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Gov’t calls in bankers
Low interest rates at centre of crucial talks
Monday, January 11, 2010
THE Government yesterday summoned the island's major bankers to a late-evening meeting at Jamaica House and scheduled another for this morning with the bankers association to get an agreement on lower interest rates on government paper which the administration sees as critical to a debt management plan it must implement in order to secure a loan from the IMF.
According to highly placed Observer sources, yesterday's meeting was scheduled to start at 6:00 pm, hours after the Cabinet ended a three-day retreat where Jamaica's application for a US$1.3-billion loan from the IMF was one of the major agenda items.
"The meeting tomorrow [this] morning is with the JBA (Jamaica Bankers' Association)," the source said before declining to speak further on the issue.
Last night, one financial analyst who opted for anonymity said he expected that the meetings with the bankers would not be smooth, as they are opposed to the Government's plan to lower interest rates to at least nine per cent.
Interest rates are currently hovering at 15 and 16 per cent.
The bankers' opposition to the proposal is rooted in concerns that any such move will be detrimental to their operations.
"The banks will take a huge hit if the interest rates are lowered," said the analyst. "You have to remember that these institutions make most of their money on government paper, and they have already invested at 15 1/2, 17 1/2 per cent, so for the Government to now cut that interest rate it will affect their balance sheets."
The Government, the analyst argued, therefore needs to get an agreement with the bankers as that was critical to its economic programme going forward.
Interest payment is the single largest recurrent expenditure for the Government, and lowering the average rate on government securities by as much as six percentage points implies savings in the order of tens of billions of dollars annually. Also, the Government has little flexibility in significantly cutting other expenses, as spending on programmes and capital projects are near minimal at this time, while cutting the public sector wage bill in any meaningful way means laying off thousands of workers.
Last week, newly appointed central bank governor Brian Wynter signalled the Government's intention to lower interest rates as he told journalists that he was working with the finance ministry on a debt management programme.
Wynter also projected inflation in the nine to 11 per cent range for the next financial year despite the contractionary impact on the economy.
"The agricultural sector continues to perform well, and with relative stability in the foreign exchange market, inflation may well continue its downward trend," Wynter said. "The question of whether lower inflation rates will come at the expense of higher interest rates and vice versa is a moot one, but it is interesting to note the debate on inflationary pressures on the economy of the United States. That's not a debate we expect to have in Jamaica given present indicators."
The Cabinet retreat was also expected to sign off on Jamaica's letter of intent to the IMF to access the funding, which will be used for balance of payment support.
Gov’t calls in bankers
Low interest rates at centre of crucial talks
Monday, January 11, 2010
THE Government yesterday summoned the island's major bankers to a late-evening meeting at Jamaica House and scheduled another for this morning with the bankers association to get an agreement on lower interest rates on government paper which the administration sees as critical to a debt management plan it must implement in order to secure a loan from the IMF.
According to highly placed Observer sources, yesterday's meeting was scheduled to start at 6:00 pm, hours after the Cabinet ended a three-day retreat where Jamaica's application for a US$1.3-billion loan from the IMF was one of the major agenda items.
"The meeting tomorrow [this] morning is with the JBA (Jamaica Bankers' Association)," the source said before declining to speak further on the issue.
Last night, one financial analyst who opted for anonymity said he expected that the meetings with the bankers would not be smooth, as they are opposed to the Government's plan to lower interest rates to at least nine per cent.
Interest rates are currently hovering at 15 and 16 per cent.
The bankers' opposition to the proposal is rooted in concerns that any such move will be detrimental to their operations.
"The banks will take a huge hit if the interest rates are lowered," said the analyst. "You have to remember that these institutions make most of their money on government paper, and they have already invested at 15 1/2, 17 1/2 per cent, so for the Government to now cut that interest rate it will affect their balance sheets."
The Government, the analyst argued, therefore needs to get an agreement with the bankers as that was critical to its economic programme going forward.
Interest payment is the single largest recurrent expenditure for the Government, and lowering the average rate on government securities by as much as six percentage points implies savings in the order of tens of billions of dollars annually. Also, the Government has little flexibility in significantly cutting other expenses, as spending on programmes and capital projects are near minimal at this time, while cutting the public sector wage bill in any meaningful way means laying off thousands of workers.
Last week, newly appointed central bank governor Brian Wynter signalled the Government's intention to lower interest rates as he told journalists that he was working with the finance ministry on a debt management programme.
Wynter also projected inflation in the nine to 11 per cent range for the next financial year despite the contractionary impact on the economy.
"The agricultural sector continues to perform well, and with relative stability in the foreign exchange market, inflation may well continue its downward trend," Wynter said. "The question of whether lower inflation rates will come at the expense of higher interest rates and vice versa is a moot one, but it is interesting to note the debate on inflationary pressures on the economy of the United States. That's not a debate we expect to have in Jamaica given present indicators."
The Cabinet retreat was also expected to sign off on Jamaica's letter of intent to the IMF to access the funding, which will be used for balance of payment support.
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