Jamaican Paper Money

[Billi Mayhue]

PaperMoney Guaranty (PMG) has certified more than 400 notes from what is regarded as the most advanced collection of Jamaican banknotes of the Sterling era: the Isabella Chang Fong & Ian Marshall Collection of Jamaican Banknotes. These notes, most of which are Specimens, Proofs and Printer's Designs, offer a unique window into the history of Jamaican paper money. They are being offered by World Banknote Auctions in a sale scheduled for November 3, 2023; bidding is already underway.

This paper reviews the Jamaican experience with indirect instruments and contrasts this with the currency board type arrangements of the common currency area governed by the Eastern Caribbean Central Bank (ECCB). Reforms in Jamaica improved intermediation and banking efficiency, but a weak fiscal position and interest rate caps undermined the effectiveness of indirect instruments in attaining monetary control. The apparent stability amongst members of the currency union may mask fiscal pressures. In most Caribbean countries, problems of quasi-fiscal pressures on money supply, and disintermediation due to some regulation, are evident. Resolving these issues are necessary to facilitate the reforms being pursued.

Approaches to monetary management in the English-speaking Caribbean evolved from the commonly shared colonial experience. Until relatively recently, currency and exchange arrangements were linked in a very direct way to the pound sterling. At the turn of the century, the principal medium of exchange in the West Indies was United Kingdom currency. This arrangement gave way to the authorization of Colonial governments to issue currency notes via Currency boards: the Board of Commission of Currency in Jamaica was established in 1939; and, the British Caribbean Currency Board (BCCB) was established in 1950 with the sole right to issue currency for Barbados, British Guiana, the Leeward and Windward islands, and Trinidad and Tobago. 3/ These Boards issued British Caribbean notes and coins, fully backed by sterling. As the countries gained independence these arrangements were replaced by the establishment of central banks in the post 1960 period; Jamaica 1960; Trinidad and Guyana 1965, and Barbados 1972. The BCCB was dissolved and replaced by the Eastern Caribbean Currency Authority (ECCA) in 1965, and in 1976, after a period of depreciation of the pound sterling, the link between the Eastern Caribbean (EC) dollar and the pound was broken and the EC dollar was pegged to the U.S. dollars at the cross rate prevailing at the time. The ECCA was subsequently transformed into a central bank (the ECCB) in 1983, with some relaxation in the foreign exchange cover requirements of its currency issue.

Chapter II overviews the reform process in Jamaica during 1985-1992. Chapter III evaluates the efficacy of these instruments in attaining monetary control, and the impact of their use on intermediation and competition in the financial system. As a contrast, Chapter IV briefly looks at the alternate experience of the currency-board type arrangements of the ECCB. Chapter V reviews developments in Barbados, Guyana, and Trinidad to highlight potential issues in monetary management and market development and relates these to the experience of Jamaica and the ECCB. Finally, some lessons are drawn from the experiences of Jamaica and the ECCB in Chapter VI.

There have been two distinct phases in the use of indirect instruments in Jamaica. The first encompassed the period 1985-1989. In this period, interest rate controls were removed, a program to remunerate reserve requirements was instituted, and the liquid asset ratio (LAR) was phased out. Open market type operations replaced credit ceilings as the primary instrument of control. The period 1989-1991 saw significant reversals, as credit ceilings were reimposed and the LAR reintroduced in response to a surge in credit and exchange rate pressures. A second phase in using indirect instruments was started in late 1991, coincident with the adoption of a more liberal foreign exchange system.

In 1985, Jamaica attempted to move from direct to indirect instruments of monetary control for the first time. Prior to this, the system of monetary management had involved: global credit ceilings and directed credit operations through sector specific refinance windows operated by the BoJ and activity specific credit ceilings; a statutory saving deposit floor rate, and a maximum mortgage lending rate; interest subsidies were given not only through refinance operations but also through specialized agencies; a non-remunerated cash reserve ratio (which differed between commercial banks and nonbank financial institutions) and a noncash liquid asset requirement.

