Morrison
The circumstances surrounding the departure of the former Bank of Jamaica governor and the dispute over his claim for a large revision of his compensation package will no doubt continue to dominate the news for now. But the opening provided for a full-scale reform of the governance system of the central bank ought to take centre stage.
One critical matter to be dealt with is how to avoid the administrative pitfalls of a management structure that combines the roles of chairman and chief executive in the office of governor. Since this kind of structure exists in nearly all central banks, the focus should be on the checks and balances that must be instituted to control the use of concentrated power.
Starting with the Coke Report of the early 1990s, there have been a number of proposals for the reform of the BOJ that have called for the bank to be made independent of ministerial authority, reporting instead directly to Parliament. The appointment of the governor would be subject to parliamentary approval. By these means, it is anticipated that the bank would be shielded from political pressure to print money recognising that BOJ advances to the Ministry of Finance have not only fuelled inflation but facilitated the lack of fiscal discipline over many years.
lack of transparency
More recently, the call for reform of the bank's operations has concentrated on the lack of transparency in its conduct of monetary policy, specifically the setting of interest rates. The argument is that rates are moved up and down, sometimes erratically in the upward direction imposing huge interest costs on the budget, without scrutiny. And there is no requirement to fully explain the reasoning behind such action.
In many countries, central banks are obliged to hold meetings at regular intervals to review monetary policy and make decisions on interest rates, with the minutes of such meetings being published within specified periods thereafter. This is a position with which I fully agree and one that should be pursued whether the bank's reporting relationship is modified or not.
Membership of committees overseeing monetary policy is usually drawn from experts within and outside the central banks. Doubt about the possibility of finding outside experts locally to serve on a monetary policy committee who could be relied on not to misuse privileged information has been raised. While I understand the concern and the differences between Jamaica's financial system and that of say, the USA, appropriate solutions can be devised.
The push for instituting a transparent process for the conduct of monetary policy should not be regarded as a cure-all for Jamaica's economic problems, for the high interest rates and inflation rates that exceed those of our major trading partners or the loss of value of the local currency. At the root of the weakness in the macro-economy and the spiralling national debt is the mismanagement of spending by Government, especially by public-sector entities even when, like Air Jamaica, they are run by private-sector management.
Political parties, while in office, seek to undertake spending beyond what can be afforded, and successive governments have been ambivalent about tightening spending. Opposition parties also contribute to fiscal indiscipline by agitating for budgetary allocations that cannot be met, and both sides have tried to fulfil unrealistic election promises. Even when both parties agree on specific objectives, like increasing the level of allocations for education, they have not committed to adjustments in spending that would be required, as was demonstrated in the resolution on the issue passed unanimously some years ago.
high compensation levels
The governor's pay dispute raises, in my mind, the issue of the high compensation levels in the local financial sector. Because of these big pay packages there has been pressure on financial regulatory agencies to keep executive remuneration at levels not far removed from those paid by private financial institutions but significantly above the rest of the public sector. This has been so since I served as a board member of the Securities Commission, now the Financial Services Commission (FSC). Indeed, my understanding is that Mr Latibeaudiere's package prior to September 2009, under J$20 million, was not significantly above that of the head of the FSC.
The pressure put on the US financial system by the culture of extravagance in executive compensation was a big factor in the meltdown last year. Executives took extraordinary risks in pursuit of gargantuan bonuses and in the process, wrecked long-established institutions. In our case, it is my firm belief that the wide interest-rate spreads maintained by local banks is in part driven by bank management's push to boost profits in order to justify highly lucrative pay packages.
With the liberalisation of interest rates, banks have reduced rates paid on passbook savings, thereby bringing down their cost of funds. But they have moved very slowly in reducing lending rates when rate cuts are made by the central bank, which means that they end up with wide spreads that increase their profits. On the other hand, they are quick to hike their lending rates when the BOJ raises its policy rates.
explanations or excuses
Over the years, we were given different explanations or excuses as to why interest rate spreads in Jamaica are the widest in the region. First, we were told that they were due to the high cash reserve requirements of the BOJ that tied up large portions of commercial bank deposits at zero rate of interest. Then, as these were slashed, the reason given was the low rates paid on deposits that had to be held as liquid assets. But while the storyline has been changing, interest-rate spreads remain wide and executive pay continues to climb.
Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.