The government plans to make a more targeted approach towards managing the foreign exchange (FX) market this fiscal year.

Finance Minister Dr Nigel Clarke unveiled a three-pronged targeted approach for the FX market, as he opened the 2020/2021 budget debate in Parliament yesterday. While pointing to the work done last year and the new measures being rolled out over the coming weeks, Dr Clarke conceded that, “There is much work to be done to improve the efficiency and depth of the foreign exchange market.”

The first pillar of the three-pronged approach will be implemented in the next few days when the Bank of Jamaica (BOJ) rolls out the first phase of its foreign exchange trading platform, which should promote greater inter-bank trading and increase the depth and liquidity of the market.

In addition, the BOJ is now working on 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 pillar, which is just being announced, will see the central bank increasing the limit below which regulatory approval is not required for the issue of US dollar securities. Dr Clarke told Parliament that while Jamaica operates a market-determined exchange rate, the BOJ has, over the years, enacted many reforms designed to deepen the market, improve its functioning, and allow the BOJ to reduce its footprint in the market.

He disclosed that at present the BOJ 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. “Mr Speaker since October 2016, the BOJ’s non-borrowed reserves increased by over US$1 billion,” the finance minister asserted.

The latest data show 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, Dr Clarke acknowledged that the challenge is that, like 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 (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 the 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.”

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 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.