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BOJ still bankrolling Gov't - But not for the long haul, says governor

Published:Friday | February 12, 2010 | 12:00 AM

DESPITE ADVANCING more than $36 billion to the Government since November, and its continued gobbling up of GOJ securities shunned by private investors, the Bank of Jamaica (BOJ) was this week contending that it would soon be reining in such support.

"The central bank will not be a source of funding for the Govern-ment going forward," central bank Governor Brian Wynter declared this week.

Speaking at his first press briefing on the economy at the BOJ offices in Kingston on Wednesday, the new central bank boss stopped short of saying what would trigger the pullback.

But possible factors include the Government's imminent recovery from its current cash crunch, given the approval of a US$1.27-billion loan from the International Monetary Fund (IMF); projected receipt of some US$1.1 billion in the first three months this year from the fund and other multilaterals; an anticipated return of private appetite for government securities; and legal limits on the BOJ's bankrolling of Government.

But even as Wynter was signalling the BOJ's intention to curb the state's deficit financing in the medium to long term, with the BOJ citing the possible inflationary effect, the bank's Quarterly Monetary Policy Report for October to December 2009 made it clear that the central bank intended to continue propping up the Government through bond purchases.

"It is possible that the bank will make further purchases in the March 2010 quarter to ensure the smooth functioning of the Government until the bond market normalises," the report, released this week, said.

The central bank head echoed this sentiment when he declared thatif the expected market supportfor government bonds does not materialise, the bank would have to intervene "to ensure stability until the JDX (Jamaica Debt Exchange)" settles.

The BOJ has explained its net financing of $20.6 billion to Government in the last quarter, "in a context of reduced investor appetite for Government of Jamaica debt resulting from the heightened uncertainty in the domestic market surrounding the terms of the IMF agreement and the associated debt-management initiatives."

In addition to temporary cash advances of $5.1 billion in Novem-ber, of which $2.5 billion was repaid in December and the remaining $2.6 billion was converted to securities, the BOJ purchased a total of $18 billion of securities on December 15 and took up $13 billion of the Ministry of Finance's 60-day Treasury bond offer on January 13.

Wynter gave no indication how much, if any, of the latest one-month and six-month Treasury bonds floated by the finance ministry this week the central bank would be taking up.

The bank, in its report, said that while it "realises the potential impact of this deficit financing on inflation," it expected the liquidity injections to be temporary.

The BOJ Act allows the central bank to grant loans to the Government up to 30 per cent of total annual revenue, provided that these are repaid within three months of the end of the fiscal year in which such funds are advanced, and permits the bank to purchase or otherwise acquire securities issued or guaranteed by the Government of a nominal value of up to 40 per cent of the estimated expenditure of the Government in that financial year.

Meanwhile, the BOJ this week also officially announced inflation of 2.8 per cent for the December quarter and annual point-to-point inflation at December of 10.2 per cent, an appreciable reduction on the 16.8 per cent recorded at December 2008.

Currency depreciation in the quarter was contained at 0.58 per cent, supported by net direct sales of US$115 million by the bank.

Net international reserves fell US$204 million from September 2009 level to US$1.7 billion at December, representing an estimated 13.4 weeks of imports. It fell another US$163 million in January to US$1.57 billion.

Mining down, farming up

Real gross domestic product decline continued, registering a two to three per cent contraction in the quarter.

Fall-offs in mining and quarrying, transport, storage and communi-cation, manufacturing and construc-tion led the decline.

The BOJ reported "strong growth" in agriculture, forestry and fishing, no doubt not yet capturing the effects of the current prolonged drought.

The central bank is projecting an annual inflation out-turn of between 9 per cent and 11 per cent for the current fiscal year to March and rate of 7.5 to 9.5 per cent for the 2010-2011 financial year.