The International Monetary Fund (IMF) said that deposit dollarisation in Jamaica is one of the highest in the region and pointed out that it has negative implications for macroeconomic stability.
In its 13th review of the Extended Fund Facility arrangement with Jamaica, the fund noted that as at June 2016, more than 45 per cent of deposits are denominated in US dollars. This is accompanied by dollarisation of investment portfolios, the fund said.
Likewise, it noted the three-year-long freeze of the domestic bond market, which resulted in greater reliance on external capital markets and in higher dollarisation of public debt deposit dollarisation has increased in the financial system and public balance sheets.
The background to this, it explained, is the 2013 crisis in which domestic bonds were restructured, reserves declined, and the nominal exchange rate depreciated.
The fund said that while local investors see FX investments as a means of reducing risk, high dollarisation has economic costs.
“It reduces the effectiveness of monetary policy, constrains central bank capacity to act as a lender of last resort, exacerbates the ‘fear of floating’, makes greater exchange rate flexibility costly, and could potentially fuel liquidity and currency mismatch risks in the financial system,” the IMF stated in its review.
The agency asserted that while latest FX and liquidity stress tests by the Bank of Jamaica (BOJ) suggest continued resilience of the deposit-taking institutions and securities dealers to these shocks, careful monitoring of the dollarisation trend and its risks is essential.
“A mix of macroeconomic and macroprudential policies is needed for de-dollarisation,” the IMF suggested. “Efforts to further develop the domestic debt market, combined with macroeconomic stability, should help gradually de-dollarise public balance sheets.”
It is also advising that greater exchange rate flexibility, with two-way movements instead of one-way bets on the tightly managed exchange rate, has been shown to encourage de-dollarisation (for example Bolivia, Peru, Paraguay, and Uruguay have de-dollarised, inter alia, by adopting inflation targeting and hence greater exchange rate flexibility).
The fund advised that “macroprudential measures have helped a number of countries de-dollarise, including with higher loan provisioning and capital requirements on FX loans, higher reserve requirements for FX deposits, and setting limits on net open FX positions”.
It noted that the BOJ is also evaluating if the current risk management framework is adequate. The IMF recommended revising the reserve requirement framework to remove the incentives of DTIs to build FX liabilities and increase their demand for Jamaican dollars.
— Avia Collinder