ANNUAL REPORT

2008

Report and Statement of Accounts for the

Year Ended 31 December 2008

 Mission
Statement
The mission of the Bank of Jamaica
is to formulate and implement
monetary and regulatory policies
to safeguard the value of the domestic
currency and to ensure the soundness
and development of the financial system
by being a strong and efficient
organisation with highly motivated
and professional employees
working for the benefit of
the people of Jamaica.


The Governor Bank Of Jamaica

Nethersole Place
Kingston, Jamaica, W.I.

31 March 2009

The Hon. Audley Shaw, M.P.

Minister of Finance and the Public Service
Ministry of Finance and the Public Service
30 National Heroes Circle
Kingston 4

Dear Minister:

In accordance with Section 44 (1) of the Bank of Jamaica Act, 1960, I have the honour of transmitting herewith
the Bank’s Report for the year 2008 and a copy of the Statement of the Bank’s Accounts as at 31 December 2008 duly
certified by the Auditors.

Yours sincerely,

Derick Latibeaudiere

 BANK OF JAMAICA

PRINCIPAL OFFICERS

GOVERNOR
The Hon. Derick Latibeaudiere, O.J.

SENIOR DEPUTY GOVERNOR

Mrs. Audrey Anderson, C.D.

DEPUTY GOVERNORS
1. Mr. Rudolph Muir - General Counsel & Bank Secretary

2. Mrs. Myrtle Halsall - Research & Economic Programming and

Banking & Market Operations Divisions

3. Mrs. Gayon Hosin - Financial Institutions Supervisory Division

4. Mr. Livingstone Morrison - Finance & Technology Division and Payments

System and Risk Management Sub-Division

GENERAL MANAGER
Mr. Kenloy Peart

DIVISION CHIEFS
1. Mrs. Natalie Haynes - Banking & Market Operations Division

2. Mr. John Robinson - Research & Economic Programming Division

DEPUTY GENERAL MANAGER

Mr. Calvin Brown
FINANCIAL CONTROLLER
Mr. Herbert Hylton - Finance & Technology Division

DEPUTY GENERAL COUNSEL

Mr. Randolph Dandy - Legal Department

CHIEF INTERNAL AUDITOR

Mr. Horace Lowers - Internal Audit Department
 BOARD OF DIRECTORS

THE HON. DERICK LATIBEAUDIERE, O.J.

Governor & Chairman

MRS. AUDREY ANDERSON, C.D.

Deputy Chairman

MR. DENNIS CHUNG

MRS. SHARON CROOKS

DR. WESLEY HUGHES, C.D.

MR. MARK MYERS

DR. JEFFREY PYNE

CONTENTS

Economic and Financial System Review

1. Overview 1

2. The Financial System 5

2.1. Monetary Policy Management 5
2.2. Money Supply 10
2.3. Commercial Banks 12
2.4. Other Financial Intermediaries 21
2.4.1. Financial Institutions Act Licensees 21
2.4.2. Building Societies 25
2.5. Development Banks 28
2.5.1. Development Bank of Jamaica 28
2.5.2. National Export Import Bank of Jamaica 31
2.6. Financial Stability Assessment of Deposit-Taking Institutions (DTIs) 33

3. Money Market Operations 40
3.1. Bank of Jamaica Operations 40
3.2. Interest Rates 43

4. The Stock Market 47

5. Supervision of Deposit-Taking Financial Institutions 52

6. Supervision of Cambios and Remittance Companies 69

6.1. Cambios 69
6.2. Remittance Companies 70

7. External Sector Developments 72

7.1. International Economic Developments 72
7.2. Balance of Payments 78
7.3. Foreign Exchange Management 86
7.3.1. Bank of Jamaica International Reserves 86
7.3.2. Reserve Management 90
7.3.3. The Foreign Exchange Market 92

8. Production and Prices 95
8.1. Production 95
8.2. Prices 100

9. Public Finance 107

10. Economic Outlook 114

Corporate & Administrative Review

11. Banking Services and Currency Operations 116

11.1. Banking Services 116
11.2. Currency Operations 117

12. Payments System Developments 119

 13. Financial Legislation 125

14. Administration 129

15. Compensation of Senior Executive Management 132

16. Calendar of Monetary Policy Developments 133

Final Accounts for the Year Ended 31 December 2008
Abbreviations

ABM Automated Banking Machines

ACH Automatic Clearing House
ACP African, Pacific and Caribbean (countries)
AML Anti-money Laundering
ASBA Association of Banking Supervisors of the Americas

BCBS Basel Committee on Banking Supervision

BCP Basel Core Principles for Effective Banking Supervision
BIS Bank for International Settlements
BOJ Bank of Jamaica
BOP Balance of Payments

CAR Capital Adequacy Ratio

CARICOM Caribbean Community
CD Certificate of Deposit
CFATF Caribbean Financial Action Task Force
CPC Chief Parliamentary Counsel
CFT Counter-Financing of Terrorism
CGBS Caribbean Group of Banking Supervisors
c.i.f. Cost, insurance and freight
CIFTS Customer Inquiry Funds Transfer System
CPI Consumer Price Index
CSD Central Securities Depository

DJIA Dow Jones Industrial Index

DTI Deposit-taking Institutions
DVBP Dollar Value of a Basis Point

ECI Export Credit Insurance

EPA Economic Partnership Agreement
EU European Union
EWS Early Warning System
EXIM National Export-Import Bank of Jamaica

FATF Financial Action Task Force

Fed Federal Reserve (US)
FIA Financial Institutions Act
FID Financial Investigations Division
FINSTAB Financial Stability Department
FISD Financial Institutions Supervisory Division
FIU Financial Intelligence Unit
f.o.b. Free on board
FSC Financial Services Commission
FY Fiscal Year

GCT General Consumption Tax

GDP Gross Domestic Product
GFA Gross Foreign Assets
GKMA Greater Kingston Metropolitan Area
GOJ Government of Jamaica

HMF Honourable Minister of Finance

IADB Inter-American Development Bank

ICBS International Conference of Banking Supervisors
IFRS International Financial Reporting Standards
IMF International Monetary Fund
IPCP Index of Primary Commodity Prices
IPDF Insurance Policy Discounting Facility
IPI Import Price Index

JBDC Jamaica Business Development Centre

JCCUL Jamaica Cooperative Credit Union League
JCSD Jamaica Central Securities Depository
JGA Jamaica Guild of Artists
JNBS Jamaica National Building Society
JSE Jamaica Stock Exchange
JTB Jamaica Tourist Board

KYC Know Your Customer

LIBOR London Inter-bank Offer Rate

LRS Local Registered Stocks

MOU Memorandum of Understanding

MPI Micro-prudential Index

NDA Net Domestic Assets

NIM Net Interest Margin
NIR Net International Reserves
NPL Non-Performing Loans
NROCC National Road Operating & Construction Company

OMO Open Market Operations

OPEC Organization of Petroleum Exporting Countries
OUC Other Urban Centres

PAYE Pay As You Earn (income tax)

PCB People’s Cooperative Bank
PCMB PanCaribbean Merchant Bank
PD Primary Dealers
PDA Primary Dealers Association
POCA Proceeds of Crime Act
POS Point of Sale

RTGS Real Time Gross Settlement

SCT Special Consumption Tax
SIPS Systemically Important Payments System
SRC Scientific Research Council
SSM Special Safeguard Mechanism
SWIPS System-wide Important Payment System

TCI Trade Credit Insurance

UK United Kingdom
UN United Nations
USA United States of America

VMBS Victoria Mutual Building Society

VR Variable Rate

WASR Weighted Average Selling Rate

WATBY Weighted Average Treasury Yield
WTI West Texas Intermediate (crude oil)
WTO World Trade Organization
 Economic and Financial System Review
1. Overview
D
uring 2008, the Jamaica Authorities were
confronted with severe challenges emanating
mainly from developments in the external
environment. The global economy was affected by
rapid increases in international commodity prices
in the first half of the year, particularly crude oil
prices. In the second half of the year, the turmoil
that characterized the global financial markets in
2007 intensified, which led to a sharp tightening of
international credit conditions. The combined effect
of the commodity price shock and the tightening
of credit conditions led to recession in the major
developed economies, particularly the United States
(US). These developments, together with weather-
related shocks during the year, had an adverse
impact on the Jamaican economy.
Inflation in Jamaica remained elevated for the year.
Over the first six months of the year, inflation in
Jamaica accelerated to 11.5 per cent, compared to
4.7 per cent in the last half of 2007. This acceleration
was influenced primarily by the sharp increases
in international commodity prices. Against the
background of a reversal in commodity prices over
the second half of the year, a more moderate inflation
rate of 4.8 per cent was realised for that period.
Other factors affecting inflation for the year included
supply shocks from adverse weather conditions
and adjustments in administered prices. The impact
of a sharp depreciation in the exchange rate on
domestic prices was also evident in the last quarter.
Consequently, the annual point to point inflation rate
at December 2008 remained elevated at 16.8 per
cent, similar to 2007.
--
The Jamaican economy contracted by 0.9 per cent in
2008, associated in part with weather-related shocks
as well as the negative impact of the increase in
commodity prices on consumer spending. This decline
was in contrast to growth of 1.5 per cent in 2007. The
main industries that contracted were Agriculture,
Forestry & Fishing, Manufacture, Construction
and Transport, Storage & Communication. Partly
offsetting the impact of the declines in these sectors
was growth in Financing & Insurance Services,
Real Estates, Renting & Business Activities and
Hotels & Restaurants.
The agriculture sector was adversely affected by the
lagged impact of adverse weather conditions. For the
manufacturing sector, the contraction was related in
part to the slowdown in construction as the main
cement producer curtailed production because of low
demand. The decline in Construction was evident
in private and public sector capital projects as well
as residential construction. Transport, Storage &
Communication was negatively affected by the
slowdown in the growth of the travel industry.
There was a deterioration of 4.3 percentage points in
the current account deficit of the balance of payments
to 20.0 per cent of GDP in 2008. This deterioration
was influenced principally by increases in the values
of fuel and food imports, driven by the commodity
price shocks. The deficit was also negatively affected
by the cessation of banana exports because of the
destruction of the crop by Tropical Storm Gustav.
Partly offsetting the impact of these changes were
increased earnings from alumina, ethanol and

