Mar 2007 Financial News

IMF sends warning shots to Jamaica

Mar 12, 2007

The International Monetary Fund (IMF), in its Article IV Consulations has raised an alarm about the risks facing Jamaica's financial sector.

Alternative investment schemes, interest rates, inflation and the exchange rate were areas that the IMF urged the authorities to pay keen attention to.

In a February 16 report first presented to officials in the Ministry of Finance and the Bank of Jamaica, the Fund warned of the development of what they describe as "speculative investment schemes" that has seemingly won the confidence of Jamaican investors.

Taking note of the 10 per cent per month lure offered by alternative investment schemes, and the prominence it has gained in the Jamaican market, the IMF states, "A worrisome development. has been the apparent growth of unregulated foreign currency trading schemes promising spectacularly high returns. The mission welcomes the authorities' efforts to enforce financial sector regulations and encourages continued enhanced supervision of activities vulnerable to interest rate risk."

The IMF urges "continued vigilance against pyramid schemes and more high-level warnings about the dangers of speculative investment schemes are, however, warranted." and suggests that the regulatory authorities strengthen their forensic investigative skills, "if and when evidence of fraud does emerge."

The report urges the central bank, in particular, to take a measured approach to juggling investors' appetite for high returns with the need to keep the nation's debt burden on a downward trend.
"Indeed, given the expected additional injection of liquidity in coming weeks from debt redemptions, there may be a case for pre-emptively increasing interest rates now," said the report. "Such flexibility would avoid creating incentives for the market to make one way bet."

While the IMF report in no way states that the central bank seeks to hike interest rates in a manner that was fiscally destructive, the report suggested that if the BOJ raised and then lowered interest rates with flexibility to match circumstances, then, "eventually inflation and exchange rate expectations could adjust to a point where interest rates could be reduced more sustainably."

The report notes that the current low interest rate and low inflation regime pursued by the Central Bank also presents risks to the financial sector.

"The mission agreed that inflation should remain the main objective of monetary policy. At the same time, if exchange rate movements become too predictable and the interest differential vis-a-vie the US dollar fell too far, there was a risk of destabilising portfolio shifts occurring."

As an example of portfolio shifts that the financial sector is willing to make, the IMF noted, "With the local currency yield premium virtually non-existent, markets became unsettled in January 2007 in anticipation of a large redemption of government bonds." The report noted that the BOJ acted quickly to stabilise the situation by issuing special one-year investment instruments. "

The Jamaica Observer
Business
Sunday, March 11, 2007
http://www.jamaicaobserver.com/magazines/Business/html/20070310T190000-0500_120200_OBS_IMF_SENDS_WARNING_SHOTS_TO_JAMAICA_.asp