Karelle Samuda and Stephanie Abrahams | A clear mandate for Bank of Jamaica

Institutions provide the ‘rules of the game’ for the organisation of activities within a society. By building strong institutions, one builds a strong country. In that regard, the Government of Jamaica has embarked upon the establishment and strengthening of economic institutions in order to underpin the economic and fiscal changes taking place in Jamaica.

One such area is the modernisation of Jamaica’s central bank, an institution that is integral to the further strengthening of the country’s monetary policy framework to achieve the objective of price stability.

Introduction

The principles for modernisation of the Bank of Jamaica (BOJ) outlined in The Bank of Jamaica Amendment Act, 2020, which was passed in December last year, are in keeping with the evolution of other central banks across the world.

A modern and independent central bank is expected to lead to greater transparency, independence and accountability in the conduct of monetary policy, thus ensuring better economic outcomes.

The amended law was contemplated for over two years, and benefited from robust feedback from technical experts at the BOJ, the Ministry of Finance and the Public Service, members of Government and the Opposition, as well as from members of the private sector and civil society.

The amended law: (i) clarifies and focuses the BOJ’s mandate; (ii) strengthens the governance structure to allow for greater operational and policy independence; (iii) enhances the corporate governance mechanisms; and (iv) guarantees the financial independence of the central bank.

Clear Mandate

The primary objectives of the bank are now price stability and financial system stability, with price stability as the principal mandate.

Price stability occurs when the general level of prices in the economy are fairly constant over time, or rise (inflation) at a stable and predictable rate. Monetary policy, which is the purview of the central bank, is what is used to influence the level of inflation in an economy.

Improved Governance and Removal of Ability of GOJ to borrow

The Government will set the inflation target (or target range) in line with its growth and employment objectives. However, the BOJ Amendment Act empowers the BOJ, and specifically the Monetary Policy Committee, to be operationally responsible for achieving this target, without external influence.

The governor of the BOJ is required to submit to the minister of finance an annual report on the performance of the board and its committees, which the minister then tables in the House of Representatives. In addition, the Monetary Policy Committee issues semi-annual reports which are also tabled in Parliament. For even greater accountability, the governor is required to attend the Standing Finance Committee of the Parliament to answer questions in relation to these reports.

Board members are now appointed for staggered terms, maintaining board stability across political cycles. No longer can the entire board be replaced at one time; instead a single board vacancy will arise every two years. This allows for building on institutional memory and capacity as well as the focus on sound analysis, independent of short-term political objectives.

All members of the board and its statutory committees are now required to meet specific qualification requirements and to undergo fit and proper assessments.

The BOJ Amendment Act also now prohibits the Government from borrowing from the central bank, except in declared national emergencies. And, in those instances, full transparency is required. The minister of finance will be required to table a resolution in Parliament setting out the circumstances and gain the consent of the Parliament.

Operational Independence

The most important feature of the modernisation is contained in a single clause in the act. This clause removes the ability of the minister of finance to give directions on monetary policy. Essentially, this means that the central bank will have unambiguous operational independence in the conduct of monetary policy.

While the goals of monetary policy remain with the political directorate, regarding the setting of the inflation target, responsibility for achieving those monetary policy goals rests squarely with the central bank.

This is a critical change that is consistent with global consensus. There is a significant lag between the timing of monetary policy decisions and when those decisions have impact. As such, monetary policy practitioners have to bring a long-term perspective to their deliberations and decisions. Experience around the world, and over time, supports the view that if monetary policy decisions are unduly influenced by short-term considerations the economy is likely to experience frequent boom-bust cycles.

This independence, therefore, decouples the economic cycle from the political cycle. The credibility of the central bank in achieving the inflation target is greatly enhanced by independence. This is important as, with credibility, inflation expectations become firmly anchored around the central bank’s stated goals.

Having greater confidence around the evolution of inflation into the future, households, investors, financial institutions and businesses are likely to make longer-term decisions that have the impact of deepening financial markets in a manner that supports improved access to finance and greater financial inclusion.

It is important to note that operational independence is balanced by greater transparency and accountability. The minutes of Monetary Policy Committee meetings will be made public and the governor will account to the Parliament, at least semi-annually, responding to questions from the elected representatives of the Jamaican people.

Closing

The clarifying of the mandate of the BOJ, as well as the enhancement of the governance structure, allows for greater operational and policy independence in the conduct of monetary policy. The implementation of the BOJ Amendment Act, 2020, along with the development of other key institutions, will allow us as a nation to have an increased ability to address priority areas as determined by Jamaicans, and achieve these objectives without compromising macro-fiscal stability.

Karelle Samuda is an adviser in the office of the Minister of Finance and the Public Service; Stephanie Abrahams is a senior analyst in the office of the Minister of Finance and the Public Service. Send feedback to karelle.samuda@mof.gov.jm or stephanie.abrahams@mof.gov.jm.