mineral fuel exports, all associated with the increase
in international commodity prices. Gross private
remittance inflows also grew by 6.1 per cent in 2008,
albeit slower than the 15.9 per cent expansion in
2007. The travel sub-account improved by US$104.3
million, related to a 3.9 per cent increase in stopover
visitors. The growth in stopover visitor arrivals
reflected the impact of the addition of new room
capacity during the year. However, an estimated
3.1 per cent decline in the average length of stay of
stopover visitors as well as a 7.7 per cent contraction
in cruise visitor arrivals partly offset the impact of
the increase in stopover arrivals on the travel sub-
account
Within the financial account, private capital inflows
were buoyed during the first half of the year by
inflows from the sale of a local rum manufacturing
company to a Trinidadian firm. Over the latter part
of the year, flows were reversed by a significant
increase in calls to repay margin arrangements
on GOJ global bonds and the termination of some
repurchase arrangements and lines of credit with
overseas brokers and distributors. The margin
calls occurred in the context of sharp reductions in
the prices of GOJ global and Jamaican corporate
bonds. Net official investment inflows also declined
in 2008, reflecting a reduction of US$185.8 million in
gross official receipts. Gross official inflows included
proceeds from a Eurobond issue of US$350 million
in February 2008. Taken in conjunction with official
capital inflows, net private capital inflows were not
sufficient to finance the deficit on the current account.
As a result, the net international reserves (NIR)
declined by US$104.8 million during the year.
The foreign exchange market was subject to
considerable pressures in 2008, particularly in
Overview
Bank of Jamaica
the last quarter of the year. These pressures were
largely related to an acceleration in the international
financial crisis. Relative to the US dollar, the
weighted average selling rate of the Jamaica Dollar
depreciated by 12.2 per cent for the year, compared
with 4.9 per cent in 2007. Some of the pressures
in the market reflected the impact of the increase
in commodity prices on imports and, consequently,
foreign exchange demand. Over the latter half of
the year, the pressures were largely related to the
reduction in net private capital inflows. Most of the
market instability occurred in the last quarter of the
year when the exchange rate depreciated by 9.7 per
cent, compared with average depreciation of 1.0 per
cent over the first three quarters.
The Bank responded to the challenges of accelerating
inflation and instability in domestic financial markets
in 2008 in several ways. Early in the year, the Bank
reintroduced the 365-day tenor to the spectrum of
open market operations (OMO) instruments and
offered variable rate instruments to the market. During
the December 2008 quarter, the Bank established a
special loan facility for security dealers and deposit
taking institutions (DTIs) with US dollar liquidity needs
to repay margin arrangements on GOJ global bonds.
An intermediation facility in both foreign and local
currency was also established to enhance the flow
of credit in the system. The Bank increased interest
rates on the entire spectrum of OMO instruments on
two occasions during the December quarter by an
average of 548 basis points (bps). The cash reserve
requirement ratio was also increased to 11.0 per cent
from 9.0 per cent. Throughout the year, the Bank
sold foreign currency amounting to approximately
US$917.8 million to the market, compared with US$1
329.0 million in 2007.
--
Annual Report 2008
In response to the deterioration in the macroeconomic
environment, market-determined yields rose
during the year, particularly in the last quarter. The
Government of Jamaica’s (GOJ) weighted average
treasury bill yields (WATBY) on the 3-month and 6-
month instruments increased to 22.01 per cent and
24.45 per cent respectively, at the December 2008
auction, relative to 12.89 per cent and 13.34 per cent
at the December 2007 auction.
Reflecting the overall slowdown in the Jamaican
economy in 2008 and the relatively tighter monetary
conditions, growth in the monetary base slowed to
9.6 per cent for the year, relative to 12.6 per cent
in 2007. The growth in broad money supply (M3*)
also decelerated sharply to 5.9 per cent from 15.9
per cent in 2007. Most of the components of M3*
contributed to the slower rate of growth. There was
also a slower rate of growth in the use of alternative
means of payment, relative to the previous year.
The slower rate of growth in the money supply
was influenced by the reduction in the NIR and
an increase in the Bank’s OMO instruments, the
former being largely due the Bank’s actions in the
foreign exchange market over the year. The growth
in BOJ OMOs was uneven throughout the year.
Over the first half, there was strong demand for the
Bank’s instruments, influenced by a widening of the
differential between interest rates on US and Jamaica
Dollar instruments. However, over the second half
of the year, there was a contraction in outstanding
OMOs, mainly associated with the uncertainties in
the global financial markets and seasonal demand
for currency.
For the period April to December 2008, the
--
Government incurred a deficit equivalent to 5.2 per
cent of GDP, compared to the budgeted deficit of 4.3
per cent of GDP. The deviation from budget reflected
a shortfall in revenue and grants, driven by the
unanticipated slowdown in the domestic economy.
The impact of the shortfall in receipts on the deficit
was partly offset by expenditure restraint, particularly
those for capital projects. The Government largely
financed its operations from the domestic market.
The balance sheets of licensed DTIs were not
immune to the developments in the international
financial markets during 2008. The impact of
these developments was primarily manifested in a
decline of 6.6 per cent in the institutions’ investment
portfolios and a tempering of equity growth. Cash
and bank balances also grew marginally, related to
the liquidation of placements at overseas institutions,
some of which was to satisfy calls on their foreign
liabilities. The overall growth in the assets of the DTIs
consequently decelerated to 8.1 per cent, compared
with 14.2 per cent for 2007.
In 2008, the prudential returns of the DTIs were
subjected to more frequent stress testing by the
Bank. Against the background of the intensifying
global financial turmoil, the BOJ’s aggregate early
warning systems showed some deterioration during
the second half of the year. However, the stress tests
revealed that the capital adequacy ratios (CARs) for
the banking system remained above the 10.0 per cent
minimum benchmark, in response to hypothetical
market, credit and liquidity shocks.
The Bank continued the process of reviewing
legislations and regulations during 2008. In relation
to the consolidation of legislations governing the
Overview
 Bank of Jamaica

operations of DTIs, focus was placed on current decline in GDP, higher unemployment and tightened
issues such as, inter-alia, the proposed role of credit credit conditions. This projection is also based on
bureaux and provisions for electronic reporting. The the expectation that the global recession will deepen
BOJ also revised two of its Standards during the year. during the year. The maintenance of relative stability
In this regard, the Bank issued the Standard of Best in the foreign exchange market will be the main
Practice for the Effective Corporate Governance in challenge for the Bank in 2009.
DTIs, which established the minimum expectations
for an effective governance framework in these
entities. The second, Revised AML/CFT Guidance
Notes, incorporated the provisions of the Proceeds of
Crime Act (POCA) and the POCA (Money Laundering
Prevention) Regulations.

Regulations to establish the supervisory regime that

will be applicable to credit unions were completed in
2008. This Bill will restrict the deposit-taking activities
of cooperative societies to those which operate as
credit unions. Secondly, it will bring credit unions
under the regulatory ambit of the Minister of Finance
and the Bank of Jamaica.

The Bank advanced the modernization of the

payments and settlement infrastructure in 2008. A
significant milestone was achieved in terms of the
delivery of the software for the Real Time Gross
Settlement (RTGS) System and the Central Securities
Depository (CSD) to the Bank in September 2008.
The Bank was also able to train and certify all
participants in the use of both systems by end-2008.
Another important milestone was the drafting of the
rules and procedures that will guide the systems.

The outlook for the domestic economy in 2009 is for

a moderation in inflation, despite the potential effect
of the accelerated exchange rate depreciation which
obtained in the latter part of 2008. It is anticipated
that the fall in inflation will occur in the context of a

Overview --
2. The Financial System

2.1. Monetary Policy Management mainly by sharp increases in international commodity

prices, due to rising demand for commodities in

D
2.1.1. Introduction
uring 2008, the Bank tightened monetary emerging economies, mainly China. The impact of
policy sharply in response to severe this demand was exacerbated by supply shortages
challenges emanating from adverse as a number of countries implemented export bans
developments in the external environment. This on certain commodities in response to concerns
was in addition to measures taken to ease liquidity about domestic food security. In addition, there
constraints in the foreign exchange market. The was continued speculation in commodities futures
challenges, some of which were unprecedented, markets, given the weakness in the US dollar. Crude
were manifested in accelerated inflation during the oil and rice prices, in particular, rose by 38.9 per cent
first half of the year and instability in the financial and 138.6 per cent, respectively, between December
markets, particularly the foreign exchange market, 2007 and end-July 2008. Consequently, annual
during the second half of the year. The acceleration inflation rose to 26.5 per cent by July 2008. The
in inflation was primarily influenced by the impact acceleration in inflation contributed to heightened
of sharp increases in global commodity prices, demand for foreign currency and consequently
particularly those for energy and grains. A trend some instability in the foreign exchange market as
reversal of these prices started in the September investors sought a hedge. These problems were
quarter, influenced by a reduction in global demand, exacerbated by high Jamaica Dollar liquidity. In this
due to an intensification of the global credit crisis.
context, the challenge for the Central Bank between
This was triggered by the collapse of two large
January and June 2008 was to temper medium-term
financial institutions in the US which heightened
inflation expectations by limiting the pass-through of
uncertainty in global financial markets and led to
rising commodity prices to underlying inflation.
severe tightening in the credit market. As a result of
these developments, significant imbalances emerged The Bank responded to these developments by
in the Jamaican foreign exchange market reflecting increasing interest rates on three occasions during
extraordinary foreign exchange needs of domestic the first half of 2008 (see Chart 1). In addition, on
financial institutions and firms. This also had an 16 January 2008, the Bank reintroduced the 365-day
adverse impact on inflation. tenor with a large premium. The Bank also offered a
special variable rate instrument as well as its regular
2.1.2. Developments and Challenges
menu of open market instruments, and sold foreign
The acceleration in inflation which began in the
currency during the first half of the year to the market
December 2007 quarter and continued into the first
to mitigate inflationary impulses (see Table 1A). The
half of 2008, presented a major challenge for the
resultant widening of the interest rate differential
Central Bank in its management of inflation. The
impetus to domestic price adjustments was fuelled  This tenor had been removed from the spectrum of open market
instruments in April 2006

--
 Bank of Jamaica

between Jamaica Dollar and foreign-currency Jamaica Dollar transactions. The Bank also tightened
denominated assets influenced unwinding of foreign monetary policy by increasing interest rates across
currency holdings by some investors. the entire spectrum of OMO instruments on two
occasions during the December quarter. In addition,
There was a subsequent decline in the rate of inflation the Bank offered a 15-day special certificate of
during the second half of the calendar year. The deposit (CD) during 18-19 November 2008, to absorb
deceleration in inflation was strongly influenced by excess liquidity. Upon the maturity of this instrument,
the decline in oil and commodity prices, particularly the Bank increased the required cash reserve ratio
since September. The Bank, however, remained on prescribed Jamaica Dollar liabilities to 11.0 per
severely challenged to meet its monetary policy cent from 9.0 per cent, effective 03 December 2008.
objectives due to the impact of heightened instability The Bank also signalled that the reserve ratio would
in the global financial markets on Jamaica’s foreign be further increased by 3.0 percentage points in the
exchange market. There was a significant increase ensuing months if economic conditions necessitated
in calls on Jamaican financial institutions to repay this action (see Table 1A).
external margin arrangements on GOJ global
bonds and the termination by overseas brokers and 2.1.3. Base Money Management
distributors of some repurchase arrangements and In the context of these challenges, the monetary
lines of credit. Further, there was also a reduction in base expanded by $6.2 billion or 9.6 per cent in
US dollar supply from major foreign currency earners 2008, relative to 12.6 per cent in 2007, and the end-
as well as from remittances. This was exacerbated December programme target of 12.6 per cent. The
by the strong seasonal demand for foreign currency expansion in the monetary base reflected an increase
in the latter part of the year. The domestic money of $1.8 billion or 3.8 per cent in net currency issue,
market was also affected, albeit to a lesser extent, as and a net increase of $4.7 billion or 27.4 per cent in
some institutions were reluctant to extend credit in the cash reserves. The deceleration in the growth of
the inter-bank market. This was in the context of high the monetary base, relative to 2007 was influenced
levels of Jamaica Dollar liquidity concentrated within mainly by a contraction of 11.7 per cent for the first
a few institutions. In light of these developments, the two quarters of the calendar year, reflecting a 16.6
exchange rate depreciated sharply in the December per cent reduction in net currency issue.
quarter (see Foreign Exchange Market).
Base money expanded by 24.0 per cent for the
The Bank responded to these later challenges with second half of 2008, mainly due to a 24.2 per cent
a number of measures. On 15 October, 2008, the expansion in the final quarter of the year. This
Bank established a US dollar Special Loan Facility reflected a seasonal increase in currency issue as
for securities dealers and DTIs. An Intermediation well as a net increase of 21.7 per cent in the cash
Facility in foreign currency was established on 12 reserves, consequent on the increase in the statutory
November 2008 to enhance the flow of credit in the requirement. Net currency issue increased by 24.5
system. This facility was also extended to include per cent for the second half of 2008. This contributed

The Financial System --

Annual Report 2008

to annual growth of 3.8 per cent as at end-2008,
relative to growth of 11.6 per cent and 18.7 per cent
in 2007 and 2006, respectively. The deceleration in
the annual growth in currency was attributed to a
decline in real wages and increased unemployment.
The expansion in the monetary base reflected an
increase of $14.0 billion in net domestic assets
(NDA), mainly reflecting a net drawdown of $11.3
billion on Government deposits at the Bank as well
as an increase in BOJ holdings of GOJ securities
(see Table 1B). The liquidity emanating from
these impulses was partly reabsorbed through net
placements of $17.2 billion on OMO securities.
Absorption was also effected through the Bank’s
net sales of foreign currency to the market which
contributed to a decline of US$104.8 million or $7.8
billion in the NIR (see Table 1B).

