IN ANNOUNCING the latest one percentage point cut in its benchmark rates last week, Jamaica's central bank said it could take the action because of the slowdown in inflation and the relative stability in the foreign-exchange market following the volatility late last year and in the early months of 2009.

Jamaicans have every cause to be glad for these developments and to hope they continue and even accelerate. For, as politicians like to remind us, inflation is a tax primarily against the poor who lack the resources to hedge against and take advantage of rising prices.

Moreover, the four-and-a-half percentage point reduction in the rate on the Bank of Jamaica's (BOJ) 180-day certificate of deposit should be good for business, assuming that it translates, as it should, into lower costs from which firms can borrow from their banks. For while a 17 per cent signal rate is still far too high to stimulate robust investment activity in the economy, any easing of the oppression on firms is good. If they don't have to pay so much to service their debt, they may maintain jobs, keep production going and, perhaps, be in a position to pay more taxes if they are profitable.

Potential benefits

There are direct benefits for the Government too. Lower interest rates mean that it will pay less on its over $600 billion in domestic debt and will, therefore, be in a stronger position to shore up its badly unbalanced fiscal accounts.

The question, though, is whether the potential benefits will be fully realised.

What BOJ's Governor Derick Latibeaudiere didn't say when the bank announced last week's rate cuts is that a significant part of the emerging market and macroeconomic stability to which he alluded has to do with assumptions being made by financial markets about Jamaica's relations with the International Monetary Fund (IMF).

Indeed, Jamaica has access to US$320 million in special drawing rights under the liquidity programme that the Group of Eight countries agreed to earlier this year in an effort to refloat the global financial system. So, there is a cushion against short-term obligations, especially with the central bank's reserves having moved up to US$1.95 billion.

Rebuilding the economy

But the most important issue regarding the IMF is, for now, psychological. It is well known that Jamaica is negotiating with the fund for US$1.2 billion in credit that will bring with it an IMF-sanctioned programme for the medium-term management of the island's economy.

The fund's imprimatur will be important for accessing additional credit from the World Bank and the Inter-American Development Bank. The expectation of the IMF agreement has shored up market confidence - domestic and foreign - in Jamaica.

It is important, therefore, that the Government concludes its negotiations with the fund, so that all uncertainties are cleared and the country can get about and concentrate on the necessary but unavoidably tough business of rebuilding the economy. As it stands now, however, an October time frame for having in place an agreement with the fund seems doubtful.

The Government will only this week table its revised Budget for the current fiscal year and there is reported unease by IMF technocrats with some of the draft proposals put before them by the Jamaican authorities. In this environment, it is important that the Government get things right - and quickly.

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