The Jamaica Bankers Association

BANK of Jamaica yesterday withdrew from the market, the 30 per cent liquidity-control instrument it introduced on Monday, saying that the paper had restored order to the foreign exchange market.

The BOJ did not say how much liquidity the instrument had actually mopped from the market, though financial sources estimate that around $3 billion was sterilised by the 150-day paper. The monetary authorities did suggest however, that enough funds had been removed from the hands of potential spenders to create the desired effect of stanching the slippage in the value of the Jamaican currency.

"The decision to remove this instrument comes against the background of tight Jamaica dollar liquidity and the appreciation in the exchange rate over the last four days," said the central bank.
Leading up to the introduction of the paper, the Jamaican dollar was trading for close to J$53.8, representing a 5 per cent devaluation since the beginning of the year, and appeared to have been on a free-fall.

With the BOJ's intervention, the local currency immediately strengthened, trading at J$51.48/US$1 by Thursday, but lost ground yesterday to trade at J$51.97/US$1.

Yesterday the BOJ conceded that the removal of the special open market instrument was also due in part, to representations made by financial institutions "and understandings reached with respect to the development of foreign exchange market protocols".

But the central bank cautioned that it stood prepared to re-enter the market, once there was evidence of renewed instability.

"Notwithstanding the withdrawal of the instrument at this time, the Bank of Jamaica will not hesitate to take whatever action it deems necessary to maintain order in the foreign exchange market," it said.

The special instrument represented a 10 percentage point increase over the highest interest rate that had been recently offered in the market, and created an outcry from members of the financial sector.

Raymond Campbell, the president of the Jamaica Bankers Association and head of First Caribbean International Bank in Jamaica, warned that the instrument would be disruptive to the financial markets, while running the risk of not addressing the real problems with the economy.

"While we recognise that this is intended to be a temporary measure, we believe that it will have a disruptive impact on the financial markets," he said.

The interest rate increase was one of several measures including a special five per cent special cash reserve for banks that the BOJ had put in place in an effort to halt the slippage of the currency. It represented a deepening of the reversal of what had become a medium term downward trend in interest rates.