Table 1A
INTEREST RATES ON BANK OF JAMAICA SPECIAL INSTRUMENTS
2008
Variable Rate Fixed Rate
Period of Issue Certificate of Deposit Margin Certificate of
Deposit
18 Jan. - 22 Jan. 12.80% 1.500
1 Sept. - 5 Sept 14.58% 1.250
18 Nov. - 19 Nov. 20.50%

Chart 1

-- The Financial System

 Bank of Jamaica

Table 1B

BANK OF JAMAICA - SUMMARY

FLOWS - J$MN
2007 2008 2008
Total Jan - Mar Apr - Jun Jul - Sept Oct - Dec Total

Net International Reserves (US$) -439.8 205.7 145.4 22.3 - 478.1 - 104.8
NET INT’L RESERVES (J$) -30 585.6 14 793.8 10 458.6 1 615.1 -34 660.4 -7 792.8
Assets -34 660.2 14 390.3 26 681.0 -14 230.5 -35 163.5 -8 322.6
Liabilities 4 074.6 403.5 16 222.4 15 845.6 503.1 32 974.6

NET DOMESTIC ASSETS 37 867.2 -21 208.6 -11 658.0 -1 687.5 48 588.4 14 034.3

Net Claims on Public Sector 325.8 2 766.6 547.9 -4 827.2 30 474.9 28 962.2
- Central Govt. Deposits 6 079.0 701.9 -18 390.3 7 111.3 21 911.8 11 334.6
- Govt. Securities -13 260.2 61.2 1.6 5 968.1 7 719.0 13 749.9
- Other 7 506.9 2 126.0 18 936.7 -17 906.6 844.1 4 000.2

Net Credit to Banks -2 115.8 - 599.9 469.3 - 771.3 - 10.6 - 912.5

Open Market Operations 40 015.7 -23 437.8 -12 656.6 4 615.9 14 291.0 -17 187.5
Other - 358.4 62.6 919.9 - 704.8 3 833.1 4 110.8

MONETARY BASE 7 281.6 -6 414.7 -1 199.4 - 72.4 13 928.0 6 241.5

- Currency Issue 4 903.4 -6 975.4 - 861.5 - 442.9 10 084.8 1 805.0

- Cash Reserve 2 438.1 390.2 416.9 334.0 3 582.5 4 723.6
- Current Account - 59.9 170.4 - 754.8 36.6 260.7 - 287.0

Memo:
NIR Stock (US$MN) e.o.p.) 1 877.7 2 083.4 2 228.8 2 251.1 1 772.9 1 772.9
Growth in Monetary Base (%) 12.6 - 9.8 - 2.0 - .1 24.2 9.6
Inflation (%) 16.8 5.2 6.0 4.7 .0 16.9

The Financial System --

Annual Report 2008

Table 1C

BANK OF JAMAICA - ECONOMIC PROGRAMME TARGETS

STOCKS - J$MN
December 2008
Target Outturn Deviation From
Target

Net International Reserves (US$) 1 707.7 1 772.9 65.2

NET INT’L RESERVES (J$) 130 056.9 128 520.4 -1 536.5

NET DOMESTIC ASSETS -56 552.1 -57 021.8 - 469.7

MONETARY BASE 73 504.8 71 498.6 -2 006.2

-- The Financial System


2.2. Money Supply
During 2008, growth in broad money supply, M3*
decelerated sharply to 5.9 per cent from 15.9 per cent
in 2007 (see Table 3). With the exception of Other
Deposits, all the components of M3* contributed to
the slower rate of growth. The deceleration in M3* was
influenced by the slowdown in economic activity.
The aggregate of currency in circulation and demand
deposits, M1*, declined by 4.8 per cent, compared
with an expansion of 20.4 per cent in 2007. Growth
in Currency with the Public decelerated to 3.2
per cent in 2008 from 13.7 per cent in 2007. This
translated into a real reduction of 11.6 per cent for
2008, relative to a real growth of 2.7 per cent for
2007. There was a faster rate of growth in the use
of alternative means of payment such as point-
of-sale (POS) transactions, predominantly credit
cards, consistent with a reduction in real wages (see
Table 2).
Table 2
ALTERNATIVE MEANS OF PAYMENT TO CASH
Annual Growth 2007
Value (%) 40.3
Volume (%) 6.6
22 437.1
Value (J$MN)
Demand deposits declined by 9.9 per cent, relative to
an expansion of 25.0 per cent in 2007. This reduction
reflected a 43.8 per cent decline in demand deposits
denominated in foreign currency as well as a slower
rate of growth in the local currency component.
The reduction in foreign currency demand deposits
reflected a decline in the deposits of business firms
 Money supply M3* is defined as M2* plus Other Deposits. M2*
represents banking system domestic and foreign currency
liabilities to the private sector in the form of notes and coins as well
as demand, time and saving deposits. Other Deposits are largely
comprised of commercial banks’ reserves.
The Financial System
Bank of Jamaica
and the tightness in the domestic and overseas credit
markets.
Growth in Quasi Money decelerated to 9.4 per cent
in 2008 from 14.9 per cent in 2007 (see Table 3).
This slower rate of growth was reflected in both
savings and time deposits, in particular, the foreign
currency component. The deceleration in these
foreign currency deposits was influenced by a
widening of the interest rate differential between US
and Jamaica Dollar instruments as well as tightness
in the overseas credit market.
The slower rate of growth in M3* was influenced by
a reduction in the NIR and a build-up in BOJ open
market instruments. The reduction in the NIR was
largely due to the Bank’s sale of foreign currency to
the market. There was strong demand for BOJ open
market instruments during the first half of the year,
influenced by the widening of the differential between
US and Jamaica Dollar instruments. However, with
increased uncertainty in the global and domestic
markets as well as the need to pay for currency orders
2008 and finance the cash reserve increase in December,
24.9 there was a net unwinding of OMO instruments in the
15.9
19 431.9
second half of the year.
The expansion in M3* was largely due to increases
in banking sector credit to the private and public
sectors. Growth in private sector credit slowed during
2008 and reflected a reduced rate of expansion in
local currency loans. The slowdown was primarily
reflected in Distribution, Personal Loans and
Transport (see Commercial Banks). The increase
in credit to the public sector was concentrated in the
final quarter of the year and reflected a net drawdown
of Government deposits at the BOJ as well as an
increase in BOJ holdings of GOJ securities.
- 10 -
Annual Report 2008

Table 3

MONEY SUPPLY, M3*

(DOMESTIC AND FOREIGN CURRENCY)
(FLOWS)
         
  2007 2008 2007 2008
  (J$M) (J$M) % %
         
Money Supply (M2)* 42 999.1 13 281.3 16.7 4.4
         
Money Supply (M1)* 17 814.1 -5 104.2 20.4 -4.8
Currency with the public 4 894.0 1 320.9 13.7 3.2
Demand Deposits 12 920.1 -6 425.1 25.0 -9.9
         
Quasi Money 25 185.0 18 385.5 14.9 9.4
Savings Deposits 18 590.4 12 069.5 14.4 8.2
Time Deposits 6 594.6 6 316.0 16.2 13.3
         
Other Deposits 6 503.5 8 140.8 12.1 13.5
         
Total Money Supply (M3)* 49 502.5 21 422.1 15.9 5.9
         
Net Foreign Assets -26 123.0 -38 916.1 -15.6 -32.5
Bank of Jamaica -30 585.4 -6 544.7 -16.5 -4.8
Commercial Banks 4 462.4 -32 371.4 -22.5 210.3
         
Credit to Private Sector 37 180.8 45 202.1 28.6 27.1
Local Currency 20 929.9 17 763.3 24.1 16.5
Foreign Currency 16 250.9 27 438.8 37.9 46.4
         
Net Claims on Public Sector 14 545.4 26 798.9 8.1 13.8
Net Claims on Financial Institutions -1 690.7 -3 132.5 17.5 27.6
BOJ Open Market Operations 40 015.7 -17 187.5 -25.9 15.0
Other Items (Net) -14 425.6 8 657.3 -67.9 168.1
         
TOTAL 49 502.6 21 422.2 15.9 5.9

- 11 - The Financial System

 Bank of Jamaica

2.3. Commercial Banks 14.3 per cent in 2007 (see Table 4). Abstracting for
2.3.1. Overview the impact of the new bank, the sector would have
The consolidated balance sheet of the commercial grown by 9.0 per cent in 2008. This slower rate of
banks showed continued growth during 2008, albeit growth reflected reductions in the institutions’ Cash
at a slower rate relative to 2007. This slowdown was and Bank Balances with commercial banks and
in spite of the addition of PanCaribbean Bank, which Investments as well as a marginal slowdown in the
was converted from a merchant bank in June 2008. rate of growth in Loans. Balances with overseas
The entry of PanCaribbean Bank increased the banks were drawn down mainly in the final quarter
number of entities in the group to seven. of the year in the context of the intensification of the
global financial crisis. Investments also declined
The deceleration in asset growth mainly reflected a during this quarter as banks unwound BOJ and GOJ
reduction in the institutions’ placements with overseas securities. The impact of this was partly offset by
banks, Investments as well as a slowdown in the an increase in the holdings of foreign government
rate of growth in Loans which was offset by a notable securities by one institution during December (see
build-up in Balances with the Bank of Jamaica. Table 4). As a consequence, commercial banks’
The latter reflected placements in the BOJ’s foreign holdings of securities as a proportion of total assets
currency deposit facility as well as an increase in declined to 29.3 per cent at end-2008 from 34.3 per
the cash reserve requirement of the deposit taking cent in 2007. The proceeds from the securities which
institutions (DTIs) to 11.0 per cent from 9.0 per cent were unwound as well as the cash and bank balances
on 03 December. The adjustment led to an increase received from overseas banks financed the build-up
in the liquid asset ratio for the banking sector to 25.0 in deposits with the Bank of Jamaica.
per cent from 23.0 per cent.
There continued to be strong growth in the banks’
The slower rate of expansion in the banks’ asset base stock of loans, which expanded by 26.3 per cent
occurred in the context of a significant deceleration in 2008 relative to 27.5 per cent in 2007. The
in the rate of growth in local currency deposits. marginal deceleration was reflected in a slowdown
Commercial banks were also able to garner increased in local currency denominated loans as there was
financing from their overseas affiliates in spite of the acceleration in the foreign currency component, partly
general tightening in the global financial markets. due to exchange rate depreciation (see Section
2.3.3). Notwithstanding the slowdown in loans, the
During the year, there was a worsening in the banks’ share of total loans in total assets increased to 44.5
asset quality, as reflected in an increase in past due per cent, the highest proportion for the four-year
loans, relative to the stock of loans. period ended December 2008 (see Chart 2).

2.3.2. Assets and Liabilities

The commercial banks’ asset base increased by
11.6 per cent in 2008, relative to an expansion of  The commercial banks’ stock of loans refers to aggregate book
value of all extensions of credit, net of the provisions for losses.

