Tweet
The sudden departure of Derick Latibeaudiere from the Bank of Jamaica (BOJ) has taken place under circumstances that have led to speculation as to the cause of the separation. It was just over a month ago that he was picked to lead Jamaica’s technical team negotiating with the IMF. After floundering for nearly six months, it appeared that the government had put him in charge of the negotiations as a bold step to quickly finalise the long-awaited loan agreement.Could it be that fundamental differences between the political directorate and the former BOJ governor with respect to the terms being negotiated were what triggered his separation?
The reading of informed sources is that the IMF negotiations have moved at glacial pace because the Golding administration is scared of agreeing to the budget cuts that the IMF is proposing because of the huge political cost. Much time has been spent in search of soft options to get around the sizeable adjustments that are necessary to get Jamaica onto a credible path to a balanced budget. One possible area of disagreement with the former governor could be the pace of interest rate reduction, with the political directorate looking to quicker downward movement as the means to secure big savings in debt servicing costs and reduction in the budget deficit.
It is no secret that Finance Minister Shaw was discomfited by the interest rate hikes carried out by the BOJ earlier in the year. They came with a price tag of near $ 15 billion which led to the increase in the supplementary budget and added to the already huge stock of debt. A slower pace of interest rate reduction, which the BOJ was advocating presumably to protect the exchange rate, would aggravate the burden. It could be argued, however, that with loan funds flowing from the IMF the pace of interest rate reduction could be accelerated without increasing the risk of sharp exchange rate slippage. Could this have been the problem?
The former governor’s track record on the matter of interest rate policy is not, we believe, a good one. If, as we hear, the pace of interest rate reduction was a key issue of disagreement, it is worth noting that the most recent episode of rate hikes was either the third or fourth of his tenure. Each was justified on the ground of stabilising the Jamaican dollar yet the rate has moved from US$1.00 = J$ 40 when he took up office in early 2006 to nearly US$ 1.00 = J$ 90 today. Meanwhile, several hundred billion dollars of interest costs have been added to the national debt to cover the cost of the high rates instituted by the BOJ in protection of the exchange rate; and this does not include the cost of rescuing the financial sector through FINSAC which came about partly because of the long period over which interest rates were kept at painfully high real levels.
We understand too that there was disagreement over the proposed Liability Management Programme, a euphemism for a debt reduction plan put forward by local private sector groups that would involve voluntary rescheduling of debt payments by the big institutional holders of government debt. The former governor maintained that this would put the financial sector at risk while the government, with prodding from its private sector backers, is anxious to re-look at the proposal after rejecting it when Standard & Poor’s earlier downgraded Jamaica’s credit rating because they felt that it was likely to be pursued. It appears that the IMF may well support his position.
Overall, we have to conclude that after nearly 14 years of Mr. Latibeaudiere’s leadership of the BOJ and his direction of monetary policy it is time for a change. The costs of his stewardship of policy in this critical area have been burdensome to the budget and the national debt. Not least, serious weaknesses in the governance system of the Bank have emerged.
Many businesses which depend on credit for day to day activities have been squeezed and the economy has stagnated with little to show by way of the stability that the high interest rates were supposed to bring. Huge transfers have instead been made to those people who were able to capitalise on the high returns on government paper. We now look to the new governor to move with speed to do his evaluation and re-shape monetary policy along more appropriate lines.
Comment