AT yesterday’s Bank of Jamaica (BOJ) press conference, Governor Brian Wynter advised that in order to address the current very tight Jamaican dollar liquidity conditions in the local financial system, he intended to go well beyond the recently introduced overnight liquidity “standby” and 14-day repurchase operations with deposit-taking institutions through the introduction of longer term repurchase agreements. What this would mean is that the BOJ would buy government paper from the major commercial banks in return for cash, providing them with liquidity, and then sell the government paper back to them under the repurchase agreement in a few months’ time. According to sources, the planned injection may be as large as $20 billion for as long as six months.

According to Wynter, the central bank was currently having active discussions with “deposit takers” on how to manage this imminent “sizable injection of liquidity” so that it goes towards the expansion of business credit. The Bank is satisfied that there is an unmet demand for credit for expansion, having assessed a number of potential projects quite carefully, and intends to fix the problem of loans not made due to a lack of liquidity in the banking system.

At the same time that this liquidity injection takes place, the BOJ plans to build up its US dollar reserves as a precautionary measure to address any issues that could be created through this injection, and generally to meet its March reserve target, which it regards as adequate for likely shocks. Despite money being “fungible”, the Governor does not expect the commercial banks to be using this new found Jamaican dollar liquidity to build long foreign exchange positions as it monitors them closely and has detailed information on their positions. Indeed, he advised that in the recent past some of the banks have actually had “short” foreign exchange positions. The concern has been instead that some of this future new liquidity could be used by the bank’s customers to build long positions in foreign exchange.

Next week, the Government will be paying out two domestic US dollar bonds with a combined value of around US$285 million, half of which will be financed by the recent IDB loan for US$140 million, with the latter funds having been received at the end of last week. While this will initially put US funds in the hands of domestic investors, mainly banks, the Central Bank will separately be taking in US dollars from the banks through a new two-year US dollar deposit instrument, as well as through outright purchases of foreign exchange. By taking two-year deposits, the asset (US cash) that the Central Bank acquires will not be offset by the two-year deposit liability for the purpose of calculating net international reserves (as would be the case for deposits under one year) and therefore, combined with purchases this month and next, the Bank is confident in meeting our quarter-end NIR target. The Central Bank has already had a dry run of this process, having paid out, very quietly, two instruments of roughly US$200 million in January, of which it got over 60 per cent back as net international reserves.

Responding to a question on the financing of the current account deficit, the Governor notes that the current severe adjustment became necessary a couple of years ago when our current account reached unsustainable levels at around 14 to 15 per cent of GDP, and the high levels of foreign direct investment (FDI) that Jamaica had experienced earlier in the decade were no longer available. He noted that high levels of FDI were not part of the current projections under the IMF agreement. He expects Jamaica’s current account deficit to fall due to improvements in competitiveness (up to now the fall in the current account deficit has not been due to increased exports but reduced imports) and that, most importantly, we will see a return to more normal levels of private capital inflows, or as he put it “a return of our domestic savings”. In short, the fear generated before and during the National Debt Exchange led to capital flight and the Governor correctly notes that those “fears continue in some quarters”, but is anticipating a reduction in those fears this year (he notes the risks have already fallen sharply), and a consequent improvement in our ability to finance our current account.