The Financial System - 12 -

Annual Report 2008

Table 4
COMMERCIAL BANKS
SUMMARY OF ASSETS AND LIABILITIES (J$MN)
   
 
Stock  Flows Flows Flows  % % %
 
  2008  2006 2007 2008  2006 2007 2008
                  
ASSETS (1) 544 653.4  62 876.2 60 866.1 56 688.4  17.3 14.3 11.6
Cash and Bank Balances 102 570.3  7 112.3 11 254.3 7 736.0  9.3 13.5 8.2
Placements with Overseas Banks 31 451.2  5 194.4 6 620.5 -9 950.8  17.6 19.0 -24.0
Due from BOJ 46 609.4  2 612.3 1 208.3 16 672.0  10.0 4.2 55.7
Other Accounts desig. as Liquid 10 544.9  1 556.0 -3 206.0 9 694.9  62.2 -79.0 1140.6
Cash Reserve 36 064.6  2 514.7 4 414.3 6 977.2  11.3 17.9 24.0
Investments 156 439.7  31 471.6 4 644.8 -6 938.1  24.7 2.9 -4.2
-Domestic Currency 96 790.4  15 160.8 -1 819.9 -7 492.9  16.7 -1.7 -7.2
BOJ Securities 35 098.3  11 603.2 -5 739.1 -1 261.6  38.0 -13.6 -3.5
Jamaica Government Securities 57 691.2  2 506.4 5 788.9 -5 468.1  4.6 10.1 -8.7
-Foreign Currency 59 649.3  16 310.8 6 464.7 0 554.8  44.9 12.3 0.9
Ja. Gov. Foreign Securities 45 793.8  7 921.6 5 804.4 -1789.1  23.4 13.9 -3.8
Foreign Govt. Securities 3 399.9  153.1 1.1 3 245.7  0.0 0.7 2 104.8
Other Foreign Securities 10 455.6  8 236.1 659.2 -901.8  334.5 6.2 -7.9
Securities Purchased for resale 3 334.4  2 448.2 -3 196.0 -650.5  51.7 -44.5 -16.3
Loans (Net of provisioning) 242 479.4  21 338.9 41 473.5 50 427.0  16.5 27.5 26.3
Domestic 132 797.8  14 939.0 22 880.8 17 859.1  19.4 24.9 15.5
Foreign 113 369.7  6 414.9 18 745.2 33 233.2  11.7 30.5 41.5
Accounts Receivable 13 054.7  -523.6 -102.2 6 647.7  -7.4 -1.6 103.8
Fixed Assets 9 435.7  333.0 355.7 1 024.1  4.3 4.4 12.2
Other Assets 17 339.3  695.8 6 435.9 -1 557.7  5.9 51.6 -8.2
                 
LIABILITIES & CAPITAL 544 653.4  62 876.2 60 866.1 56 688.4  17.3 14.3 11.6
Deposits  333 960.0  36 660.6 38 233.2 12 801.3  14.9 13.5 4.0
Domestic 205 487.7  26 976.9 22 540.5 7 091.9  18.1 12.8 3.6
Foreign  128 472.4  9 683.8 15 692.7 5 709.4  9.9 14.7 4.7
Due to Bank of Jamaica 197.1  -51.9 -149.2 163.7  -22.1 -81.7 489.8
Due to Commercial banks 65 911.2  11 600.3 4 574.3 22 745.1  43.0 11.9 52.7
Domestic currency 1 151.4  -158.7 1 097.5 -781.2  -16.0 131.4 -40.4
Foreign Currency 64 759.8  11 759.0 3 476.8 23 526.2  45.2 9.2 57.1
Head Off./Parent Co. 11 015.7  768.2 265.7 4 862.7  15.0 4.5 79.0
Overseas banks 53 358.5  10 577.9 3 883.2 18 278.0  51.3 12.4 52.1
Due to Specialised Institutions 4 512.2  286.4 -202.2 503.0  7.3 -4.8 12.5
Securities sold under Repurchase Agreements 24 990.4  -3 397.7 7 014.7 4 843.6  -20.6 53.4 24.0
Other Liabilities 52 067.5  10 783.2 6 369.9 9 556.2  42.5 17.6 22.5
Capital Account 63 015.1  6 995.2 5 025.4 6 075.7  15.6 9.7 10.7
               
(1) Assets exculde contingent accounts              
Data account for provisioning                 
Investments and Cash and Bank Balances adjusted to reflect reclassification of
Certificates of Deposit from “other accounts designated as liquid” to BOJ securities

- 13 - The Financial System

 Bank of Jamaica

Chart 2
Loans and Securities as a Proportion of Commercial Banks’ Assets

Chart 3
The Composition of Commercial Banks’ Assets
at 31 December 2007 and 31 December 2008

The slower growth in the banks’ assets during 2008
occurred in the context of a significant deceleration
in the rate of growth of deposits, particularly in the
first half of the year (see Table 4). Growth in local
currency deposits slowed to 3.6 per cent, well below
the average of 11.0 per cent in the last five calendar
years. This development could be attributed to a
slowdown in economic activity and the fallout in
the alternative investment schemes which affected
deposits. The slower build-up in private sector
deposits was also evident in the foreign currency
component and reflected a decline in demand
deposits as well as lower rates of growth in savings
and time deposits. In contrast, there was robust
expansion in other deposits which includes ‘funds
held by overseas residents’.
The deceleration in foreign currency deposits,
primarily demand deposits, largely occurred during
the second half of 2008. In particular, there was a
reduction in foreign currency deposits of business
firms. In contrast, during the last quarter of the year,

The Financial System - 14 -

Annual Report 2008

individuals accumulated holdings of foreign currency
deposits in the context of the general uncertainty.
Consequently, the ratio of these deposits to total
private sector deposit liabilities was 30.1 per cent at
end-2008, relative to 30.6 per cent at end-2007 (see
Chart 4).
Consequent on the sharp deceleration in the growth
of deposits, the commercial banks recorded a
notable expansion in funds due to commercial banks
overseas during 2008. The growth rate of this source
of financing increased to 52.1 per cent during 2008
from 12.4 per cent in 2007.

Table 5
COMMERCIAL BANKS’
TOTAL DEPOSITS (J$MN)
                   
  Stocks   Flows Flows Flows   % % %
  2008   2006 2007 2008   2006 2007 2008
                   
Deposits 336 613.1   38 156.8 37 872.3 13 861.0   15.5 13.3 4.3
Private Sector 271 199.2   22 500.3 38 105.0 11 903.4   11.3 17.2 4.6
Demand /1 58 101.4   8 557.4 12 920.1 -6 482.2   19.9 25.0 -10.0
Savings 159 359.6   12 905.0 18 590.4 12 069.6   11.1 14.4 8.2
Time 53 738.3   1 037.9 6 594.6 6 316.0   2.6 16.2 13.3
Government 29 935.6   14 518.1 0 436.4 -6 671.8   67.0 1.2 -18.2
Other 35 478.3   1 138.4 -0 669.1 8 629.4   4.3 -2.4 32.1
/1 Deposits adjusted for Net Items in the Process of Collection

Table 6
COMMERCIAL BANKS’
LOCAL AND FOREIGN CURRENCY DEPOSITS /1
(PRIVATE SECTOR) (J$M)
                   
  Stocks   Flows Flows Flows   % % %
  2008   2006 2007 2008   2006 2007 2008
                   
Private Sector Deposits 271 199.2   22 500.3 38 105.0 11 903.4   11.3 17.2 4.6
Local Currency 168 966.3   20 391.5 15 660.2 7 296.7   16.2 10.7 4.5
Foreign Currency 102 232.9   2 108.8 22 444.8 4 606.7   2.9 29.9 4.7
/1 Deposits adjusted for Net Items in the Process of Collection

- 15 - The Financial System

 Bank of Jamaica

Chart 4
FOREIGN CURRENCY DEPOSITS TO TOTAL DEPOSITS
December 2005 to 2008

2.3.3. Loans and Advances

The stock of commercial bank loans and advances reflected in Tourism, Personal Loans, Professional &
at end-2008 reflected a slower rate of increase of Other Services and Overseas Residents. Loans to
26.2 per cent, relative to an expansion of 27.1 per Tourism were largely denominated in foreign currency
cent in 2007(see Table 7). This was in spite of and reflected financing for working capital as well as
PanCaribbean Bank adding $5.9 billion to the loan the purchase of a property by one institution (see
stock during the year, 78.0 per cent of which was Table 8). Growth in Personal Loans decelerated to
denominated in foreign currency. The slowdown was 15.2 per cent, relative to an increase of 31.8 per cent
influenced by a reduction in loans to the public sector in 2007. This slower growth reflected a deceleration
as loans to other financial institutions increased while in the growth in instalment credit which includes
the growth in loans to the private sector was flat, financing for motor cars. Growth in loans for motor
relative to 2007. In real terms, however, the growth cars slowed to 19.8 per cent in 2008, relative to 63.0
in the total stock of loans and advances decelerated per cent in 2007. This lower growth may be attributed
to 8.0 per cent in 2008, compared to 8.8 per cent largely to higher interest rates, adjustments to
in 2007. Loans outstanding to the private sector Government’s motor vehicle import policy as well as
continued to dominate the commercial banks’ loan a decline in real income and the general slowdown
portfolio, accounting for 87.0 per cent at end- 2008, in the economy. There was strong growth in loans to
compared to 83.4 per cent at end-2007. Overseas Residents which was predominantly used
to finance payment of dividends. This expansion
Commercial banks’ loans to the private sector grew by contributed to an increase in the proportion of foreign
31.7 per cent in 2008, relative to an increase of 31.1 currency loans to total loans and advances to 46.1 per
per cent in 2007. The growth in 2008 was primarily cent at end-2008 from 41.1 per cent at end-2007.

The Financial System - 16 -

Annual Report 2008

Table 7

COMMERCIAL BANKS’
TOTAL LOANS AND ADVANCES (J$MN)
                   
  Stocks   Flows Flows Flows   % % %
  2008   2006 2007 2008   2006 2007 2008
                   
Public Sector 30 775.4
  -4 614.1 3 726.2 -887.8
  -14.2 13.3 -2.8
Other Financial Institutions 1 160.4
  554.2 -676.0 410.6
  63.6 -47.4 54.8
Private Sector 214 231.7
  25 156.2 38 575.8 51 569.5
  25.4 31.1 31.7
Agriculture and Fishing 4 588.1
  466.8 -134.7 2 424.3
  25.5 -5.9 112.0
Mining and Quarrying 700.9
  390.5 -130.1 187.5
  154.3 -20.2 36.5
Manufacturing 9 302.6
  1 187.3 393.8 3 043.5
  25.4 6.7 48.6
Construction & Land Development 12 902.1
  2 533.2 931.8 3 924.7
  46.0 11.6 43.7
Transport, Storage & Communication 11 468.2
  -1 503.5 4 485.6 3 276.8
  -28.9 121.0 40.0
Tourism 40 769.0
  1 364.6 5 280.5 11 206.2
  6.0 21.7 37.9
Distribution 23 099.6
  4 918.7 5 159.0 4 370.8
  56.9 38.0 23.3
Professional & Other Services 16 769.6
  1 556.4 2 589.3 4 943.1
  20.3 28.0 41.8
Personal Loans 84 877.3
  14 761.9 17 780.4 11 175.3
  35.9 31.8 15.2
Electricity, Gas & Water 3 353.5
  -556.2 2 215.2 948.1
  -74.5 1 165.3 39.4
Entertainment 414.8
  17.1 - 5.5 129.0
  6.2 -1.9 45.1
Overseas Residents 5 986.2
  19.5 10.2 5 940.1
  118.8 28.4 12 883.5
                   
TOTAL 246 167.5   21 096.3 41 626.0 51 092.4   15.9 27.1 26.2
* Private Sector loans exclude debentures    

Chart 5

Distribution of Private Sector Loans and Advances

as at 31 December 2007 and 31 December 2008

- 17 - The Financial System

 Bank of Jamaica

Table 8

COMMERCIAL BANKS
FOREIGN CURRENCY LOANS AND ADVANCES (US$000)
                   
