New Confidential Economic Bulletin

Overview
The BOJ has continued their major intervention in the foreign exchange market for most of October and into the first week of November. The NIR fell by over US$60m in October and the volume of hard currency sold into the market by the BOJ has fallen off in recent days. Interest rates on the 9 and 12 month repos have been reduced to their levels before the 4% increase last month and the government paid off a maturing T-Bill issue at the end of October, rather than hold a tender at which the T-Bill rates would have risen significantly. A rise in the T-Bill rates would have increased the interest rates payable on the government's large stock of floating rate LRS, thus adding substantially to its domestic debt servicing costs.

The manner and extent of the BOJ's intervention in the FE market is still having an impact in the financial sector and may affect the wider economy for some time to come. A lot of institutions found themselves caught short when the unlimited issue of 9 and 12 month repos hit the market, as note holders pulled cash from lower yielding repos to go into the higher yielding ones. While the money market players seem to have sorted themselves out fairly quickly, BOJ had made advances to financial institutions, probably commercial banks, of up to J$2.95bn by 25/10/00. The intervention may also come back to haunt the BOJ itself. That institution now holds about J$7bn of repos which are unbacked by government LRS or other securities. Unless this situation is corrected, the payment of interest on these instruments will put high-powered money into the economy, thus creating serious problems for the containment of inflation in 2001.

At the time of writing, 9/11/00, the Jamaican dollar is trading at between J$45-45.15 on the FE market, with BOJ selling into the market at J$44.30 when they intervene. It is quite likely that the rate will continue to slip if the BOJ does not continue its interventions, but how fast or how slow the movement will be, is anybody's guess. The BOJ seems now to be pursuing a policy of preserving the real effective exchange rate and is therefore trying to limit the depreciation in the local currency to the inflation differential between Jamaica and its major trading partners. If the manner in which they intervened in the FE market in October has set the pattern for future interventions, then we can look forward to a lot more volatility in local interest rates in the coming months.

The pressure in the real sector continues to be quiet intense and the lay-offs that have been a feature of private sector activity for some time now, have begun to hit the public sector as well. Since our last bulletin, the Postal services have announced plans to lay off 300-400 temporary workers and the JDF is also to reduce its civilian workers by a similar level, by a process of attrition. The government is obviously bracing itself for next year's budget when the FINSAC debt comes onto the books and it is quite likely that there will be further reductions of staff in the public sector. Although the fiscal accounts for the first half of the 2000/01 fiscal year showed some improvement over last year's outturn, interest rates have not fallen as planned and so debt servicing costs are going to rise both this year and next. The revenue authorities are making a Herculean effort, with tax revenues rising by 18.2% in the first half of this year, but the interest rate policy is adding to the burden that they have to bear. Next year they will also have to contend with the absence of considerable one-off inflows like the sale of the cellular licences.

The year 2001 is likely to be another very challenging one for both the public and private sectors.

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