jamaica’s context, an independent central bank is still important although the major problem that this solution was to address - high inflation - no longer exists. However, the more severe issue of fiscal dominance needs to be addressed, and this solution goes a far way in doing same. The independent central bank is a strong inhibitor against this practice. Jamaica will be better off with disciplined fiscal management coupled with strong monetary management in order to ensure entrenchment of macroeconomic stability. Institutional strengthening such as the Independent Central Bank, Independent Fiscal Commission, Fiscal Responsibility Laws, and other structural reforms in taxation, and public-sector modernisation are all critical to for building a robust and modern economy.
- Densil Williams is professor of international business at The University of the West Indies. Send feedback to firstname.lastname@example.org.