By Alva Edwards,
Acting Financial Editor
THE lowering of interest rates is necessary in jump starting the economy and awakening it from the slumber of five years of negative growth, a fact not lost on the Government.
But the will to implement a cut in interest rates and the ability to do so all too often proves a conundrum that has taxed many exchequers, and is not just peculiar to Dr. Omar Davies' tenure as Minister of Finance.
Speaking at a Mayberry's Investor's Workshop in Kingston last month, the Minister of Finance and Planing, Dr. Omar Davies, said that one of the Government's major disappointments and set backs of last year was its inability to cut interest rates. He pointed out that the Government was on target for the first three quarters of the calendar year and the first two quarters of the fiscal year.
He added that it was on target not just for a reduction, but also in terms of the Government's commitment to reducing the cash reserve ratio.
He attributed the failure to meet the target in the last part of the year to a number of factors, primarily the participation of local investors in putting pressure on the domestic foreign exchange market which was in turmoil during the last bond issue lead by Bear Stern.
Buffeted by this scenario, the options available to both the Ministry of Finance and Planning and the Bank of Jamaica (BoJ) would come down to the Government( as the biggest spender), contracting its level of expenditure thereby ensuring that there would be less Jamaican dollars available.
Then there is the option of selling money to the foreign exchange at a rate that would influence a downward turn in the exchange rate. Of course it could tighten an already taut monetary policy by virtue of the actions of the Central Bank.
When faced with these options the Government decided to sell heavily into the market which in the end did not assuage rampant instability. The dilemma bore two horns, a hike in interest rates, and a free falling exchange rate.
The Government elected to settle for the former and in effect further stymied confidence in the banking and business community at large. There are those that say a fall in interest rates must factor in an overvalued exchange rate and the servicing of a huge domestic debt.
But just where can the Ministry of Finance and Planning concentrate its greatest efforts given the fact that it is besieged on all fiscal fronts.
Last year, faced with further devaluation and rising inflation the Government has been forced into containment mode, with it having to forgo a reduction in interest rates.
But what of this year? Economist and bankers alike, view a reduction in interest rates as just the panacea needed for both the private economy and in terms of the governance of the country.
Economist Dennis Morrison used the analogy of landing an aircraft. "It is a delicate operation which has to factor in a number of relationships. You just don't land a plane at 30,000 feet."
To this end he views a reduction as dependent upon a trade off between the interest rate and the exchange rate, with the currency having to be fully backed in order that a reduction can take place.
Speaking to the Financial Gleaner, Mr. Morrison who is also senior director at the Jamaica Bauxite Institute (JBI) and head of the Airports Authority said: It is vitally important that interest rates fall because it essentially sends out a positive signal to the country at large. A cut in interest rates will make money cheaper for borrowers and will encourage commercial banks to begin lending again which enhances their profitability. This will be determined by just how the Government services its public debt particularly with the Financial Sector Adjustment Company (FINSAC) debt coming on to the Government's books this fiscal year and whether the Government can meet its fiscal target and reach a surplus." Looking at the year ahead, Mr. Morrison remained optimistic predicting that the Government would borrow less and reduce interest rates to a sustainable level.
An attempt to reduce interest rates will be determined by two factors, namely the extent of Government borrowing this year, (a fall off on its current levels will see less pressure placed on both the foreign exchange and interest rate) and growth of revenues via taxation and divestments.
The Government of Jamaica's (GoJ) interest rate targets for 2001/2001 as expressed in its "Letter of Intent" of July 2000 and its "Memorandum of Economic and Financial Policies" were to achieve a Central Bank 30 day reverse repurchase rate of 13.5 per cent and a six month treasury bill rate of 14 per cent.
The difficulty in containing interest rates can clearly be seen by what has occurred over the last four months. While the Central Bank has not changed its 30-180 day repurchase rates over that period, it has on two occasions dramatically increased its 270 day and 365 day reverse repurchase rates due in the main to extraneous circumstances.
Economist and business development manager at George & Branday noted: "The success of the Government's drive to lower local interest rates is primarily dependent on its ability to lower the exchange rate premium demanded by investors, and the yield offered by its overseas U.S. dollar denominated Eurobonds. The very high level of internal debt, the constant need for financing created by the very short average maturity of the internal debt, and the very high level of debt servicing as a total percentage of the total budget (which stands at some $167 billion) make it difficult to lower interests rates."
However Mr. Collister did point out that a lowering of interest rates was possible provided the Government was able to balance the budget, make net gains on the next budget from the divestment of JPSCo and NCB, receive further inflows from the multilaterals and benefit from the lowering of U.S. interest rates (lowered 50 basis points on January 3 and again earlier this week.)