The introduction of a competitive price foreign exchange auction in 1984 was accompanied by a dismantling of import controls that had comprised licenses and quotas. A negative import list approach was adopted, and a schedule for eventual elimination of the list was outlined. With respect to monetary management, it was recognized that existing arrangements were ineffective in the more market-based economic environment. Commercial banks were circumventing credit ceilings by shifting loans and deposits to nonbank affiliates, stimulated by differential reserve and capital requirements on nonbanks. Further, the LAR, which required investment in treasury bills (which were at times in insufficient supply) had resulted in low yields on government paper and high interest rates on private sector loans which the authorities considered to be inconsistent with the policy objective of stimulating private sector led growth.

A program to reform monetary management was outlined in September 1985. The aim was to at gradually liberalize interest rates, remove interest distortions and utilize indirect instruments of monetary control. Initially this involved the removal of interest rate restrictions on lending (September 1985) and the indexation of the minimum saving deposit floor rate to the market determined time deposit rate (October 1985). Simultaneously, credit ceilings were eliminated (October 1985) and open market type operations using a BoJ certificate of deposit were instituted as of November 1985, in the context of a reserve money program (Table 2).

In support of these operations, the internal interest rate structure of the BoJ was revised and in May 1986, a formal refinance window to provide lender of last resort support was reactivated. In addition to this window, the BoJ operated a liquidity support facility (LSF), where securitized short-term lending was provided. 5/ Further, penalties for breaches of reserve requirements were introduced and a more penal rediscount policy was adopted to discourage the early encashment of government securities at the BoJ, and encourage secondary trading.

With respect to other instruments used in this first phase of indirect monetary management, the BoJ in 1985 re-introduced a pre-shipment financing facility and a Bankers Export Guarantee facility, to channel credit to the export sector at preferential but indexed rates of interest. 6/ The persistence of excess liquidity, however, obviated the need for active use of these facilities and by 1989 they were wound down as outstanding credits matured. Also, though used on an ad-hoc basis, the BoJ at times (in consultation and through the Ministry of Finance), transferred public enterprise deposits from the commercial banks to the BoJ. This was used primarily to deal with lumpy liquidity flows caused by transactions of the monopoly oil importing public enterprise. Finally, in 1987, the Government of Jamaica initiated a program of external debt conversions. To sterilize the liquidity arising from debt redemption, an Equity Investment Bond was issued to non-banks to fund them. 7/

Credit ceilings were reintroduced in September 1989 in response to mounting exchange pressures and credit expansion. As well, banks were advised of the reimposition of the LAR in October, and in November the indexation of the minimum deposit floor was replaced with a step adjustment of the savings deposit rate by 5 percentage points. In January 1990, the reserve requirement on banks was increased, and the previous program of paying interest on a proportion of the requirement was discontinued.

In January 1991, credit ceilings were abandoned because the BoJ practice of granting exemptions, as well as circumvention by banks through off-balance sheet transactions, had made them ineffectual. The LAR (the scheduled removal of which had been completed in March 1988) was reintroduced, and progressively increased to 33.5 percent by January 1991, before being again eliminated in April 1991.

The saving deposit floor rate was eliminated in October 1990, and with the removal of credit ceilings and the LAR in early 1991, a second phase of management through indirect instruments began. In 1991, the BoJ initiated reverse repurchase transactions, by modifying the liquidity support window, the rules of which had been applied loosely. Further, the rediscount rate began to be adjusted regularly and a volume ceiling on BoJ rediscounting was instituted to encourage secondary trading rather than borrowing from the BoJ. Finally a program to equalize the reserve requirements between commercial banks and nonbank financial institutions at levels close to the higher requirement applied to the banks, progressively reduced the liquidity of those institutions and reduced the incentive for disintermediation.

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