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Jamaica has shown we're not just sprinters but can do marathons

BY KEITH COLLISTER

Sunday, September 15, 2019

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I interviewed former IMF resident representative Constant Lonkeng by phone, literally as he was packing up to leave his office at the Bank of Jamaica (BOJ) — his very last interview as our official representative before his tenure ended.

He started by noting that Jamaica had “exceeded expectations” as people, “including the markets”, were in doubt as to whether we could pull this off . With our history of poor performance we needed not only a credible framework but to see implementation.

“What Jamaica now pays on its international bonds is a sign of credibility as perceived by the market” an appropriate remark as Jamaica has just borrowed at its lowest-ever rate for its longest 2045 maturity as part of last week's debt swap.

Lonkeng noted it has been a continuous process to create sustained reform momentum and a predictable economy and policy. “Policy continuity is key to allow investors to think 10 to 20 years down the road,” he said.

Describing it as a “unique moment in Jamaica's history”, he pointed to a few main themes for us to focus on continued debt reduction, central bank independence, macro-fiscal capacity, a national disaster risk financing strategy, special resolution regime for financial institutions, and structural reforms to boost productivity and medium-term growth.

One of his concerns was how to avoid “reform fatigue” and maintain momentum with the implementers and the public. His answer: resolve and communication. Citing the innovation of the BOJ communication tapping into our culture, he argued that this was a testimony to programme ownership, adding that while the IMF had provided “technical assistance” in communication to the BOJ, “we would never have thought about mixing reggae and inflation”.

He added, for instance, that if you looked at the quality of the BOJ's quarterly press briefings now verses a few years ago, the questions from both the press and the audience “were more sophisticated” and often more forward-looking (eg on the transmission channel of monetary policy) rather than on the recent level of the exchange rate. He believed this reflected the level of maturity of policymaking that Jamaica had reached and the sophistication of the audience. He believed it was important not to forget the critical role of the Jamaican people, who are more appreciative than they used to be of the need for macroeconomic prudence, and whose “sacrifices would make them more jealous of the gains”.

He thought this conversation was even more important as Jamaica was now at the point where “policy trade-offs were more prominent”, rather than seven years ago when there was nothing to do but “adjust” as the policy space was more limited. Now the focus was on “crowding in” and “how to promote SME financing” reflecting the evolution of the sophistication of the economy as the Government reduces its debt.

When the policy rate is cut it is now about inflation and not other objectives, suggesting that there is more clarity on the BOJ's policy objectives and adding to its “credibility”. Communication is important, as if one cuts rates today but people are not clear on the monetary policy stance (eg whether the cut will persist or will be reversed immediately tomorrow) they might be confused, lessening the impact of the policy rate cut in the first place.

If inflation-targeting is the policy, then the discussion should be about areas such as dollarisation (currently roughly 40 per cent of deposits) and the concentration of credit. With respect to the banking competition study currently underway, he added it “would be interesting to see what comes out of it”; it is not just the financial sector but the “little guy” who has to be ready. “Small businesses need to be transparent and open their books”. Interestingly, financial institutions have recently committed to changing their business models, as “the Government's risk has been easier to price relative to a barber in Half-Way-Tree” .

He regarded the strengthening of “institutions”, eg to navigate the political cycle, as important to safeguard the gains. He noted that the Government is taking the time to design a fiscal council “to get it right” as this would serve Jamaica better. He noted, however, that even the fiscal council channel works through the people, with no direct policymaking mandate. “At the end of the day the people decide,” which also extends to the issue of accountability for an independent central bank. He expressed confidence in the level of maturity of the key elements of society on these issues.

Concerning monitoring after the agreement ends later this year, Lonkeng noted that it was unusual to keep the IMF resident representative office post-programme (the IMF had other representative offices for non-borrowing countries but normally for systematically important countries such as China and Indonesia), but this suggested both the strength of the partnership and the confidence of the Government that they are going to do the right thing. It is a two-way signal our Government is signalling it intends to keep to sound policy and the IMF is signalling a strong partnership.

Among other functions, the office acts as a liaison to the IMF review mission and technical assistance teams “Jamaica was a top 10 recipient of technical assistance from the IMF during 2016–2018 alongside much bigger countries such as China and Ukraine,” Lonkeng noted.

Whilst target-setting and monitoring disappear, the IMF can remain part of the local debate. There will be no programme, but the fund will still offer advice and comment on policies annually through the Article 4 consultation process that is common across its 189 member countries.

With respect to Jamaica's growth challenge “nobody wants growth bounded between one and two per cent”. Lonkeng believes Jamaica's structural impediments are well known. Other than crime, there is a strong need for more emphasis on “speedy implementation”, reflecting sometimes limited capacity. Public sector transformation is key, in addition to the related need to “attract and retain talent”, as if one wants performance one needs to incentivise effort. Other issues include lack of agricultural resilience, access to finance and the brain drain (a more predictable economy with brighter prospects would make people come back or stay).

Asked what had most impressed him about Jamaica outside of work, he said, beyond the music and culture, “the Boys' and Girls' Champs”. Watching their “passion and clockwise process”, he observed it was no accident that Jamaica generates so many world-class athletes. “If a 14-year-old can manage the pressure of his peers and school fans here at the National Stadium, the world stage is likely a joke. He/she would be well ahead of the pack.”

“Six and a half years of straight, consistent sound policy that's not a sprint, but a marathon,” he concluded.


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