Public discussion has so far focused on the pros and cons of the dismissal of former Bank of Jamaica (BOJ) Governor Derick Latibeaudiere.

I suggest that attention should now aim more at addressing the institution and its relevance to the critical financial and economic problems facing the country rather than on Latibeaudiere's dismissal.

There are some who argue that BOJ needs to have more autonomy from the ministry of finance. I do not share that view. This position is arrived at because the problems that Jamaica now face have to be addressed primarily with fiscal policy — Government's revenue and expenditure strategies — rather than with monetary policy that is the proper function of any central bank.

Moreover, there has to be total sync between fiscal and monetary policies that can only be achieved with strong central control.

Under the classical rationale for establishing a central bank, its main role is to curb inflation by changes in money supply and interest rate policies. BOJ expanded that role by extensive use of bank reserve requirements and intervention in the market to protect the exchange rate.

Continuing policies

While these tools are necessary from time to time, when they become enshrined as continuing policies, as in the case of Jamaica, they create serious distortions in the interest rate and foreign exchange markets.

Consequently, interest rates have remained at continuously high levels and the exchange rate has been artificially propped with the wasteful use of net international reserves to fight a losing battle.

This policy contributed significantly to the collapse of financial institutions and businesses and ruined Jamaica's export competitiveness. With high cash reserve requirements, banks must charge higher interest rates than the 'normal' spread over deposit rates to cover the additional sterilisation of deposits. My recollection is that cash reserves in the 1990s were in excess of 40 per cent. It would not be surprising if intervention in the foreign exchange market over recent years is in excess of the present level of net international reserves.

By enacting these policies, the BOJ, under Latibeaudiere's leadership, was reacting to the pressures caused by the escalating fiscal deficits. He did not voice any strong public objection that led to the forced distortion of BOJ's proper role. Indeed, the cynical might argue that Latibeaudiere and his senior management staff actually facilitated the disastrous financial policies of the then government.

Jamaica will have to rely more on fiscal policy to address its problems, as we will be sure to see, when the expected International Monetary Fund (IMF) agreement is announced.

The policy initiatives will call for planned lower deficit — by increasing revenues and reducing expenditures — and national debt in relation to GDP.

Instead of the IMF traditional demand management strategy, given Jamaica's urgent need to generate economic growth and exports, it would not be surprising to see the fund supporting a low inflation model that would allow for lower interest rates and relative stability in the exchange rate, although there could be an upfront adjustment to deal with an overvalued exchange rate.

If such measures are pursued, there will be less need for the BOJ to influence interest and foreign exchange rates since its money-creating ability and reliance on bank reserve requirements, along with intervention in the foreign exchange market, would be curtailed. Indeed, it would then play a passive role — in contrast to its interventionist role for nearly 20 years.

So, what should be the BOJ's role?

The BOJ's role

Under the scenario described, its size would be drastically reduced, like other government entities, to become a more efficient organization and to perform more as an arm of the ministry of finance.

To the extent that its money and credit expansion role becomes reduced significantly, especially if the fiscal measures were to succeed, the BOJ would then become a de facto glorified currency board.

Whether it should continue tohave supervisory powers over banks is another issue.

It displayed no good track record for it to retain this function. It failed to recognise the financial crisis in the 1990's and did nothing constructive to save the domestic financial sector. It stood by silently - and probably even abetted - the wholesale transfer of ownership from Jamaican nationals to overseas owners with all of the real adverse economic consequences, especially the bleeding balance of payment effect from profits earned and repatriated overseas and less bank competition that normally result in lower interest rates.

It might, indeed, be timely to remove these supervisory functions from BOJ and to combine them with those for the insurance industry under a new umbrella supervisory agency for financial institutions, drawing on existing manpower from the central bank and elsewhere in the public sector so as not to build another high-cost bureaucracy.

Under the above scenario, there would be no justification for the BOJ to continue acting with the supremacy that it has, so far, enjoyed.

Dr Paul Chen-Young is an investment banker and economist.

business@gleanerjm.com