  Stocks   Flows Flows Flows   % % %
  2008   2006 2007 2008   2006 2007 2008
                 
Public Sector 232 515
  -11 859 38 112 -39 665
  -4.8 16.3 -14.6
Other Financial Institutions 12 930
  4 840 -10 610 6 220
  38.8 -61.3 92.7
Private Sector* 1 169 806
  65 398 192 894 312 183
  10.9 29.0 36.4
Agriculture 23 378
  1 775 1 325 16 093
  42.4 22.2 220.9
Mining & Quarrying 1 963
  5 164 -1 690 -1 525
  101.0 102.0 103.0
Manufacturing 61 451
  32 591 -23 821 28 186
  133.1 -41.7 84.7
Const., & Land Development 105 108
  16 855 21 963 25 772
  41.6 38.3 32.5
Transport, Storage & Comm. 86 962
  -2 224 38 510 15 495
  -6.3 116.8 21.7
Electricity, Gas & Water 26 838
  -10 003 31 650 -4 827
  -99.9 211 000.0 -15.2
Distribution 142 774
  -2 065 51 181 39 390
  -3.8 98.0 38.1
Tourism 479 596
  2 598 45 990 85 238
  0.8 13.2 21.6
Entertainment 1 178
  -261 -453 -19
  -13.7 -27.5 -1.6
Professional & Other Services 72 158
  5 616 9 576 20 510
  15.4 22.8 39.7
Personal Loans 94 575
  15 298 18 570 14 192
  32.9 30.0 17.7
Loans to Overseas Residents 73 825
  54 93 73 678
  1.0 2.0 3.0
                   
TOTAL 1 415 251   58 379 220 396 278 738   6.8 24.1 24.5
*Private sector loans excluding debentures        

Chart 6
COMMERCIAL BANKS’ ADVANCE TO DEPOSITS RATIO
December 2005 to December 2008

The Financial System - 18 -

Annual Report 2008

The ratio of total non-performing loans to total loans
increased to 2.6 per cent at end-2008, from 2.0 per
cent at end-2007 and 2.2 per cent at end-2006.
The ratio of commercial banks’ loans to deposits
increased to 62.7 per cent at end-2008, from 52.3
per cent at end-2007 (see Chart 6).
2.3.4. Liquid Assets
Total liquid assets of the commercial banks increased
by 25.8 per cent in 2008. This largely reflected higher
holdings of short-term instruments due to increased
uncertainty as well as the increase in the required
liquid assets ratio. At end-2008, the ratio of average
liquid assets to prescribed liabilities increased to 37.4
per cent from 30.0 per cent at end-December 2007
(see Table 9). With the higher holdings of securities,
the banks’ excess reserves as a proportion of
prescribed liabilities increased to 12.4 per cent at
end-2008 from 7.0 per cent at end-2007.

Table 9
COMMERCIAL BANKS
LIQUID ASSETS
               
    2006 2007 2008
    Dec Dec Mar Jun Sep Dec
Statutory Liquidity (%)            
Cash Reserve Ratio 9.0 9.0 9.0 9.0 9.0 11.0
Liquid Assets Ratio 23.0 23.0 23.0 23.0 23.0 25.0
               
Average Liquid Assets Holdings (%) 42.3 30.0 33.4 36.7 39.7 37.4
               
Liquid Assets (J$BN)            
Notes and Coins 6.5 6.5 7.0 3.9 5.3 7.0
Current Account 1.3 2.9 1.4 0.5 0.5 1.4
Cash Reserve 14.8 17.3 17.7 18.1 18.4 22.0
Treasury Bills 1.2 2.1 1.9 1.6 1.5 0.8
Local Registered Stocks* -2.3 -1.9 -1.2 -2.0 -0.8 -0.7
Other Government Securities 1.3 2.2 1.7 3.4 3.6 4.4
BOJ Open Market Instruments 42.1 30.9 35.6 38.5 46.3 34.3
Other Placements with BOJ 4.1 0.9 4.3 4.5 6.4 3.2
Repo Agreements with counter-parties 1.4 1.5 0.2 0.7 0.9 0.2
Total   70.4 62.4 68.6 69.2 82.1 72.6
               
Prescribed Liabilities (J$BN) 164.7 191.7 196.1 201.0 204.5 178.2
Excess Reserves (J$BN) 31.7 13.5 20.5 27.5 34.2 22.2
*Net of securities pledged as collateral            

 Non-performing loans are classified as loans past due for three

months and over. The international maximum benchmark for non-
performing loans is 10.0 per cent.

- 19 - The Financial System

 Bank of Jamaica

2.3.5. Interest Rates and Spreads

During 2008, the overall interest rate spread of the
commercial banks declined by 56 basis points (see
Table 10). The decline in the spread largely reflected
a reduction in the weighted average loan rate during
the period April to October. Concurrently, there were
increases in the weighted average deposit rate.
With the exception of loans to Other Public Sector
and Central Government, the reduction in the overall
interest rate spread was reflected in all categories of
loans (see Table 11). The most significant reduction
was evidenced in the spread on loans to commercial
entities and Instalment Credit which together
accounted for approximately 62.6 per cent of the
loan portfolio.

Table 10

DOMESTIC MARKET INTEREST RATES

(End of Period)
  2006 2007 2008
  Dec Dec Mar Jun Sep Dec
COMMERCIAL BANKS            
             
INTEREST RATE SPREAD 12.57 12.18 12.58 12.12 11.44 11.62
             
Overall Average Weighted Loan Rate 17.59 17.11 17.33 16.97 16.46 16.78
             
Foreign Currency Average            
Weighted Loan Rate 9.76 9.75 8.63 9.42 9.35 8.96
             
Overall Average Weighted Deposit Rate 5.02 4.92 4.75 4.85 5.02 5.16
Demand 2.86 2.79 2.64 2.63 2.59 2.45
Savings 4.64 4.47 4.33 4.35 4.48 4.48
Time 6.60 6.99 6.82 6.94 7.03 7.37
Certificates of Deposit            
1-month 6.36 6.99 6.44 6.54 6.16 7.28
3-month 6.98 6.96 6.88 7.03 7.27 7.39
12-month 6.71 6.95 6.86 7.38 7.08 7.25
             
Foreign Currency Average            
Weighted Deposit Rate 3.26 3.13 2.88 2.72 2.94 3.02
Demand 2.28 2.35 1.77 1.63 1.64 1.72
Savings 2.21 2.31 2.10 2.06 2.03 2.00
Time 5.01 5.09 4.93 4.95 4.83 5.11
             
             
GOJ 6-MONTH TREASURY BILL RATE 12.31 13.34 14.22 14.43 15.35 24.45
             
BOJ 180-DAY REPURCHASE            
AGREEMENT RATE 12.00 12.00 14.20 14.70 14.70 21.50
             
PRIVATE MONEY MARKET RATE 11.85 12.60 13.90 14.65 14.85 25.00

The Financial System - 20 -

Annual Report 2008

Table 11

COMMERCIAL BANKS’ INTEREST RATE SPREADS

(BY SECTOR)
               
  2006 2007   2008
  Dec Dec   Mar Jun Sep Dec
               
OVERALL AVERAGE WEIGHTED LOAN RATE 17.59 17.11   17.33 16.97 16.46 16.78
               
               
OVERALL AVERAGE WEIGHTED DEPOSIT RATE 5.02 4.92   4.75 4.85 5.02 5.16
               
               
OVERALL SPREAD 12.57 12.18   12.58 12.12 11.44 11.62
   
Instalment Credit 16.63 16.02   15.96 15.63 15.47 15.23
Mortgage 8.07 2.48   2.75 2.62 2.49 2.42
Personal 22.62 20.50   20.51 20.38 19.38 19.78
Commercial 8.34 8.95   9.04 8.76 7.66 7.85
Central Government 8.81 10.31   10.48 9.85 10.07 17.17
Other Public Sector 7.10 4.59   6.17 6.22 8.23 8.18

2.4. Other Financial Intermediaries

2.4.1. Financial Institutions Act Licensees
(FIAs)
The consolidated balance sheet of the FIA licensees
recorded a notable decline in 2008, relative to end-
2007. The contraction was mainly influenced by the
conversion of Pan Caribbean Merchant Bank (PCMB)
to a commercial bank in June 2008 and the continued
realignment of the balance sheet of another entity
towards core business. These respective factors
mainly resulted in declines in Loans and Advances
and Investments. The consolidated balance sheet
of the FIAs was also influenced by the impact of the
global financial crisis. This was reflected in reductions
in the institutions’ Cash and Bank Balances with
Commercial Banks, and Investments, mainly
holdings of non-GOJ foreign currency securities. The
FIAs also unwound securities sold under repurchase
agreements while increasing their liabilities with the
BOJ.
The cash reserve requirement of the FIAs was
increased by 2 percentage points to 11.0 per cent on
3 December 2008. The adjustment led to an increase
in the statutory liquid asset ratio for the sub-sector to
25.0 per cent from 23.0 per cent.

 Includes merchant banks and trust companies.

 Pan Caribbean Merchant Bank converted to PanCaribbean Bank
and accounted for 22.0 per cent or $8 815.4 million of the sub-
sector’s asset base at end-May.

- 21 - The Financial System

 Bank of Jamaica

Table 12
ASSETS AND LIABILITIES OF FIAs
(J$MN)
               
    % %
Stock Flows Flows  
Change Change
    2008* 2007 2008 2007 2008  
  Assets (1)            
  Cash and Bank Balances with Commercial Banks 302.1 580.8 -2 358.8 27.9 -88.6  
  Balances with Other Financial Institutions 7.2 1.7 -0.7 27.3 -8.5  
  Balances with Bank of Jamaica 978.5 155.0 64.3 20.4 7.0  
  Investments 15 495.2 -2 356.4 -8 746.8 -8.9 -36.1  
  Securities Purchased with a View to Resale 3 190.1 -122.9 253.0 -4.0 8.6  
  Loans & Advances (net of provision) 10 710.2 3 044.9 -3 422.4 27.5 -24.2  
  Accounts Receivable 1 171.2 -379.5 -7.4 -24.4 -0.6  
  Other Assets 800.7 21.0 305.3 4.4 61.6  
  TOTAL 32 655.3 944.5 -13 913.5 2.1 -29.9  
               
  Liabilities and Capital            
  Deposits 14 519.4 3 136.3 -2 633.9 22.4 -15.4  
  Balances due to Commercial Banks 542.3 -281.6 -30.5 -33.0 -5.3  
  Balances due to Specialised Institutions 143.8 35.0 -196.4 11.5 -57.7  
  Borrowings from Other Financial Institutions 673.7 -405.5 -583.7 -24.4 -46.4  
  Securities sold under Repurchase Agreements 7 279.8 -1 699.7 -10 832.5 -8.6 -59.8  
  Other Liabilities 4 841.0 -294.3 4 075.2 -27.8 532.1  
  Capital & Reserves 4 655.2 454.4 -3 711.6 5.7 -44.4  
  TOTAL 32 655.3 944.5 -13 913.5 2.1 -29.9  
               
  Memorandum Items            
  Foreign Currency Assets 19 099.7 18.0 -10 752.4 0.1 -36.0  
  Foreign Currency Liabilities 12 634.8 2 129.8 -3 686.4 15.0 -22.6  
               
  (1) Assets exclude contingent accounts            
  * Provisional Data            
2.4.1.1. Assets & Liabilities

