Al Edwards, Business Co-ordinatorAs indicated by the published balance sheets of the Bank of Jamaica (BoJ), and highlighted by one of this paper's columnists, the central bank has been showing accumulated losses since the second quarter of this year, amounting to approximately $1.1 billion up to the end of October 2001. This in contrast to the institution posting $2.7 billion in profits last year. However checks with the central bank reveal that since October, there has been a significant improvement in the profit/loss position of the Bank, and Sunday Business understands that after the Bank's third quarter operations, the loss figure has dwindled to the region of some $298 million up to the middle of November.
Interestingly, a close look at the bank's published paperwork reveals that despite its accrued losses, the Bank has not so far this year generated a cash loss.
Understanding BoJ finances
The central bank's primary functions relate to the issue of currency, conducting monetary policy, and managing its foreign reserves, and the major components of its assets are its foreign securities and Government of Jamaica securities. Its major liabilities are its stock of open market instruments plus, to a lesser extent, the money in circulation and the reserves it holds for commercial banks. When the bank earns money, it does so primarily from interest income on its foreign and domestic assets. It in turn accrues most of its costs when it has to pay out interest on the domestic instruments it issues. Issuing such instruments (what the bank refers to as open market operations, OMO) is done as part of conducting monetary policy. Figures obtained from the central bank by Sunday Business indicate that its other operational expenses, such as administration and other agency costs, are relatively small compared to the use of these open market operations.
The reasons for the current loss position include:
a) The NIR
The major reason for red ink appearing on the central bank's books this year appears to be the dramatic increase in the levels of the Net International Reserves (NIR). Quipping that he was happy to finally know for sure that persons were actually reading the BoJ's published balanced sheets, BoJ Governor Derick Latibeaudiere told Sunday Business, "We have accumulated reserves at a rapid rate relative to any other central bank that you can speak of."
At one point in September 2001, the NIR had increased to a record US$1.6 billion, closing the month at US$1.5 billion, which, according to BoJ officials, was approximately US$200 million higher than programmed. Sunday Business understands that part of the increase came from extraordinary inflows such as US$242 million from the bauxite sector, US$541 million from other private inflows (both up to March this year), plus the US$449.9 million proceeds of the Government's Eurobond, as well as US$178.5 million from the sale of Jamaica Public Service Company (JPSCo).
Central bank officials point out that leaving these US$ inflows on the market and not purchasing them could have created disruptive effects on the exchange rate. Then, since the total NIR build-up up to the end of October injected some J$23 billion into the market, the Bank utilised OMO to mop up the Jamaican dollar liquidity and maintain monetary stability.
b) Reducing the cash reserve ratio.
The three percentage point reduction in the cash reserves ratio since the start of the year also injected some J$2.6 billion back into the banking system, which, for the same reasons as above, the Bank also reabsorbed through OMO. Banking sector sources point out that the cash reserve ratio had been hiked years ago as a liquidity control measure in response to a period of very high inflation.
Since the BoJ had to turn around and mop up the funds released, these sources add that reducing the ratio this year transfers the cost of restricting that liquidity from the commercial banks back to the central bank. The move, some say, is also a deliberate jolt that is hoped will stimulate increased activity in the banking sector. Largely because of these two factors, Sunday Business understands that interest costs to the central bank associated with the increase in open market instruments amounted to some J$10.5 billion by the end of October 2001.
c) Income losses
Central bank officials reveal that while spending more on one hand, on the other, the bank has pulled in relatively less-than-usual operating revenue so far this year.
Interest income on BoJ's domestic assets declined by approximately J$1.1 billion for the first ten months of 2001 relative to the 2000 calendar year. In addition, because of the steady reduction in United States interest rates this year, the bank has suffered potential earnings losses on its foreign assets of some US$32.8 million ($1.5 billion).
The rationale
Referring to the loss situation at a press conference on Wednesday, Governor Latibeaudiere said, "There are times when the central bank has to take an explicit decision that it will do something in the public's interest and absorb the cost - but the losses of a central bank are not in the same vein as the loss of another public or private entity. [Those losses do not] pass ultimately to the taxpayer."
BoJ officials point to the fact that the Bank's monetary policy operations have resulted in a significant reduction in inflation over the past five years, and that in pursuit of its low inflation mandate, invariably there will be some adjustment cost.
The BoJ's recent profit/loss history: Prior to 1994, the Bank's balance sheet also showed losses, due, in part, to its holdings of non-interest bearing securities. For the six-year period 1989 to 1994, the central bank recorded accumulated losses of approximately J$13.2 billion. In order to curtail sources of monetary expansion and reduce the burden on the national budget, BoJ officials told Sunday Business in 1995 the bank's operations were modified with the acquisition of interest-bearing securities and the sterilisation of Government balances within the Bank of Jamaica. This sparked a dramatic reversal of the loss position, with the Bank generating average annual profits of J$2 billion between 1995 and 2000, with an accumulated profit for the six-year period of J$12.1B at December 2000. These profits have been set off against the accumulated losses of the previous period.
The restructuring, the bank says, was in keeping with the shift in emphasis towards the reduction of inflation through strict base money targeting. The revised reporting format recently observed in the bank's balance sheet, according to BoJ officials, is in keeping with this emphasis, and the bank's external auditors have endorsed the change, indicating that reporting net profit/loss under "Government Obligations" weekly and monthly, as against only annually, is consistent with the stipulations of the Bank of Jamaica Act. Under the Bank of Jamaica Act (1960), section 9, the Bank credits its annual net profits or losses to Government, by way of the General Reserve Fund. If the central bank makes losses, the Government is legally obligated to make good from the Consolidated Fund any losses not covered by the reserve fund.
