In response to the current global financial crisis, governments around the world have, and are, putting in place both fiscal and monetary stimuli to mitigate the impact on their respective economies.

In Jamaica, our Government has recently announced, and implemented, several fiscal measures in this regard. At the same time, perhaps in concurrence with the IMF, our Government has tacitly approved or appears indifferent to the Central Bank's position on its current monetary policy stance regarding the recent hikes in interest rates.

While the Government might have been anesthetised or neutralised by the IMF, and the country braces for the inevitable negative economic consequences (stagnation and contraction) which will result from the recent rate hike(s), it is timely that a critical analysis be conducted on the mandate and modus operandi of the central bank. And, more critically, assess the bank's capability to be effective in the current 'crisis' enveloping the Jamaican economy.

The Legal Mandate of the BOJ

The Bank of Jamaica Act 1960

Section (5) General Objects:

The principal objects of the bank shall be to issue and redeem notes and coins, to keep and administer the external reserves of Jamaica, to influence the volume and conditions of supply of credit so as to promote the fullest expansion in production, trade and employment, consistent with the maintenance of monetary stability in Jamaica and the external value of the currency, to foster the development of money and capital markets in Jamaica and to act as banker to the Government.

This mandate is still in effect and is recited annually by the bank's external auditors in their 'Notes to the Financial Statements', item 1, Identification.

The Bank's written Operating Policy Framework vis-à-vis its Legal Mandate

Stated in this framework are:

1. Under the BOJ Act (1960) the conduct of monetary policy is aimed at regulating the growth of money and credit in line with the resources expected to finance economic activity and generate employment without undermining price stability. This is in keeping with the bank's main objective of safeguarding the value of the domestic currency.

2. Monetary policy refers to the actions taken by the central bank to influence the amount of money and credit in the economy. In doing so, the central bank can determine the level of consumption or investment spending and, hence, influence the rate at which domestic prices grow and the level of growth in the economy.

A close examination of the above policy statements reveals a subtle but fundamental shift from the General Objects Clause of the act. The act stipulates the use of money and credit for the fullest expansion of the economy (growth) with stable prices. Egregiously, the second policy statement reverses the requirement of the act by espousing and putting into practice the use of money and credit to control domestic prices, firstly, and lastly, the use of money and credit to passively affect the level of economic activity and not the fullest expansion thereof.

The above violation is further exacerbated by the following statement at the end of policy statement (1) above and repeated hereunder:

"This is in keeping with the Bank's main objective of safeguarding the value of the domestic currency."

The "value of domestic currency" is the last mentioned of the Bank's technical core functions in the General Objects Clause of the Act and it is neither expressed nor implied as the main objective of the Bank.

The bank's modus operandi would appear to be significantly at variance with General Objects Clause of the Act.

The international influence of the Reserve Bank of New Zealand (RBNZ)

In April of 1996, when the BOJ installed its new governor, the RBNZ was in its sixth consecutive year of unprecedented success with low single digit inflation results. This was achieved under the leadership of its distinguished and highly successful governor, Dr Donald T. Brash. Governor Brash joined the Bank in September of 1988 and was instrumental in the new RBNZ Act of 1989 which set the primary function of the Bank as follows:

"Provide stability in the general price level".

In addition, he negotiated and signed a formal contract on behalf of the RBNZ with the Government that he as governor would hold inflation between 0-3 per cent or he be dismissed.

Governor Brash met the inflation target for the full period of his tenure which ended in April of 2002.

The Brash euphoria not only influenced the BOJ in 1996 but other central banks worldwide. Coincidentally, in that same year, 1996, a published comment from Milton Friedman read as follows: "... it is interesting to note that so far as the international acceptance of monetary control is concerned it was started by the (Reserve) Bank of New Zealand".

Inflation and domestic currency stability in the monetary control environments of Jamaica and New Zealand

The key variable in "safeguarding the domestic currency" is inflation. In this endeavor, the BOJ is compared with the RBNZ, its apotheosis.

Inflation outturn

The BOJ inflation outturn (Dec/Dec) for the years 1996-2008 shows an average of 11 per cent.

Over the same period, the Jamaican currency depreciated significantly. At the start of 1996, the Jamaican dollar could purchase 2.5 cents US (40/1). By the end of 2008, one Jamaican dollar could only purchase 1.25 cents US (80/1).

Anti-inflation success

In contrast, the legacy of Dr Brush's spectacular anti-inflation success between 1990 and 2001 was maintained to 2008. In January 2009, the RBNZ reported that: "Since 1990 CPI inflation has averaged around 2.5 per cent". While the conditions relating to currency movements are dissimilar, it is worthy of note that in 1990, one New Zealand dollar could purchase 60 cents US (1.67/1). By 2008, the NZ dollar had appreciated and was purchasing 80 cents US (1.25/1)

Economic growth: Is it a central bank's prerogative?

