Senior proposes introduction of loan reserves

Keith Senior, general manager of JN Fund Managers, has proposed that the central bank of Jamaica imposes reserves on loans as a way to solve problems arising from increasing aggregate demand while also imploring political leaders to run the country as if they are operating a business.

"I think in the case of Jamaica a hard decision needs to be made. If we think of a country like a business, you have a business, you are running losses, what do you do? What do you do? You make some tough decisions in terms of how to correct those losses, which is the same thing for a country," Senior said speaking at a Gleaner Editors' Forum last Friday.

"You have to address these fiscal deficits. They are exactly like running a business and having losses. Once you move towards fixing that problem, the exchange rate in itself falls into place," he asserted at the forum which focused on whether the country should move to a fixed exchange-rate system.

Senior contends that historically when problem arises with the local currency, it is usually the case for the central bank to adjust the deposit reserves of financial institutions, but this he points out is really not the way to address the problem. "When we have monetary problems, we tend to look at the financial system and attempt to adjust it by looking at the prudential reserves that the banks, financial institutions, maintain, and address those prudential reserves, thereby using it to extract money out of the system and move interest rates up," he said.

"The problem has not been deposits, never been. The problem has historically been credit."

"Perhaps one of the things the central bank ought to have considered is to reduce the reserves deposits and impose reserves on loans, because that's where the problem was," he said.

According to Senior, the bank should impose reserves on loans for the productive sector at zero per cent, while a reserve at a rate of 100 per cent is established for credit to the non-productive sector.

This, Senior believes, will reduce aggregate demand and drive the economy into an export-oriented growth model.

"I have held that view for a number of years and I once expressed those views to the central bank, it was never taken up," said Senior.

The Bank of Jamaica, which is the authority over all deposit-taking institutions, currently imposes a cash-reserve ratio and a liquid-asset ratio on all these institutions. The cash reserves are set at 12 per cent of Jamaican dollar deposits and 26 per cent for liquid assets; while foreign cash reserves are set at 9 per cent of forex deposits and 23 per cent for liquid assets.

These requirements stipulate the level of free reserve cash or assets in liquid form that can be drawn on in the case of a financial crisis and are adjusted from time to time.

When these reserves are moved down, Senior argues, immediately more pressure is placed on the balance of payments, the trade deficit and on the exchange rate arising from increased consumption.

Like the other participants at the forum, Senior agrees that the problem lies with fiscal indiscipline and that is essentially what needs to be addressed.

"We need to look at the fiscal as if we are running a business, look at Government no different than if we were running a manufacturing business ... and make some hard decisions in that respect," he said.

business@ gleanerjm.com