How is the Bank of Jamaica committed to preserving the purchasing power of the Jamaican dollar in the short and medium term?
The Bank of Jamaica has been operating a monetary policy framework referred to as “inflation targeting lite" by the IMF. This means we announce targets for the inflation rate and use monetary policy tools to achieve the targets. However, because we do not have all of the elements, including the legal mandate, necessary to make that framework fully effective, we safeguard the value of the currency by focusing on delivering the target for inflation set by the government after consultations with us. At present, the inflation target for the medium term is 4-6%, and we aim for the middle of that range.
What complementary micro-economic policies have helped Jamaica fulfill the IMF's precautionary standby arrangement?
We adopted the IMF's metric called the Assessment of Reserve Adequacy (ARA) to determine the appropriate level of foreign reserves to hold. In that regard, our gross reserves at USD3.5 billion exceed 100% of that metric. It is as well to maintain adequate reserves in the context of the government's commitment to a flexible market-determined exchange rate. The foreign exchange market must have the liquidity to meet the demand and supply needs of participants in the market. Added to that are reforms that the Central Bank has undertaken to create and enhance domestic currency liquidity assurance for deposit-taking institutions. With a few other tweaks to our policy interest rate, we have aimed to improve the mechanism by which policy interest rates set by us can be transmitted into the market; we have more work to do on that front. We are also poised to introduce other reforms involving adjustments to cash reserves, liquid asset ratios, and so on. Our focus is to fix, correct, and realign various parameters to be more supportive of the modern, open, competitive economy Jamaica has been building. Some of these parameters have to be reset because the environment has changed, as have the methods of doing things in Jamaica and the world.
What about a more independent central bank?
The Bank of Jamaica has operated in an independent fashion for more than 20 years. However, the country will not be able to reap the full benefits and dividends of this type of arrangement until the independent operations of the central bank are carried out on the basis of an unambiguous legal mandate and with the proper legal arrangements in place for transparency and accountability. The design of the bank's independence within a suitable context for Jamaica is coming in recently tabled legislation. It will include specific arrangements that look at the independence of the board, such as revisions to the tenure of board members, and staggering board appointments to provide for periodic refreshment of the bank's leadership while providing continuity in governance and insulating the highest level of the institution from the ordinary political cycle. To that end, the government will continue to appoint board members, though there will be limits on the ability of any one administration to completely change the board during one political cycle, creating an institutional sense of independence. There will also be important reforms for the governance of the bank that will include a monetary policy committee to change the decision-making environment from one where the governor is the sole decision-maker to one where decisions are made on a collegiate basis. It will establish accountability mechanisms such as regular appearances by the governor in front of the Jamaican parliament. These reforms, coupled with fiscal reforms, should give stakeholders a reason to believe that Jamaica has addressed and structured a long-term answer to the macroeconomic stability problem, which we have demonstrated can be solved in the short and medium term.