The Bank of Jamaica. - File
The two monetary policy measures announced by the Bank of Jamaica this week will, according to central bank governor, Derick Latibeaudiere, soak up an estimated 50 per cent of liquidity in the financial system.
Effective December 3, on the expiration of a 15-day notice period, the BOJ said Tuesday that it would raise the cash reserve requirement of commercial banks, merchant banks and building societies from nine per cent to 11 per cent. In turn, the liquid asset requirement will rise from 23 per cent to 25 per cent.
The central bank also floated a special certificate of deposit to primary dealers and commercial banks to mature in two weeks on December 3, with interest payable at 20.5 per cent.
Latibeaudiere, at his quarterly press briefing on Wednesday, indicated that these two moves should take care of half the liquidity in the financial system.
He also noted that the central bank was prepared to raise the reserve requirements a further three percentage points if it becomes necessary to have the desired effect.
Major impact on all economies
These moves, he contended, were being made in a period of global financial uncertainty which was having a major impact on all economies, both in the developed nations and the emerging markets; and that in this type of environment, the central bank needed to take strong, decisive action in order to mop up liquidity and bring confidence back to the market.
Latibeaudiere said, in response to queries on why he needed to take such drastic action, said significant liquidity had built up in the system over the past two weeks, notwithstanding take up on the 11.5 per cent two-year US$-linked fixed instrument floated by the Finance Ministry and the near US$170 million taken up by securities dealers facing margin calls on GOJ bonds.
The BOJ had also intervened steadily over this period, selling hard currency into the market, but the Jamaican dollar continued to slide in relation to the US dollar, resulting in a sharp depreciation in the exchange rate.
According to the BOJ governor, the build up in liquidity in the system and the subsequent demand pressure in the foreign exchange market was "largely due to a build-up in Jamaica liquidity associated with the maturity of both BOJ and GOJ securities."
Whichever way one looks at these moves by the central bank, the actions are bound to affect the financial markets.
The anticipated reduction in prices as a result of lower international prices for food and oil will not occur as merchants will be factoring into their calculations for stock replacement costs, the actual JMD depreciation, as well as the anticipation of further movements in the short run.
The Government of Jamaica will be facing higher debt servicing charges for the rest of the fiscal year, which has another five months to run.
Surprises awaiting the Cabinet
This, coupled with the payment of retroactive salary and travel benefits to government workers, and the accumulation of unpaid liabilities that have, undoubtedly, built up in the system over the past few months, means that there will be some surprises awaiting the Cabinet when they get the report from the Ministry of Finance on the magnitude of the changes in the estimates of expenditure to be incorporated in the supplementary Budget.
Therefore, anticipate a flurry of roll-overs of maturing GOJ instruments, particularly during the last quarter of the fiscal year.
In addition, the Government will quite likely have to delay any plans to bring a significant amount of off-balance sheet transaction on to its books during the remainder of the current financial year. Instead, a number of these will be postponed until next year, which will make the already difficult budget planning process for FY2009-10 that much harder.
In this regard, the Minister of Finance should consider requesting a monthly spreadsheet of all outstanding payables from all Ministries and Public Bodies (including the ones that are currently self-financing), so that, at all times, he has a handle on the commitments that have already been made.
This report should track major outstanding bills, such as those for parish council streetlights, utilities for schools and hospitals, plus other major IOUs.
Bank and supplier credit will dry up for much of the productive sector, and with higher interest rates facing those companies, along with further crowding out of the private sector by central government and agencies, expect a slow down or postponement of major expansion projects.
Layoffs and closures likely to increase
It is likely too that layoffs and closures will increase over the next six to 12 months.
Calls are being made for a major bail-out of the tourism sector. If this is accommodated by the Government, it will have major implications for other sectors of the economy, as well as the bottom line of the Government.
In such a scenario, it would be difficult to see how the budget for the upcoming fiscal year would be predicated without a massive tax package in the mix.
Whatever the outcome of the Cabinet deliberations on the revision of the budget, Prime Minister Bruce Golding should come to the nation with an honest, forthright statement on the state of the Jamaican economy, the hurdles, and the steps that are being taken to keep the economy afloat.
Any attempt to sugar-coat the situation in the face of the strong action that has been taken by the BOJ this week will not inspire market confidence.
It is time for the Golding administration to level with Jamaicans.
rashir0@hotmail.com