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Jamaica’s three-pronged approach to manage FX market: Budget Debate 2020/2021

Finance Minister, Dr Nigel Clarke has announced a three-pronged approach to managing Jamaica’s foreign exchange (FX) market this fiscal year amid mounting concerns by the productive sector of the wild swings in the exchange rate.

Finance Minister, Dr Nigel Clarke

The first pillar of the approach will see the Central Bank rolling out later this month the first phase of its foreign exchange trading platform. In opening the 2020/2021 budget debate in parliament this afternoon, Dr Clarke disclosed that this platform should promote greater inter-bank trading and increase the depth and liquidity of the market.

The second step, where work is on in earnest involves the Central Bank introducing derivative products such as forwards and swaps to assist in improving the functionality of the foreign exchange market and the experience of end-users.

The third and final approach will see the Central Bank increasing the limit below, which regulatory approval is not required for the issue of US dollar securities.

“In fact, Mr Speaker since October 2016, the BOJ’s non-borrowed reserves increased by over US$1 billion.”

– Finance Minister, Dr Nigel Clarke

This initiative is being announced for the very first time. Dr Clarke told Parliament that while Jamaica operates a market-determined exchange rate, the Central Bank over the years has enacted many reforms designed to deepen the market, improve its functioning and to allow it to reduce its footprint in the market.

In announcing the three-pronged targeted approach for the FX market, Dr Clarke pointed to the work done last year and the new measures being rolled out over the coming weeks. He conceded that, “there is much work to be done to improve the efficiency and depth of the foreign exchange market.”

The Finance Minister disclosed that at present the Bank of Jamaica (BOJ), the island’s Central Bank, has gross reserves of US$3.6 billion and non-borrowed reserves in excess of US$2.5 billion, which is more than the country has ever had. “In fact, Mr Speaker since October 2016, the BOJ’s non-borrowed reserves increased by over US$1 billion,” Clarke told the House of Representatives.

The Bank of Jamaica in downtown Kingston.

The latest data shows that to date, annual inflows of foreign exchange to Jamaica have been more than sufficient to meet Jamaica’s needs with the Finance Minister arguing that “the proof lies in the fact that Jamaica has been able to increase its foreign exchange reserves while also rapidly increasing its non-borrowed reserves. “

However, the Finance Minister acknowledged that the challenge is like that in every other country in the world FX inflows and outflows are not balanced at every point in time while making the point that, “this is where market forces are best able to resolve these short-term imbalances with price (i.e., exchange rate) movements, without the need for excessive central bank intervention.

He told Members of Parliament that “Jamaica’s market is developing, no doubt with teething pains. However, as it develops there has been less need for use of precious reserves in the market. The reserves in your central bank are a public resource and belong to all Jamaicans. We need our reserves to protect us against shocks in the external environment.”

The BOJ has gross reserves of US$3.6 billion and non-borrowed reserves in excess of US$2.5 billion, said Finance Minister Nigel Clarke.

Emphasising that the BOJ has been reducing its use of reserves for intervention in the foreign exchange market and relying on demand/supply market forces to resolve those imbalances, Clarke explained that this was being done in order to preserve our foreign exchange reserves for a genuine rainy day and so provide and maintain sustainable economic independence for Jamaica.

Between March 2013 and June 2017 when the BOJ Foreign Exchange Intervention & Trading Tool (B-FXITT) was introduced, the BOJ intervened in the foreign exchange market to the tune of US$2.5 billion. Dr Clarke noted that this intervention would not have been apparent because prior to recent reforms the Central Bank did not need to disclose its intervention, as the FX system then was not a transparent and open process.

Between July 2017 and November 2019 BOJ’s interventions totalled US$740 million. Measured on a monthly basis over both periods, BOJ’s interventions have declined by 50 per cent. This has allowed the BOJ to increase non-borrowed reserves by US$1 billion.

All of this translates into improved credit ratings, improved credit terms and lower interest rates for businesses and households. In concluding the Finance Minister made the point that “management” of the exchange rate as we use to do, with excessive intervention, compromises long term sustainability and economic independence.