"We will always have a vibrant capital market in Jamaica, but we need to get real," Shaw said at the Scotia DBG-sponsored discussion on the supplementary budget at the Terra Nova Hotel in St Andrew last Thursday.
"There is a creature called single-digit interest rates. As long as we are able to control inflation, we have to accept lower spreads. The Bank of Jamaica is now offering 17 per cent on its 180-day instruments and it cannot be that some are still insisting that they want 23 per cent for loans," said the minister.
"We have to have a buy-in to lower interest rates. Inflation is now being controlled, so that excuse can no longer be used."
interest rates reduced
The interest rates offered by the Bank of Jamaica on its open market instruments were reduced significantly by a cumulative 450 basis points during the quarter ended September 30, adjustments, the central bank said, that were in line with the falling inflation and continued stability in the foreign-exchange market.
Interest rates, however, remain above the 12-14 per cent lows of two years ago.
Shaw said a low-interest rate policy would remain a key part of the plan to regain fiscal control of the economy, noting that Jamaica had in the current fiscal year lost US$1.3 billion in revenue, amounting to 20 per cent of the Budget, or 10 per cent of GDP.
Meanwhile, Lissant Mitchell, senior vice-president of Treasury and capital markets at Scotia DBG, said that the trending down of interest rates was one of the improving fundamentals of the Jamaican economy, alongside a stable exchange rate since February 2009, single-digit inflation of seven per cent and an improving balance of payments.
He noted, however, that remaining areas of concern included continuing negative GDP growth, the credit ratings downgrade to CCC-, reduced remittances and tourist flows, depressed stock and bond markets, a widening fiscal deficit and rising oil prices.
According to the analysis provided by Scotia DBG, the rate of economic growth in the upcoming months is expected to be sluggish in light of moderations in the global business arena.
potential flows threatened
The investment bank noted that potential flows to the Jamaican economy, especially of foreign direct investment, remained threatened by tightened liquidity conditions and a considerable lack of access to capital markets precipitated by the international economic crisis.
And that growth would continue to be retarded due to the recurrent weakness of the productive sector and exacerbated by the shortfall in government revenues.
Shaw said at the forum that in light of the current conditions, it would have been irresponsible for Jamaica not to approach the International Monetary Fund (IMF), as 60 other crisis-stricken countries had done.
He said that an agreement with the IMF was imminent, and would open doors to funds from other multilateral institutions.
Shaw stated that tax reform, continued low interest rates, and restructuring of the public sector were key changes to be made in the medium term, but that his ministry would also be looking at ways to give the productive sector a shot in the arm.
"Ultimately, it is not about whether we get money from the IMF, World Bank or the IDB (Inter-American Development Bank)," he said.
"Over time, we are going to have to substitute earnings for borrowings. You cannot borrow your way out of persistent poverty."
Shaw said manufacturing would be given priority in terms of support because the sector's job multiplier effect was greater than other areas.
For every job created in manufacturing, Shaw said, two other jobs were created elsewhere in the economy.
avia.collinder@gleanerjm.com