May 2017 Financial News

NIR at comfortable level, says IMF representative to Jamaica

May 24, 2017

Both the central bank of Jamaica and the International Monetary Fund (IMF) appear to be holding fast to the policy position of continued build-up of the net international reserves against future shocks. Jamaica's NIR has moved from US$496 million in March 1996 to US$2.65 billion as at Friday May 18, 2017. Whether or not this build-up, which targets a level of US$4 billion by the end of the current standby agreement in 2019, is having unintended effects such as an impact on the value of the Jamaican dollar, is a question which neither body appears to believe to be true.

Constant Lonkeng Ngouana, IMF Resident Representative for Jamaica, when asked by the Jamaica Observer what is the IMF's answer to those who say that seeking to build the Net International Reserves to US$4 billion will have a negative impact on the Jamaican dollar, said the short answer to this question is “NO”.

He clarified: “The targeted level of reserves by the end of Jamaica's Stand-By Arrangement (SBA) in 2019 referred to in this question is based on the IMF's standard norm for Assessing the Adequacy of Reserves (ARA). The ARA metric is consistent across countries and determines for each economy the prudent level of reserves that, combined with sound policies and fundamentals, reduces the likelihood of balance-of-payments crises and provides some policy buffers.

“As such, the contemplated reserves build-up, to the contrary, would allow the BOJ to preserve macroeconomic and financial stability against disorderly FX market conditions.”

He pointed out that the US$4 billion figure referred to corresponds to the level of gross reserves which includes IMF credits (NIR excludes those credits).

“As for the Jamaican dollar more specifically,” Lonkeng told the Business Observer, “its value ultimately depends on the inflation differential vis-à-vis trading partners and the country's economic fundamentals. Those fundamentals will improve as structural reforms under Jamaica's reform programme incentivise private investment, attract FDI flows, ensure a vibrant domestic base for J$ assets, and improve labour productivity.”

The Net International Reserves (NIR) has been defined as the country's insurance cover against adversity. While economic fundamentals continue to improve, the BOJ still believes that keeping a healthy buffer in place is necessary.

Within the last week, Governor of the Bank of Jamaica Bryan Wynter outlined that for the December 2016 quarter, the current account deficit of the balance of payments was “a mere 0.3 per cent of GDP (US$38.1 million) — a half a percentage point of GDP (or US$77 million) better than the deficit for the December 2015 quarter”.

The BOJ now estimates the current account deficit for fiscal year 2016/17 at 1.8 per cent of GDP, which is below the 2.0 per cent of GDP deficit for the previous fiscal year.

Wynter noted: “In fact, we have to go back about 20 years in Jamaica's history to find another deficit this low. Furthermore, if we subtract imports financed by foreign direct investment inflows, this will be the second consecutive year when Jamaica earns more in foreign exchange than it spends. Goods exports for the quarter rose strongly by about nine per cent (US$26 million) for the first time in nearly four years, reflected almost entirely in non-traditional exports.”

Otherwise, the BOJ in published literature says that the NIR buffer is a key consideration in ratings assigned by the international ratings agencies, with Jamaica now comparing favourably to comparable economies in the Caribbean.

It points out that in determining an appropriate level of reserves, central banks consider a range of factors which include vulnerability to shocks, the strength of the fiscal and financial sectors, the current account balance, the composition of capital flows and the level of debt.

IMF representative Lonkeng , responding to the question, 'What is the IMF's answer to those who say that the Net International Reserves are too high?' answered: “Jamaica's level of Net International Reserves (NIR) — at US$ 2.65 billion as of Friday last week — while comfortable, is not too high, in light of the reserves 'adequacy' metric, which is an international norm for comparing reserve levels across countries (see below).

“The metric takes into consideration several sources of market pressure and vulnerabilities, such as the level of short-term debt, broad money, and other liabilities.”

Lonkeng pointed out, “It is also worth noting that the BOJ has a renewed focus to reduce its reliance on borrowed reserves (ie reserves borrowed by issuing CDs to commercial banks) — currently amounting to US$822 million — over the medium term.

“A gradual reduction of the stock of CDs — which are liabilities in US dollars for the central bank — would improve the BOJ's reserves autonomy and reduce interest payments on those instruments, thus further strengthening the BOJ's financial position.”

When asked to state the net cost of building up the NIR, the IMF representative answered: “The opportunity cost of holding reserves is the potential higher short-term rate of return that could be achieved if those resources were invested differently. This cost, however, is vastly outweighed by the benefits associated with reserves build-up, including cushion against external shocks and vulnerabilities (eg spike in global oil prices, global market turmoil, etc.).”

Lonkeng said that the appropriate level of reserves depends on individual countries' characteristics. “Jamaica's current level of gross reserves is about 80 per cent of the ARA metric — comparable to many similar emerging market economies — and is projected to reach 100 per cent of the metric by the end of its current SBA,” he concluded.

In a speech given in 2006 by the former Governor of the BOJ Derick Latibeaudiere entitled, 'The Net International Reserves of the Bank of Jamaica: The Realities', he noted that before the build-up of more than US$1 billion, “There were occasions when ships with their cargo of oil to discharge would be waiting in the harbour to be assured of payment.

“There was also an extended period up to the early 1990s [when] Jamaica had to resort to the IMF for balance of payments support because we had no reserves. With higher levels of reserves, the bank was able to easily sell upwards of US$20 million to the foreign exchange market on any given day,” he outlined.

Questions sent to the BOJ regarding medium-term NIR targets were not answered up until press time.

 

Source:
BY AVIA COLLINDER
collindera@jamaicaobserver.com
Business reporter
Jamaica Observer
Wednesday May 24, 2017

http://www.jamaicaobserver.com/business-observer-daily-biz/nir-at-comfortable-level-says-imf-representative-to-jamaica_99788?profile=1056