Tweet
By Keith Collister
Friday, February 20, 2009
At his most recent quarterly press briefing on Wednesday, Central Bank Governor Derick Latibaudiere stated that whilst he fully understood people's concerns about the current high level of interest rates, the fundamental issue was that there was a disequilibrium in Jamaica's foreign exchange market due to lower supply and greater demand. "We do have, potentially, an imbalance between demand and supply. We need to take measures to reduce demand and increase supply".
Central Bank Governor Derick Latibaudiere
In the first part of his press conference, he went through a list of countries - Iceland, Russia, South Africa, Brazil and Mexico - "that were deemed to be relatively strong prior to the crisis" and "have experienced significant outflows, exchange rate depreciation, loss of reserves, deterioration in external accounts and stock market declines as a direct result of the uncertainties surrounding the crisis. In addition, interest rates were increased in all these countries with the exception of Mexico".
On the same day, Jamaica Manufacturers Association (JMA) President Omar Azan noted at his "Stimulate Production" press conference the JMA position that "the measure adopted by the Governor of the BOJ to defend the dollar by hiking interest rates, has been ineffective and is damaging to the productive sector and the country as a whole."
Mr Azan argued: "Hiking interest rates is not the solution. We have to produce our way out of this crisis. To do so, credit needs to flow to businesses which will translate into jobs and economic growth."
In his statement, Azan also noted that "while other countries in this time of global recession are stimulating their economies by reducing interest rates, we are doing the total opposite. Canada and England have reduced their lending rates to one per cent, Japan to 0.1 per cent, the Euro Zone to two per cent..."
The issue that by raising its interest rates during an economic crisis, Jamaica was doing the exact opposite of other countries who had sharply lowered their interest rates was also raised at the Bank of Jamaica's press conference. The Governor advised that in the US and the UK, people were currently so risk averse that their Governments didn't have any problem raising money. In any case, the fall in the official interest rates of the overseas Central Banks (such as the Federal Reserve and the Bank of England) were not being translated into lower interest rates in the private market.
In contrast to these developed countries, the Governor noted that emerging market countries like Jamaica will always have problems borrowing internationally. The Governor also argued that the rates at which the Jamaican government borrows abroad- "almost sets a floor for what interest rate" can be set domestically. In his view, if the Central Bank drops interest rates, and as a result nobody buys new government instruments, the Government will have a problem of paying salaries.
Exchange control no solution
At their press conference, the JMA boss noted "We were pleased to hear in yesterday's papers that the Government is not considering imposing capital controls to ensure adequate supply of the US dollar in the market. This was indeed a relief as we cannot go back to a system where you have to endure a bureaucracy to access foreign exchange for normal business activities. The productive sector has to be able to pay its suppliers, and investors cannot have their capital flows directed by a bureaucracy".
At his press conference, the Governor found common ground with JMA on the issue of exchange control. Responding to the question as whether exchange control was a solution to the problem, he stated: "Absolutely not. If we were going to preside over something like that, it wouldn't be with me here."
The key issue of the negative impact of high interest rates remains, however. In their press release, the JMA noted that "The Government's recently announced stimulus package, while designed to stimulate production, is being nullified by the high interest rates."
The JMA argues correctly that "to reverse this cycle, the Government has to begin freeing up credit and stimulating production. Failure of the Government to act boldly and swiftly, will only deepen the impact of the recession on the private sector, and lead to greater job losses.
Stimulating local industry will help to protect existing jobs and create new ones through expansion. If the government fails to do so, it too will face challenges in paying the public sector as without production there is no GCT and payment of PAYE."
The JMA noted that the IDB US$300-million line of credit and the $US100-million credit facility with the Chinese government would not be enough, as in their view companies will not be able to meet the collateral requirements to access these loans, given their deteriorating cash flow and receivables. In their view, "our lending institutions must play their part in the movement to stimulate production". The JMA recommended as a solution the implementation of a mutual guarantee scheme to broaden access to financing for small businesses, whose lack of collateral either denies them credit or forces them to pay high costs for capital.
The key issue appears to be that the market is still expecting a shortage of foreign exchange, with the result that individuals make efforts to hedge their exposures, which the Governor, probably rightly, declined to call speculation. In many cases, this means buyers of foreign exchange are buying in advance of their needs to ensure availability when it becomes time to pay the bill, and sellers are selling later due to uncertainty that the fall in the dollar has bottomed out.
The Bank of Jamaica has only has two instruments to maintain currency stability, higher interest rates and the sale of its foreign exchange reserves, and is clearly worried about using too much of its foreign exchange reserves and inviting a downgrade by the major rating agencies.
It has taken a very positive step in removing the public sector bodies from the foreign exchange market, so that demand and supply is now totally private sector driven. However, the Government may need additional supplies of foreign currency to ameliorate market concerns. In that regard, Jamaica needs to hear more from the major banks as to why very little of the IDB money has apparently been disbursed.