The assets of the FIA licensees amounted to $32
655.3 million at end-2008, representing a contraction
of 29.9 per cent for the calendar year. Adjusting for
the impact of PCMB, the sector would have declined
by 13.9 per cent, relative to a decline of 0.9 per cent
in 2007. This overall contraction largely reflected
declines in Investments, Cash and Bank Balances
with Commercial Banks and Loans & Advances
(net of provision). Investments declined by 36.1 per
cent, relative to a reduction of 8.9 per cent in 2007
and accounted for approximately 63.0 per cent of
the overall contraction (see Table 12). Taking into
account the impact of PCMB, Investments declined
by 29.8 per cent, relative to 10.5 per cent in 2007.
The decline in investments of the remaining entities
occurred mainly in the first four months of the year
and primarily reflected reductions in the institutions’
holdings of corporate securities denominated in
foreign currency as one institution realigned its
portfolio towards core business. The impact of the
decline in these securities was partly offset by an
increase in the holdings of GOJ foreign currency

The Financial System - 22 -

Annual Report 2008

denominated securities. Cash and bank balances quarter of the year, after the exit of PanCaribbean.
placed with overseas commercial banks declined Without the impact of Pan Caribbean, the securities
in response to the general uncertainty that obtained purchased with a view to resale would have increased
in global financial markets and the intensification of by 34.9 per cent, relative to the overall increase of
the credit crisis in the final quarter of the year. This 8.6 per cent.
led institutions to unwind cash balances as well as
securities to finance calls on the liabilities during that
The deposits of the FIAs contracted by 15.4 per cent
quarter. during 2008, in contrast to an increase of 22.4 per
cent in 2007. This decline was mainly influenced by
Loans and Advances contracted by 24.2 per cent the removal of the foreign currency deposits of Pan
in 2008, mainly due to the conversion of PCMB Caribbean, which had accounted for 85.3 per cent
to a commercial bank, which affected the foreign of its balance sheet at the time of exit and 26.7 per
currency loans portfolio. Abstracting for this, growth cent of the sector’s total deposits. Abstracting for this
in loans and advances decelerated to 9.7 per cent impact, growth in deposits decelerated to 18.9 per
in 2008 from growth of 33.7 per cent in 2007. This cent from 20.8 per cent in 2008 in keeping with the
deceleration reflected the slowdown in economic slowdown in the economy.
activity in 2008.
During the year, there were continued declines in
Consequent on the overall decline in foreign currency Securities sold under Repurchase Agreements
loans and cash balances with commercial banks and Borrowings from Other Financial Institutions
abroad, the sub-sector’s holdings of foreign currency as one large institution continued to realign its balance
assets declined by 36.0 per cent for 2008. With the sheet towards core activities. In addition, these
exclusion of PCMB, the foreign currency assets declines were influenced by the tightening of credit in
declined by 21.2 per cent, relative to 2.7 per cent the global financial market and the attendant call on
in 2007. The decline in 2008 led to a reduction in the liabilities in the latter half of the year. Consequent
the ratio of foreign currency assets to total assets of on these developments, deposits became the largest
the remaining entities to 51.9 per cent at end-2008 source of financing, accounting for approximately
compared to 65.2 per cent at end-2007. 52.0 per cent of total liabilities compared to 45.0 per
cent of total liabilities in 2007. With the exclusion of
The impact of the declines in some of the major Pan Caribbean, deposits accounted for 37.2 per cent
categories of assets was partly offset by increases of liabilities in 2007.
in Balances with the Central Bank, Securities
Purchased with a View to Resale and Other Assets, The entities’ consolidated capital base declined by
mainly in the final quarter of the year. The expansion 44.4 per cent in 2008, relative to growth of 5.7 per
in balances with the BOJ mainly resulted from the cent during 2007. After adjusting for the impact of
increase in the cash reserve requirement in the final PCMB, the capital base declined by 8.4 per cent,
 At the point of exit, Pan Caribbean accounted for 76.8 per cent of relative to growth of 3.2 per cent in 2007. The decline
total foreign currency loans and 30.0 per cent of total loans.

- 23 - The Financial System

 Bank of Jamaica

for the remaining entities reflected reduction in the impact of PCMB, there were net repayments in
retained earnings and reserves. all sectors with the exceptions of Mining & Quarrying,
Professional & Other Services and Electricity. FIA
2.4.1.2. Sectoral Distribution of Loans licensees extended loans mainly to Construction &
Loans and advances to the private sector declined Land Development, Electricity and Personal (see
by 23.4 per cent in 2008, relative to growth of 21.8 Chart 7).
per cent in 2007 (see Table 13). Taking account of Table 13

SECTORAL DISTRIBUTION OF LOANS AND ADVANCES

OF
INSTITUTIONS LICENCED UNDER THE FINANCIAL INSTITUTIONS ACT
(J$M)
2007 2008* 2007 2008 2007 2008
Stock Stock Flows Flows (%) (%)

Public Sector 435.4 126.9 75.4 -308.5 21.0 -70.9

Financial Institutions 641.3 627.4 630.8 -13.9 6 010.4 -2.2
Private Sector 13 130.5 10 063.6 2 354.2 -3 067.0 21.8 -23.4
Agriculture & Fishing 1 029.6 28.4 -7.4 -1 001.2 -0.7 -97.2
Mining & Quarrying 10.2 47.3 -9.7 37 -48.6 361.8
Manufacturing 519.1 363.5 95.6 -155.6 22.6 -30.0
Construction & Land Development 2 977.5 2 514.9 1 313.6 -462.6 78.9 -15.5
Transport, Storage & Communication 842.2 443.4 233 -398.8 38.2 -47.4
Tourism 810.7 283.5 -185.1 -527.1 -18.6 -65.0
Distribution 1 763.0 1 276.6 -111.6 -486.3 -6.0 -27.6
Professional & Other Services 1 534.4 1 601.9 209.6 67.5 15.8 4.4
Personal Loans 2 767.9 2 451.3 783.6 -316.5 39.5 -11.4
Electricity 14.6 2 451.3 4.4 2 436.7 43.7 16 694.4
Entertainment 89.3 24.5 -17 -64.8 -16.0 -72.5
Overseas Residents 772.2 820.8 45.5 48.6 6.3 6.3
TOTAL 14 207.2 10 817.9 3 060.4 -3 389.3 27.5 -23.9

* Provisional
Totals include provisions for loan losses

The Financial System - 24 -

Annual Report 2008
Chart: 7
At end-2008, the quality of the loan portfolio, as
evidenced by the ratio of past due loans (over three
months) to total loans, deteriorated, as reflected in an
increase in the ratio to 5.4 per cent at end-2008, from
3.7 per cent in 2007. The ratio was 4.9 per cent in
2007 when the PanCaribbean effect was taken out.
2.4.2 Building Societies
2.4.2.1 Overview
The assets of the building societies grew at a slower
rate during 2008, relative to 2007. The deceleration
was influenced mainly by the slowdown in the
domestic economy. There was also a reallocation
of assets in the context of the global financial crisis.
The impact of these developments was reflected
in declines in the institutions’ Cash and Bank
Balances with Commercial Banks and holdings of
non-GOJ foreign currency denominated securities
- 25 -
Chart: 8
as well as a slowdown in the rate of growth of
mortgages. Concurrently, there was a notable build-
up in Balances with the Bank of Jamaica, largely
reflecting placements in the BOJ’s foreign currency
Deposit Facility.
The cash reserve ratio requirement was increased by
2 percentage points to 11.0 per cent on 03 December
2008. This applied to institutions which did not meet
the 40.0 per cent requirement for residential mortgage
loans to savings fund ratio. The cash reserve
requirement of the building societies remained at 1.0
per cent for those which met the qualifying ratio. The
increase in the cash reserve ratio requirement led
to an increase in the statutory liquid asset ratio for
the sub-sector to 25.0 per cent from 23.0 per cent
and remained at 5 per cent for those meeting the
qualifying ratio.
The Financial System
 Bank of Jamaica

Table 14

ASSETS AND LIABILITIES OF BUILDING SOCIETIES

 (J$M) 
    STOCK STOCK FLOW FLOW Per Cent Per Cent  
    2007 2008 2007 2008 2007 2008  
                 
  ASSETS              
  Cash and Balances with Commercial Banks 20 432.3 13 142.8 6 641.7 -7 289.4 48.2 -35.7 
  Balances with Other Financial Institutions 28.7 35.3 -1 488.7 6.6 -98.1 22.9 
  Balances with Bank of Jamaica 1 876.8 7 389.9 267.2 5 513.1 16.6 293.8 
  Investments (net of provision) 26 879.9 22 655.6 2 640.4 -4 224.2 10.9 -15.7 
  Securities Purchased with View to Resale 7 925.5 11 651.5 -6 331.0 3 726.0 -44.4 47.0 
  Loans and Advances (net of provision) 58 258.3 75 415.4 15 170.6 17 157.1 35.2 29.5 
  - of which Mortgages 57 680.1 74 665.1 15 082.5 16 985.0 35.4 29.4 
  Accounts Receivables 3 858.5 3 792.9 -107.5 -65.6 -2.7 -1.7 
  Fixed Assets 2 082.0 2 364.7 -60.3 282.6 -2.8 13.6 
  Other Assets 1 410.6 2 083.6 498.1 673.0 54.6 47.7 
  TOTAL 122 752.6 138 531.8 17 230.5 15 779.2 16.3 12.9 
                 
  LIABILITIES and CAPITAL              
  Savings Fund 84 377.3 93 285.3 10 792.3 8 908.0 14.7 10.6 
  Due to Commercial Banks 3 824.7 5 365.1 960.6 1 540.4 33.5 40.3 
  Due to Specialized Institutions 9 251.4 14 093.4 3 197.0 4 842.0 52.8 52.3 
  Due to Other Financial Institutions 890.9 1102.6 -672.2 211.7 -43.0 23.8 
  Other Liabilities 3 206.8 4 072.8 286.6 866.0 9.8 27.0 
  Capital and Reserves 21 201.5 20 612.6 2 666.2 -588.9 14.4 -2.8 
  TOTAL 122 752.6 138 531.8 17 230.5 15 779.2 16.3 12.9 
                 
  INDICATIVE RATIOS (Per Cent)              
  Liquid Assets : Total Assets 18.2 14.8         
  Liquid Assets : Savings Fund 26.5 22.0         
  Advance : Savings Fund 69.0 80.8          
  Mortgage Loans : Savings Fund 68.4 80.0          
                 

2.4.2.2 Assets and Liabilities

The total assets of the building societies stood at
$138 531.8 million at end-2008, reflecting growth of
12.9 per cent for the year, compared to an increase
of 16.3 per cent in 2007. The deceleration mainly
reflected reductions in the institutions’ Cash and
Bank Balances with Commercial Banks and
Investments. Balances with overseas banks were
drawn down mainly in the final quarter of the year,
following the intensification of the global financial
crisis. A slowdown in the rate of growth in mortgages
of all institutions also contributed to the deceleration
in the growth rate of the asset base (see Section
2.4.2.3).
Most of the decline in Investments occurred early
in the year and mainly reflected a reduction in
one entity’s holdings of local corporate securities.
There were also reductions in the sectors’ holdings