The Federal Reserve

It is instructive to observe that after World War 11, the Federal Reserve responsibilities were expanded with the enactment of the Employment Act of 1946, designed to promote maximum employment. This Act was further amended in 1978 as the Full Employment and Balance Growth Act (Humphrey-Hawkins) mandating the Federal Reserve to establish a monetary policy that maintains long-run growth, minimise inflation, and promote price stability. Coincidentally, the legal mandate for growth, inflation, and stability mirrors that of the BOJ Act of 1960. The Jamaican legislators were almost two decades ahead of the American legislators in this regard.

Since Humphrey-Hawkins, 1978 to 2007, (30 years), the US economy, a mature economy and the largest in the world, has recorded an annual average growth of over three per cent. This annual growth record was interrupted in only three of the 30 years: 1980 (-0.1), 1982 (-1.9) and 1991 (-0.1). The noticeable reduction in 1982 resulted from the "oil price shock of the late 1970s".

Interestingly, an internally promoted regional Fed President, Paul Volker, was appointed head of the Federal Reserve in August 1979, the year following Humphrey-Hawkins. Though not a committed monetarist - inflation could be controlled solely by controlling the stock of money - he combined money supply, interest rates and jawboning endeavours to reduce inflation from 13.3 per cent in 1979 to 3.8 per cent in 1982. Since then, inflation has averaged 3.2 per cent annually to 2008. Volker demitted office in 1987 but his legacy - sustained economic growth and low inflation continues.

Inflation environment

In 1996, like the Federal Reserve in 1979, the BOJ got an internally appointed Governor. The new Governor inherited a somewhat similar high inflation environment as did Volker. Inflation was already trending downwards from 27 per cent in 1994 to 26 per cent 1995 and 15.8 per cent in 1996. By 2000, it had reached 6.1 per cent (Dec/Dec) and started increasing again for the next five years with a reduction in 2006. Unlike Volker, overseeing the largest economy in the world, the new BOJ governor did not bring average annual inflation below four per cent and hold it for the thirteen years of his (continuing) tenure. The average inflation rate over the 13-year period (including 2008 at 17 per cent Dec/Dec) is 11 per cent.

As regards the BOJ's nemesis, economic growth, the first four years of the new governor's tenure saw an unprecedented four years of negative GDP growth for the period 1996-1999. As reported by the PIOJ in its 2000 edition of Economic and Social Survey, real annual GDP growth for (96-99) was -1.3, -1.8, -0.4, -0.4, respectively.

Totally oblivious to the unprecedented negative GDP results, and perhaps confirming its own disregard for economic growth, the Central Bank wrote the following self-congratulatory comments in October of 2000, six months after the PIOJ GDP publication:

"During the four-year period 1996-1999, the results of monetary policy have been reflected in:

1. The marked reduction in the monthly and annual inflation rates.

2. Relative exchange rate stability.

3. The steady gain in credibility of the central bank as it relates to defining and implementing monetary policy actions.

All three aspects have contributed to stability in the Jamaican economy and fostering a more friendly investment climate in support of increased growth over the long term."

In spite of the high expectations in October of 2000, the Jamaican economy, eight years later, continues to struggle. Unlike Volker, at the Fed, who set the stage for 30 years of economic growth (with low inflation), the BOJ's Governor has delivered an average annual inflation rate of 11 per cent and an average annual real economic growth of less than one per cent (0.7) over the years 1996-2007.

The Reserve Bank of New Zealand

The BOJ and the Federal Reserve share a similar statutory orientation with growth as their primary objective. However, the RBNZ, despite having price stability as its primary statutory objective, has a sustained long-term economic growth rate similar to that of the United States. Between 1994 to 2008 (June/June) the New Zealand economy grew at an average rate of 3.3 percent.

Despite New Zealand's commendable growth performance, its former Governor, Dr Donald Bash, in August of 2001, eight months before demitting office, made the following statement in a speech to a conference on the topic, 'Faster Growth? If We Want It':

"Fundamentally, this conference is about economic growth, and how New Zealand can get more of it.

Many New Zealanders do not see increasing growth as a high priority objective. What we want is to have access to better housing, better health care, and better education. What we want is to protect the relatively egalitarian society of our past from increasing income disparities. What we want is more attention paid to preserving our natural environment. What we want is less stress and more leisure time."

It is a most compelling statement from a sitting central bank governor of a small country of 4.8 million people without an abundance of natural resources or the largess (unearned windfall) of foreign remittances.

In Jamaica, a relevant request to the current central bank governor would be: Faster Growth! We want it! This should not be an unreasonable request given the label of a world-class banker being ascribed to him by The Sunday Gleaner of November 3, 2002.

(See table above)

The BOJ has substantially underperformed in all categories, excepting the inflation outturn during 96-99 when compared with developing countries.

See Part II in Sunday Business

Growth and inflation in comparable economic regions

The following statistics were taken from the PIOJ's annual Economic and Social Survey publications:

Average Annual % Inflation

Jamaica Asia Developing Countries

96 -99 9.9 5.6 9.9

00 - 06 9.7 3.0 6.0

Average Annual Real GDP Growth

96 -99 -1.0 6.2 4.0

00 - 06 1.5 7.6 6.3

(Asia excludes China)