The Jamaican central bank has undertaken to supply key state-owned companies with their foreign currency requirements in what the bank's governor, Derick Latibeaudiere, says is a temporary move to help ease a demand scramble on the foreign exchange market and pressure on the Jamaican dollar.

The Bank of Jamaica did not say how much cash it will steer to the facility, which Latibeaudiere disclosed at a briefing on Wednesday, but it is estimated that demand for the current quarter will reach around US$130 million.

"By providing foreign exchange on a timely basis for payments such as oil imports, this measure should help reduce some of the pressure on the (foreign exchange market," the BOJ governor told reporters and analysts at his briefing.

Latibeaudiere told the Financial Gleaner yesterday that while the facility would not deal "everything the public sector wants", the central bank's action should help better match market demands with supply flows, thereby helping to instil order in the market.

"What was happening was that a lot of demand was coming together in a cluster," he said in yesterday's interview. "Everybody wanted to buy early and sell later and that precipitated an imbalance in the market."

This move to segregate large state companies from the jostle in the foreign exchange market is just the latest in a string of measures by the BOJ to calm a market that was dragged into turbulence by the global credit crisis and the resultant recession.

Global credit crisis

For example, in the three months up to the end of last December the central bank sold US$432.1 million in the market to defend the Jamaican dollar and since January has backed that up with another US$134.5 million.

This was in addition to a US$300 million credit facility to Jamaican financial institutions hit by margin calls by foreign banks at the onset of the global credit crisis last year that precipitated the pressure on the Jamaican dollar. The central has also jacked up domestic interest rates and pushed up the cash reserves requirement of commercial banks in an effort to suck Jamaican dollar liquidity from the market.

Despite Latibeaudiere's efforts, the Jamaican dollar depreciated by 12.2 per cent against the greenback last year, nearly three times the average annual rate but slower than many other currencies ... some for countries with sounder economic fundamentals than Jamaica's. Falling demand and lower prices for exports such as alumina and tourism, a slowdown in remittances from Jamaicans abroad and uncertainty about the government's access to international capital markets continued to fuel market uncertainty and a slide in the Jamaican dollar.

But the market has recently been showing signs of stability, apparently as the central bank's interventions and liquidity measures bit, buttressed by a start to the disbursement of loans to Jamaica by the Inter-American Development Bank and the World Bank.

Latibeaudiere believes, too, that reflows from a more than US$200 million bond paid out by the government a week ago - partly out of central bank reserves and a loan from Bank of Nova Scotia - has contributed to the calming of the foreign exchange market.

"About 30 per cent of that bond was held by Jamaicans and some of that money is coming back," he told the Financial Gleaner.

Difficult economic times

But notwithstanding the immediate easing of the turbulence, the central bank governor warned that Jamaica continues to face uncertain and difficult economic times.

For instance, he projected that the economy, for the fiscal year, which ends March 31, could decline by up to two per cent and that weakness could continue well into 2010.

"The economy will not grow in zero-nine/zero-ten ... full stop," he said at the briefing. We have to understand that." Indeed, the Planning Institute of Jamaica has projected that the economy will contract by around two per cent this year.

In yesterday's interview, Latibeaudiere was confident that Jamaica, if it maintained appropriate fiscal and monetary policies could ride out the storm, but made clear that "it is not going to be easy".

There was likely, he said, to be continued "disjuncture between the supply and demand" of foreign exchange.

He said: "Looking at the year ahead, if we are lucky we are going to have remittances flat; if we are lucky we are going to have tourism flat and bauxite is going to decline. There could be problems on the part of the government borrowing on the international capital market... (which will be) dependent on the interest rates we are willing to pay."

Monetary policy

At the time, Latibeaudiere said, foreign direct investment (FDI), which has hovered at around US$500 million and US$600 million in recent years, is likely to decline in 2009.

It is against this background the BOJ governor rejected calls for what he would consider a premature loosening of monetary policy, including a call by the Jamaica Manufacturers Association for the central bank to make available for cheap loans the over $2 billion it holds in liquidity reserves from commercial banks.

"You would be working against yourself," he said. "You have defined part of the problem as the need to mop up liquidity (to support the Jamaican dollar). You would be upending that."

business@gleanerjm.com