The Financial System - 26 -

Annual Report 2008
of foreign government securities and corporate
securities denominated in foreign currency in the final
quarter of the year. The proceeds from the unwinding
of these securities as well as the drawdown of cash
and bank balances from overseas banks financed
the acquisition of additional GOJ foreign currency
denominated securities and the build-up in balances
with the Bank of Jamaica. The increase in the
holdings of GOJ global bonds was consistent with
higher returns on these instruments.
The assets of the building societies continued to
be financed largely from the savings fund, although
there was a slowdown in the growth rate of this
source of financing to 10.6 per cent from 14.7 per
cent in the previous year. This deceleration was
reflected in savings denominated in foreign currency
while there was marginal growth in the domestic
currency component. Building societies, however,
recorded an increase of 40.3 per cent in funds due
to commercial banks, both local and overseas, in the
September and December quarters, respectively.
This growth rate represented an acceleration, relative
to expansion of 33.5 per cent in 2007. The increased
placement with domestic banks was concentrated
in one institution. Growth in liabilities to specialized
institutions, particularly the National Housing Trust,
remained strong, reflecting the mortgage financing
arrangement between the two institutions.
Capital and Reserves declined by 2.8 per cent
during 2008, compared to a growth rate of 14.4 per
cent in the previous year. This decline arose largely
from the erosion in reserve holdings, given the
reduction in the market value of the securities held
by the institutions.
- 27 -
During 2008, there was a decline in the liquid assets
to total assets ratio to 14.8 per cent, from 18.2 per
cent at end-2007, mainly reflecting the decline
in Cash and Bank Balances with Commercial
Banks. In addition, the liquid assets to savings fund
ratio declined to 22.0 per cent, from 26.5 per cent at
end-2007, reflecting the faster deceleration in liquid
assets, relative to the savings fund. In contrast, the
growth in loans outpaced that of the savings fund
which resulted in an increase in the advance to
savings fund ratio to 80.8 per cent at end-2008, from
69.0 per cent at end-2007.
There was deterioration in the quality of the loan
portfolio. At end-2008, the ratio of total past due
loans (over three months) to total loans, was 3.6 per
cent relative to 3.0 per cent at end-2007.
2.4.2.3 Building Societies’ New Mortgage Loans
During the review year, there was a sharp deceleration
in growth in the value of new mortgage loans issued
by building societies. Concurrently, the number of
new mortgages issued continued to decline, albeit
at a slower rate, relative to 2007 (see Table 15).
The slower growth in the value of new mortgages
was reflected largely in the slowdown in growth of
residential mortgage loans to 27.9 per cent, from 60.5
per cent in 2007. In addition, there were declines of
31.5 per cent and 98.1 per cent in new commercial
and agricultural mortgage loans, respectively.
The number of new mortgage accounts declined by
1.2 per cent during 2008, following a decline of 4.7
per cent in 2007. The reduction in 2008 was mainly
reflected in a 96.4 per cent decline in the number
of agricultural and other new accounts as well as
a slowdown in the growth rate in the number of
The Financial System
 Bank of Jamaica

new residential mortgages. The average loan size loan rate charged by building societies was 12.56 per
increased to $4.8 million in 2008 from $3.9 million in cent, a reduction of 4.0 basis points for the year. This
2007. At end-2008, the weighted average mortgage was a slower decline relative to the decline of 128.0
basis points for 2007.

Table 15
BUILDING SOCIETIES NEW MORTGAGE LOANS
2007 to 2008
                 
    Stock Stock Flow Flow % Change % Change  
    2007 2008 2007 2008 2007 2008  
                 
  Value of New Accounts (J$M)              
  Residential 14 582.7 18 655.5 5498.1 4 072.8 60.5 27.9  
  Commercial 196.8 134.8 87.1 -61.9 79.5 -31.5  
  Agricultural & Other 0 727.9 0 013.9 -456.1 -714.0 -38.5 -98.1  
  TOTAL 15 507.3 18 804.2 5 129.1 3 296.9 49.4 21.3  
                 
  Number of New Accounts              
  Residential 3 719 3 885 132 166 3.7 4.5  
  Commercial 16 18 -12 2 -42.9 12.5  
  Agricultural & Other 223 8 -316 -215 -58.6 -96.4  
  TOTAL 3 958 3 911 -196 -47 -4.7 -1.2  
                 
  Weighted Average              
  Mortgage Loan Rate (%) 12.60 12.56 -1.28 -0.04      

2.5. Development Banks
2.5.1. Development Bank of Jamaica
During 2008, the Development Bank of Jamaica
continued to provide medium and long-term
financing through Approved Financial Institutions
(AFIs) and People’s Cooperative Banks (PCB) at
concessionary interest rates. Both loan approvals
and disbursements increased during the year,
relative to 2007. Loan approvals for Small and
Medium-sized Enterprises (SME) recorded the
largest increase while loan disbursements to Other
Services grew the strongest during the year. In
contrast, the sectors that experienced the sharpest
declines in loan approvals and disbursements were
Manufacturing and Agro-Industry.
 AFIs include commercial banks and merchant banks.
The assets of the DBJ fell by 2.3 per cent in 2008
due to declines of 34.8 per cent and 7.4 per cent in
Investments and Loans to Financial Institutions,
respectively (see Table 16). The contraction in
Investments was influenced by a call on liabilities
due to the National Road Operating & Constructing
Company (NROCC). Securities were unwound
to finance the repayment of these liabilities. The
reduction in Loans to Financial Institutions
reflected declines in Other Loans and Loans to AFIs.
These contractions were partially offset by increases
of 18.6 per cent in Receivables & Prepayments, as
well as respective increases of 2.8 per cent, 32.4 per
cent and 39.0 per cent in GOJ Infrastructural Loan
Programmes, Securities-Resale Agreements and
Cash and Bank Balances,.

The Financial System - 28 -

Annual Report 2008

With respect to the DBJ’s liabilities, there was a and Manufacturing all recorded declines in the value
decline in Other Liabilities, which primarily reflected of loans approved in 2008, relative to 2007.
the repayment of liabilities due to NROCC. This
decline more than offset the increases in all other Local currency loan disbursements amounted to $2
categories of liabilities and Shareholders’ Equity. 066.1 million, an increase of 5.9 per cent, relative to
2007. This was due to an increase in disbursements
Loan Approval and Disbursements to Other Services and, to a much lesser extent
Local currency loan approvals amounted to $2 016.9 Mining & Quarrying, SME and Tourism. There
million in 2008, reflecting an increase of 22.0 per was a decline in disbursements to all other sectors.
cent, relative to 2007 (see Table 17). The increase Other Services and Agriculture accounted for
was mainly related to the SME line of credit which 51.5 per cent and 20.4 per cent, respectively, of
commenced during the year and accounted for disbursements made during the year respectively.
the majority of local currency loan approvals (see
Table 18). Local currency loan approvals for Mining Foreign currency loan approvals and disbursements
& Quarrying, Agro-Industry and Tourism also increased during the year to US$8.9 million and
increased during the year. However, Agriculture (the US$8.0 million, respectively. These were both related
second largest beneficiary of loans) Other Services to loans for Tourism and Agriculture.

Table 16

DEVELOPMENT BANK OF JAMAICA

ASSETS AND LIABILITIES (J$MN)
  2007 2008 Change % Change
ASSETS        
Cash and Bank Balances 566.0 787.0 221.0 39.0
Receivables and Prepayments 3 816.0 4 524.0 708.0 18.6
Investments 7 098.0 4 628.0 -2 470.0 (34.8)
Securities - Resale Agreements 1 095.0 1 450.0 355.0 32.4
Loans to Financial Institutions 10 059.0 9 313.0 -746.0 (7.4)
-Loans to Co-operative Banks 585.0 884.0 299.0 51.1
-Loans to AFIs 3 797.0 3 740.0 -57.0 (1.5)
-Other Loans 5 677.0 4 689.0 -988.0 (17.4)
GOJ Infrastructural Loan Programmes 23 739.0 24 397.0 658.0 2.8
Other Assets 0.0 0.0 0.0 0.0
Fixed Assets 426.0 627.0 201.0 47.2
TOTAL 46 799.0 45 726.0 -1 073.0 (2.3)
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Shareholder’s Equity 5 996.0 6 922.0 926.0 15.4
Current Liabilities 1 144.0 1 751.0 607.0 53.1
Long-term Liabilities 32 197.0 33 420.0 1 223.0 3.8
Short-term Liabilities 395.0 407.0 12.0 3.0
Other Liabilities 7 067.0 3 226.0 -3 841.0 (54.4)
TOTAL 46 799.0 45 726.0 -1 073.0 (2.3)

- 29 - The Financial System

 Bank of Jamaica

Table 17

LOAN APPROVALS AND DISBURSEMENTS TO AFI’s , PCB AND INVESTMENTS BY SECTOR

APPROVALS
    Local Currency (J$MN)     Foreign Currency (US$MN)    
    2007 2008 % change 2007 2008 % change
Sector              
Agriculture   720.3 445.3 -38.2 0.0 3.0 -
Agro-Industry 128.0 231.3 80.7 0.0 0.0 0
Manufacturing 233.8 104.0 -55.5 0.0 0.0 0
Mining & Quarrying 51.2 199.4 289.5 0.0 0.0 0
Other Services 395.1 195.6 -50.5 0.0 0.0 0.0
Tourism   124.3 191.3 53.9 2.1 5.9 177.0
SME   0.0 650.0 - 0.0 0.0 0.0
Total   1 652.7 2 016.9 22.0 2.1 8.9 323.8
DISBURSEMENTS
    Local Currency (J$MN)     Foreign Currency (US$MN)    
    2007 2008 % change 2007 2008 % change
Sector              
Agriculture   725.3 421.4 -41.9 0.0 4.0 -
Agro-Industry 560.0 91.1 -83.7 0.0 0.0 0
Manufacturing 425.2 140.0 -67.1 0.0 0.0 0
Mining & Quarrying 51.2 137.6 168.8 0.0 0.0 0
Other Services 79.6 1,064.8 1 237.7 0.0 0.0 0
Tourism   109.7 136.2 24.2 1.9 4.0 109.8
SME   0.0 75.0 - 0.0 0.0 0.0
Total   1 951.0 2 066.1 5.9 1.9 8.0 321.1

Table 18

LOAN APPROVALS AND DISBURSEMENTS TO AFI’s, NPCB AND INVESTMENT BY SECTOR

(PROPORTIONS)
    APPROVALS DISBURSEMENTS
    Local Foreign Local Foreign Local Foreign Local Foreign
    Currency Currency Currency Currency Currency Currency Currency Currency
    2007   2008   2007   2008  
Sector                  
Agriculture 43.6 0.0 22.1 33.7 37.2 0.0 20.4 0.0
Agro-Industry 7.7 0.0 11.5 0.0 28.7 0.0 4.4 0.0
Manufacturing 14.1 0.0 5.2 0.0 21.8 0.0 6.8 0.0
Mining & Quarrying 3.1 0.0 9.9 0.0 2.6 0.0 6.7 0.0
Other Services 23.9 0.0 9.7 0.0 4.1 0.0 51.5 0.0
Tourism   7.5 100.0 9.5 66.3 5.6 0.0 6.6 0.0
SME   0.0 0.0 32.2 0.0 0.0 0.0 3.6 0.0
 Total   100.0 100.0 100.0 100.0 100.0 0.0 100.0 0.0

The Financial System - 30 -

Annual Report 2008

2.5.2. National Export-Import Bank of Jamaica to policyholders requiring working capital support.
2.5.2.1. Introduction
During 2008, the EXIM Bank broadened its reach
During 2008, the National Export-Import Bank of
to include emerging sectors such as the creative
Jamaica Limited (EXIM Bank) continued to provide
industries and intensified its collaborative efforts with
financial support to firms in the form of short and
agencies such as the Jamaica Business Development
medium-term financing as well as trade credit
Centre (JBDC), the Scientific Research Council
insurance.
(SRC) as well as the Jamaica Guild of Artists (JGA).
The collaboration with these agencies was aimed
The EXIM Bank’s loan portfolio continued to record
at establishing viable risk-sharing agreements to
growth, in line with the objectives set in its Three-Year
encourage the development of entrepreneurship. In
Strategic Plan (2007-2010) – Vision 2010. The EXIM
this regard, the JBDC and EXIM Bank signed a 60:40
Bank had set as its target a 25.0 per cent increase
per cent risk sharing agreement to facilitate financing
to $6.0 billion in loan utilization for the financial year
to craft manufacturers contracted to JBDC’s Things
ending March 2009. In support of this objective,
Jamaican shops. A Memorandum of Understanding
the EXIM Bank increased funding to the tourism,
between the EXIM Bank and the SRC was also
agro-business, manufacturing as well as mining &
in the process of being finalized. It is anticipated
quarrying sectors, which were identified as having the
that this agreement would allow researchers and
potential for increased foreign exchange earnings.
developers of new products to access financing
Special emphasis was also placed on funding the
for the establishment of new businesses. Financial
development and expansion of small and medium-
support was committed to the JGA to facilitate
sized enterprises, particularly those providing vital
access to grant funding from the Caribbean Export
linkages to the export sectors.
Development Agency for training and development.
In August 2008, the EXIM Bank introduced
2.5.2.2. Review of Lending Operations
Trade Credit Insurance (TCI). This facility was an
During 2008, the EXIM Bank disbursed domestic and
enhancement on the previous Export Credit Insurance
foreign currency loans of approximately J$3.3 billion
(ECI) product. Trade Credit Insurance covers export
and US$37.3 million, respectively, achieving total
and domestic sales, the sale of goods trans-shipped
disbursement of approximately J$6.5 billion. This
from Jamaica’s duty free zones to countries within
represented an increase in total disbursements of
the Caribbean as well as third-country sales against
35.0 per cent for the year.
commercial and political risks of non payment. A
corresponding Insurance Policy Discounting Facility
Local currency disbursements were 29.0 per cent
(IPDF) that allows for the discounting of up to 80.0
above that recorded in 2007 and reflected the
per cent of insured receivables was made available
continued strong demand for pre- and post-shipment
 The utilization of credit for the nine months ended December
financing which provided working capital support to
2008 amounted to $5.4 billion. The performance for the nine
months ended December 2008 was partly attributed to the Bank’s domestic manufacturers and exporters (see Table
competitively priced loan products, supported by sustained
marketing and advertising programmes.
19).