It is also worth noting that, at his press conference, responding to a question as to whether Jamaica should go back to the IMF, the Governor stated in his view: "We should not rule out anything".
http://www.jamaicaobserver.com/magaz...TE_REGIME_.asp
Friday, February 20, 2009
At his most recent quarterly press briefing on Wednesday, Central Bank Governor Derick Latibaudiere stated that whilst he fully understood people's concerns about the current high level of interest rates, the fundamental issue was that there was a disequilibrium in Jamaica's foreign exchange market due to lower supply and greater demand. "We do have, potentially, an imbalance between demand and supply. We need to take measures to reduce demand and increase supply".
Central Bank Governor Derick Latibaudiere
In the first part of his press conference, he went through a list of countries - Iceland, Russia, South Africa, Brazil and Mexico - "that were deemed to be relatively strong prior to the crisis" and "have experienced significant outflows, exchange rate depreciation, loss of reserves, deterioration in external accounts and stock market declines as a direct result of the uncertainties surrounding the crisis. In addition, interest rates were increased in all these countries with the exception of Mexico".
On the same day, Jamaica Manufacturers Association (JMA) President Omar Azan noted at his "Stimulate Production" press conference the JMA position that "the measure adopted by the Governor of the BOJ to defend the dollar by hiking interest rates, has been ineffective and is damaging to the productive sector and the country as a whole."
Mr Azan argued: "Hiking interest rates is not the solution. We have to produce our way out of this crisis. To do so, credit needs to flow to businesses which will translate into jobs and economic growth."
In his statement, Azan also noted that "while other countries in this time of global recession are stimulating their economies by reducing interest rates, we are doing the total opposite. Canada and England have reduced their lending rates to one per cent, Japan to 0.1 per cent, the Euro Zone to two per cent..."
The issue that by raising its interest rates during an economic crisis, Jamaica was doing the exact opposite of other countries who had sharply lowered their interest rates was also raised at the Bank of Jamaica's press conference. The Governor advised that in the US and the UK, people were currently so risk averse that their Governments didn't have any problem raising money. In any case, the fall in the official interest rates of the overseas Central Banks (such as the Federal Reserve and the Bank of England) were not being translated into lower interest rates in the private market.
In contrast to these developed countries, the Governor noted that emerging market countries like Jamaica will always have problems borrowing internationally. The Governor also argued that the rates at which the Jamaican government borrows abroad- "almost sets a floor for what interest rate" can be set domestically. In his view, if the Central Bank drops interest rates, and as a result nobody buys new government instruments, the Government will have a problem of paying salaries.
Exchange control no solution
At their press conference, the JMA boss noted "We were pleased to hear in yesterday's papers that the Government is not considering imposing capital controls to ensure adequate supply of the US dollar in the market. This was indeed a relief as we cannot go back to a system where you have to endure a bureaucracy to access foreign exchange for normal business activities. The productive sector has to be able to pay its suppliers, and investors cannot have their capital flows directed by a bureaucracy".
At his press conference, the Governor found common ground with JMA on the issue of exchange control. Responding to the question as whether exchange control was a solution to the problem, he stated: "Absolutely not. If we were going to preside over something like that, it wouldn't be with me here."
The key issue of the negative impact of high interest rates remains, however. In their press release, the JMA noted that "The Government's recently announced stimulus package, while designed to stimulate production, is being nullified by the high interest rates."
The JMA argues correctly that "to reverse this cycle, the Government has to begin freeing up credit and stimulating production. Failure of the Government to act boldly and swiftly, will only deepen the impact of the recession on the private sector, and lead to greater job losses.
Stimulating local industry will help to protect existing jobs and create new ones through expansion. If the government fails to do so, it too will face challenges in paying the public sector as without production there is no GCT and payment of PAYE."
The JMA noted that the IDB US$300-million line of credit and the $US100-million credit facility with the Chinese government would not be enough, as in their view companies will not be able to meet the collateral requirements to access these loans, given their deteriorating cash flow and receivables. In their view, "our lending institutions must play their part in the movement to stimulate production". The JMA recommended as a solution the implementation of a mutual guarantee scheme to broaden access to financing for small businesses, whose lack of collateral either denies them credit or forces them to pay high costs for capital.
The key issue appears to be that the market is still expecting a shortage of foreign exchange, with the result that individuals make efforts to hedge their exposures, which the Governor, probably rightly, declined to call speculation. In many cases, this means buyers of foreign exchange are buying in advance of their needs to ensure availability when it becomes time to pay the bill, and sellers are selling later due to uncertainty that the fall in the dollar has bottomed out.
The Bank of Jamaica has only has two instruments to maintain currency stability, higher interest rates and the sale of its foreign exchange reserves, and is clearly worried about using too much of its foreign exchange reserves and inviting a downgrade by the major rating agencies.
It has taken a very positive step in removing the public sector bodies from the foreign exchange market, so that demand and supply is now totally private sector driven. However, the Government may need additional supplies of foreign currency to ameliorate market concerns. In that regard, Jamaica needs to hear more from the major banks as to why very little of the IDB money has apparently been disbursed.
It is also worth noting that, at his press conference, responding to a question as to whether Jamaica should go back to the IMF, the Governor stated in his view: "We should not rule out anything".
http://www.jamaicaobserver.com/magaz...TE_REGIME_.asp
(it cures all ills in our society).
Comment