Costly decisions

The Patterson administration ignored advice from international financial institutions on how to deal with the collapse of Jamaica’s financial sector in the 1990s because it would have been “costly”, former Finance Minister Dr Omar Davies admitted.

Davies made the conclusion in a November 19, 2009 written submission to the Commission of Enquiry, responding to more than 40 questions on the Government’s handling of the crisis.

The submission was among dozens of documents released by the Ministry of Finance on Thursday as part of the FINSAC Commission Archives.

Davies said the Government of the day sought advice from the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank.

He said the discussions took place in both Kingston and Washington and “dragged” on for several months.

“The summary of the advice which was eventually received was that intervention would be costly and would impact for an extended period on the fiscal accounts,” said Davies.

He said the advice was to allow institutions to fail, exclude their principals from future participation in the financial sector, and pay the depositors out of the proceeds of the sale of the assets that existed.

Davies said to effect this approach, there was a recommendation to close the entire financial system for a period of two weeks to implement all the required changes.

“This last recommendation reflected a total lack of appreciation of the implications of such an action and was rejected as impractical,” Davies said.

The former finance minister, who has been heavily criticised for the fallout, also denied any recollection of failing to act on the advice of the financial institution because of possible political implications.

The Commission of Enquiry noted that a November 1996 report of the IMF, the Inter-American Development Bank, and the International Bank for Reconstruction and Development estimated the size of the insolvency of Jamaican institutions at 20 per cent of GDP and advised immediate action to rectify the situation.

It said that the same report said the Patterson administration decided that that was not “politically possible”. The commission said the eventual cost was 40 per cent of GDP.

But Davies said he could not recall the specific report that was referenced.

“I recall discussions with the institutions, and the representatives of the institutions were told that closure of so many institutions would result in chaos. I do not recall the use of the term politically possible. I do recall it being pointed out to the multilaterals the potential social consequences of some of their recommendations,” he said.

He further argued that there could be no definitive response concerning the trade-off of the cost of the intervention.

Davies said while the eventual cost was greater than expected, there was no way to assess the “social chaos” that would have resulted from taking some of the actions recommended by the multilateral institutions, including the closure of the system for two weeks.

The commission also pressed Davies on why, as minister, he did not take timely action, having been notified by the Bank of Jamaica (BOJ) Supervisory Department of the insolvency of certain financial institutions.

He said that while the BOJ did make reports indicating insolvency or expected insolvency of certain institutions, “in virtually all instances, the level of bad loan was far greater than initial inspections indicated”.

He said it was agreed by the then Cabinet, Ministry of Finance, and the BOJ that attempts would be made to work with the principals to inject capital and sell assets in order to address the deficiencies identified.

Davies said that after many attempts, it became apparent that the principals had no genuine commitment to carrying out the undertakings given and that the decision was taken to do a generic intervention through FINSAC.

The Gleaner was unable to reach Davies for comment yesterday.

More than $160 million has been spent on the commission to produce a report.

The information was gathered over 10 years, beginning in 2009, but challenges resulted in the commission’s fizzling.

The information gathered was subsequently handed over to the ministry in 2019.

Yesterday, Finance Minister Dr Nigel Clarke said releasing the information should serve as a lesson to Jamaica as to what must never happen again.

“One of the most critical factors for economic stability is financial sector stability, and as such, regulation has to keep pace with the innovation in the sector,” Clarke noted at the launch of the FINSAC Commission Archives at The Jamaica Pegasus hotel in New Kingston.

Clarke said the twin-peak regulation being prepared by the finance ministry is critical to Jamaica’s financial sector stability going forward, given the complexion, makeup and structure, where financial conglomerates control 90 per cent of assets.

“Financial sector regulation must continue to be free of undue influence. Regulators must be completely empowered to do their work with a transparent appeals process that exists that does not involve the political class. That is critical for Jamaica’s long-term future,” said Clarke.

kimone.francis@gleanerjm.com