This article by @drnigelclarkeja is such an important article about the recent BOJ Amendments Act & establishing the Independent Fiscal Commission that I feel compelled to do a thread explaining some key components.

//Thread

#FinanceTwitterJa https://jamaica-gleaner.com/article/commentary/20201213/nigel-clarkebuilding-institutions-future-part-i-independent-central-bank

GOJ has prioritised 2 complementary institutional reforms: (i) Tabling legislation for the establishment of an Independent Fiscal Commission to strengthen JA’s Fiscal Responsibility Framework; and (ii) creation of an independent BOJ with an explicit mandate for price stability.

The key takeaway here is the following:
- Two key initiatives have been wildly successful for JA’s economic reform across administrations over the last 11 years: Inflation Targeting by @CentralBankJA and the establishing of @EPOCJA to monitor GOJ’s progress.

Both were temporary solutions that came out of the IMF engagements since 2009.

Given how successful they have been across 3 administrations, the most prudent course of action is to institutionalize them so they cannot be politicized like many good initiatives in our history.

So, this administration and this MoF specifically has championed the institutionalization of these two policies.

In other words, he has used his office to systematically devolve power from himself for the benefit of the country.

This is a HUGE step towards our econ. indep.

The BOJ Amendments Act creates the institutional framework for Full-Fledged Inflation Targeting monetary policy strategy in which the achievement of the inflation target set by GOJ will unambiguously be the primary objective of the Bank of Jamaica (BOJ or central bank).

In other words, BOJ’s primary objective will just be the inflation target range set by GOJ.

This is a great move because the single biggest destabilizer for economic growth is unstable (or high) inflation.

If GOJ sets an inflation target too high, we can vote them out.

Once GOJ sets the inflation target, BOJ has no choice but to achieve it.

It’s a simple measure. We can easily tell if they are being successful or not. Either inflation is within the range or not.

It makes accountability dead simple for us as citizens.

We do NOT want high inflation. When inflation is high, the people that feel it the most are the most poor and vulnerable. Imagine a loaf of bread costs $400 today, and in 3 months it costs $600. Their wages won’t increase fast enough to keep up with those price rises.

We all instinctively know this. That’s why people squeal when the JMD depreciates vs the USD. The reason is because people expect prices of everyday goods to increase. Based on our history, pre-2009, that is a justified expectation.

The passthrough effect of FX movements...

has been a lot lower in the last decade or so.

But my point is that even though ppl cringe re: JMD depreciation, it’s really price increases they are worrying about.

So, when we focus BOJ on controlling price increases within a reasonable range, it makes life so much better.

“Once a new target is set, the BOJ is expected to achieve it over the medium term (defined as not less than 36 months).”

I love the specifics of this because we can hold @CentralBankJA accountable according to the inflation rate within that target range, which is what we need.

“Such independence also requires that the bank is held accountable to stakeholders for its actions and outcomes and that there is the fullest transparency about its operations. In that regard, the BOJ Amendment Act puts in place several accountability measures...”

“including notifying the public, through the minister, on the reasons for any deviations of outcome from the target and any proposed actions to restore inflation within the target range.”

I think this is pretty clear. If inflation is outside of the range, BOJ needs to explain.

“Furthermore, the public will have access to the minutes of Monetary Policy Committee (MPC) meetings where interest rate and other monetary policy decisions are taken, within four weeks of the meeting.”

The MPC is where the key policy rate decision is made.

Publishing the minutes of that meeting is an international best standard. The Fed and many other 1st world central banks publish minutes for the meetings related to their key policy rates.

So this is GOJ taking us into the 21st century.

https://www.federalreserve.gov/monetarypolicy/fomcminutes20200916.htm

In the US and those developed countries, the content of these minutes move markets.

Investors get an understanding for the policy preference of key decision makers so it helps to make planning easier and more predictable once you have a better understanding of how they think.

We have never had this in JA, so it will be very interesting to see how both institutional and retail investors respond to this.

“In addition, the governor will be required to appear before the Standing Finance Committee of the House of Representatives to answer queries with respect to the reports.”

Even though BOJ is independent, they are still accountable to Parliament, which is good.

Another key aspect of the reform is banning GOJ from borrowing from BOJ.

This is a crucial, crucial reform.

What would happen in the past is GOJ would run like a pattyshop, so investors wouldn’t want to lend it money. So they turn to BOJ and force BOJ to print money...

then use that printed money to borrow from GOJ. GOJ is forced to pay higher interest rates. Both printing and higher interest rates cause inflation to spike. That creates a negative feedback loop where GOJ has to keep borrowing at high interest rates (from BOJ, et. al) to pay...

current interest expenses and it just goes on and on.

“The BOJ Amendment Act now prohibits the Government of Jamaica from borrowing from the central bank, except in declared national emergencies.”

This. Is. Huge!!!!

GOJ has no choice but to live within its means.

So, all in all, these reforms are not sexy and they may appear boring but make no mistake they are very, very historic.

We are entrenching the economic gains that we have achieved over the last 11 years, and securing our future.

It is actions like these that make me optimistic about JA’s future.

Yes, the economy has been ravaged by COVID, but at least the damage isn’t compounded by the effects of persistently bad decisions for decades like has happened in the past.

The economy is currently undergoing a restructuring brought on by COVID and that has created many opportunities.

I am seeing many myself, I would encourage you to be bold and take risks now.

It’s a great time to be in JA.

See thread below re: JA’s golden window. https://twitter.com/marcgayle/status/1205250373834940422