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JM | Dec 15, 2020

Long-desired Bank of Jamaica autonomy taking hold

/ Our Today

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Amended BOJ Act will  secure, among other things, personal independence of directors and institutional independence

The Bank of Jamaica in downtown Kingston.

Efforts to modernise and make the Bank of Jamaica (BOJ) more independent in its operations and policy decision-making processes are now taking hold after years of debate and much consternation.

The move to truly make Jamaica’s Central Bank more autonomous goes back to the early 1990s and gathered momentum in the years later with the Daisy Coke report on giving the BOJ more autonomy. So, after nearly two decades of agonization, and much talk of action, the powers and influence of the Minister of Finance over the BOJ are being stripped away.

This power is being vested in a more autonomous central bank to govern the island’s monetary affairs. The culmination of this was evidenced in the amendments to the Bank of Jamaica Act, aimed at clarifying the central bank’s mandate and enhancing its governance structure.

Richard Byles, governor of the Bank of Jamaica.

This aspiration became a reality when the Bank of Jamaica (Amendment) Act, 2020 was approved by the House of Representatives on November 17, 2020 and passed in the Senate on December 4, 2020 without amendments or dissent. Included in the law are provisions to further drive independence of BOJ with greater accountability and transparency, focused on discharging a well-defined mandate of financial system stability and price stability with the latter taking precedence.

Ministry of Finance powers and influence being whittled away

The amendments are expected to secure personal independence of directors, institutional independence and operational and policy independence, which many believe ostensibly was controlled by the Ministry of Finance at Heroes Circle. The issue of independence of directors had come into question with the sudden resignation of former BOJ Governor Derrick Latibeaudiere in October 2009.

While the Finance Ministry reported then that Latibeaudiere’s departure was by mutual agreement between himself and then Finance Minister Audley Shaw, insiders say the BOJ governor was forced out of office by the then Bruce Golding administration over issues at the central bank.

The Ministry of Finance and the Public at Heroes Circle in Kingston.

With the amendment now being put in effect, such powers of Heroes Circle are being disposed of. The independence of BOJ directors, institutional independence and operational and policy independence are all necessary features for any modern day central bank to be able to reduce inflation biases and insulate monetary policy from short-term political pressures and time-inconsistent policies.

In fact Central bank independence became popular in the 1970s and has proven to be a valuable, stabilising force for countries seeking politics-free monetary policy decisions. This is owing to the fact that government oftentimes tries to manipulate monetary policy to bolster their election chances and prioritisation of short-term political gains, which, for the most part, cause long-term pain for the economy, in the form of higher inflation or even hyper-inflation.

Political interference linked to most major financial crises

In nearly every major financial crisis of the past decade – from East Asia to Russia, Turkey, and Latin America – political interference in financial sector regulation helped make a bad situation worse. It has been seen where political pressures not only weakened financial regulation generally, but also hindered regulators and the supervisors, who enforce the regulations from taking action against banks that ran into trouble.

The entrance to the Bank of Jamaica in downtown Kingston. (Photo: Facebook @BankOfJamaica)

In so doing, political interference has crippled financial sectors, leading to the crisis, delayed recognition of the severity of the crisis, slowed needed intervention, and raised the cost of the crisis to taxpayers. As such policymakers and policy analysts are increasingly recognising the need to shield financial sector regulators from political pressure to improve the quality of regulation and supervision with the ultimate goal of preventing financial crises.

It is believed that regulatory and supervisory independence in the financial sector complements central bank independence in achieving and preserving the twin goals of monetary and financial stability. However, it has been shown that while independent central banks have successfully pursued monetary stability, the task of creating them and keeping them independent and accountable poses difficulties that cannot be ignored.

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