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 Bank of Jamaica

Table 19

LOCAL CURRENCY DISBURSEMENTS

Facilities 2007 2008 Change Change

J$MN J$MN J$MN %
Bankers Export Credit Facility 168.0 487.0 319.0 189.9
Export Credit Facility
596.4 640.0 43.6 7.3
Insurance Policy Discounting Facility
24.6 41.1 16.5 67.2
Pre-Shipment/Copake Facilities
989.0 1,231.5 242.5 24.5
Apparel Sector Financing
49.0 27.0 -22.0 -44.9
Modernization Fund for Exporters
462.7 554.7 92.0 19.9
Small Business Facility
224.5 201.9 -22.6 -10.1
General Trade Line
47.8 59.7 11.9 24.9
JEA/Ebbed
11.7 28.8 17.1 146.4
NIF
18.1 70.3 -11.1 -61.1
Information Communication Technology (ICT)
0.2 0.3 0.1 50.0
Total 2 592.0 3 342.3 750.8 29.0

Table 20

APPROVED LOANS BY INDUSTRY

Industry 2007 2008
J$ % J$ %
Agro Processing 864.8 33.5 1612.0 49.2
Food & Beverage 887.8 34.1 991.3 30.2
Textile & Apparel 72.9 2.8 28.3 0.9
Manufacturing 497.0 19.2 246.1 7.5
Distribution/Services 211.5 8.2 346.9 10.6
Mining 58.0 2.2 54.5 1.7
Total 2 592.0 100.0 3 279.0 100.0

The Agro-Processing and Food & Beverage for 79.4 per cent of total local currency approvals
sectors continued to be the main recipients of the (see Table 20).
EXIM Bank’s funding in 2008, collectively accounting

The Financial System - 32 -

Annual Report 2008

Table 21

FOREIGN CURRENCY DISBURSEMENTS

US$MN US$MN Change Change
Facility 2007 2008 US$ %
Lines of Credit 17.2 28.5 11.3 65.7
Bankers Export Credit Facility 0.6 2.0 1.4 240.0
Cuban Line of Credit 3.2 6.6 3.4 105.3
Export Growth Initiative Fund 1.6 0.3 -1.4 -84.4
Total 22.6 37.3 14.7 65.2

Foreign currency loan disbursements increased during the second half of the year. This deterioration
by 65.2 per cent during 2008, primarily reflecting occurred against the background of challenges
an increase in lines of credit support to finance arising from the impact of the intensification of the
the construction and hardware industries (see global financial turmoil.
Table 21).
2.2.2. Credit Risk Stress Tests Results
2.6. Financial Stability Assessment of The DTIs remained resilient to hypothetical shocks
Deposit-Taking Institutions (DTIs) to non-performing loans (NPLs) during 2008.12 For
2.6.1. Overview instance, there was a less than 0.5 percentage point
In 2008, the prudential returns of DTIs were subjected decline in capital adequacy for all three sectors as
to frequent stress testing by the Bank.10,11 For each a result of a hypothetical 30.0 per cent increase in
quarter, the tests revealed that the capital adequacy NPLs (see Table 22). During 2008, there was an
ratios (CARs) for the banking system remained above increase in NPLs when compared to the previous
the 10.0 per cent minimum benchmark, in response year, largely influenced by the slowdown in domestic
to hypothetical market, credit and liquidity shocks. economic activity during the year. The ratio of NPLs
However, the CAR for the banking system would to total loans increased to 2.6 per cent at end-2008,
have declined marginally as at end-2008, relative relative to 2.0 per cent at end-2007 and 2.2 per cent
to end-2007. The BOJ’s aggregate early warning at end 2006.13
system indicated that the macro-prudential index as
well as the micro-prudential indices for commercial
banks, FIA licensees and building societies sectors
also showed deterioration during 2008, particularly
10 The objective of stress testing is to determine the impact of extreme
but plausible shocks to various risks factors (credit quality, foreign
exchange, and domestic interest rate and liquidity risks) on the
capital adequacy of DTIs. 12 NPLs represent principal and interest payments outstanding 3
11 Prudential returns used in the assessment include, but are not months and over.
limited to, Jamaica Dollar and foreign currency balance sheets, 13 The international benchmark for non-performing loans to total
sectoral credit profiles, maturity and repricing gaps of the DTIs. loans is 10.0 per cent.

- 33 - The Financial System


Table 22
DTI’s QUARTERLY CREDIT RISK STRESS TEST RESULTS
 
30.0 per cent shock to NPLs
Original CAR
Post-shock CAR
Change in CAR (percentage points)
Notes:
1/ Capital adequacy is impacted through provisions for new NPLs, where capital and risk-weighted assets (plus foreign exchange exposure)
are reduced by the amount of the new provisions
2/ The assumed provisioning rate for new NPLs is 20.0 per cent for the 3 - 6 months category and 100.0 per cent for loans outstanding over
6 months.
This deterioration in credit quality for 2008 was
reflected mainly in Personal, Transportation,
Distribution and Professional Services which
accounted for 62.4 per cent of the total loans at end-
2008. Despite these relatively high concentration
levels, the DTIs were resilient to a hypothetical 40.0
per cent deterioration in performing loans to these
sectors (see Table 23). As a result of this hypothetical
shock the system’s CAR declined by 3.6 percentage
points to 11.5 per at end-2008.
2.2.3. Foreign Exchange Risk Stress Test
Results
The vulnerability of DTIs to foreign exchange rate
risk increased during 2008, principally as a result of a
The Financial System
Bank of Jamaica
Mar-08 Jun-08 Sep-08 Dec-08
17.03 16.70 16.02 15.15
16.72 16.37 15.68 14.76
-0.31 -0.33 -0.34 -0.39
sharp depreciation in the value of the Jamaica Dollar
against major international currencies in the second
half of the year. The increased exposure of DTIs to
foreign exchange rate risk was evident, as the ratio
of foreign currency net open position to capital for
the system increased to 28.0 per cent at end-2008,
relative to 22.2 per cent for the corresponding period
in 2007 (see Table 24). Nonetheless, a hypothetical
depreciation of 30.0 per cent in the exchange rate
vis-à-vis major international currencies did not have a
significant impact on the DTIs’ CAR (see Table 24).14
Specifically, DTIs’ CAR fell by 1.4 percentage points
to 13.8 per cent for the December quarter, indicative
of the system’s resilience.
14 The net open position is computed as the sum of the net spot posi-
tions, net forward positions and guarantees. Thereafter, the foreign
exchange exposure is determined as the maximum of the long and
short net open positions across all currencies. Hypothetical shocks
to the relevant exchange rate are applied to each of the net open
positions. The impact of the resulting foreign exchange gain or loss
on profitability and capital adequacy are then evaluated.
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Annual Report 2008

Table 23

BANKING SYSTEM QUARTERLY SECTORAL CREDIT RISK STRESS TEST RESULTS

  Mar-08 Jun-08 Sep-08 Dec-08
Impact of 40% decline in Performing Loans
Manufacturing 16.89 16.54 15.87 14.99
% Pt. Change -0.14 -0.16 -0.15 -0.16
Construction 16.76 16.43 15.76 14.88
% Pt. Change -0.27 -0.27 -0.26 -0.27
Tourism 16.47 16.10 15.41 14.47
% Pt. Change -0.56 -0.60 -0.61 -0.68
Personal (domestic residents) 14.51 14.22 13.64 12.71
% Pt. Change -2.52 -2.48 -2.38 -2.44
Personal (overseas residents) 16.91 16.58 15.83 14.90
% Pt. Change -0.12 -0.12 -0.19 -0.25
Professional Serv. 16.74 16.40 15.73 14.82
% Pt. Change -0.29 -0.30 -0.29 -0.33
Transportation 16.85 16.51 15.83 14.95
% Pt. Change -0.18 -0.19 -0.19 -0.20
Distribution 16.69 16.32 15.64 14.75
% Pt. Change -0.34 -0.38 -0.38 -0.40
Agriculture 16.97 16.65 15.97 15.07
% Pt. Change -0.06 -0.05 -0.05 -0.08
Entertainment 17.02 16.69 16.02 15.14
% Pt. Change -0.01 -0.01 0.00 -0.01
Electricity 16.98 16.63 15.96 15.09
% Pt. Change -0.05 -0.07 -0.06 -0.06
Mining 17.02 16.69 16.01 15.13
% Pt. Change -0.01 -0.01 -0.01 -0.02
Overall Decline in CAR
% Pt. Change -4.55 -4.64 -4.58 -4.90

Original CAR 17.03 16.70 16.02 15.15

Notes:
1/ Shocks applied by determining increases in NPLs from 40.0 per cent declines in performing loans
2/ Capital adequacy is impacted through provisions for new NPLs, where capital and risk-weighted (plus foreign exchange exposure) are
reduced by the amount of the new provisions
3/ The assumed provisioning rate for new NPLs is 20.0 per cent    

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 Bank of Jamaica

Table 24
DTI’s QUARTERLY FOREIGN EXCHANGE RISK STRESS TEST RESULTS
  Mar-08 Jun-08 Sep-08 Dec-08
NOP/Capital (per cent) 20.3 18.8 25.0 28.0

30.0 per cent shock to FE rates

Original CAR 17.03 16.70 16.02 15.15
Post-shock CAR 15.56 15.37 14.63 13.76
Change in CAR (percentage. points) -1.47 -1.33 -1.40 -1.38

Notes:
1/
Shocks are applied directly to the Jamaica Dollar vis-à-vis the US dollar, with the associated changes to the exchange rate of the Jamaica
Dollar vis-à-vis the Euro, the Canadian dollar, the Pound Sterling and other currencies converted to US dollars.
2/
The Risk-Weighted Assets include the foreign exchange exposures.

2.2.4. Interest Rate Risk Stress Tests
There was a general increase in the DTIs’
susceptibility to interest rate shocks during 2008
as measured by the dollar value of a basis point
(DVBP) to capital base ratio. The ratio increased to
5.2 per cent at end-2008 from 0.03 per cent at end-
2007. However, hypothetical interest rate increases
applied to the aggregate DTIs’ balance sheet during
2008 had no material impact on the system’s CAR.
Stress tests results indicated that the DTIs’ buffer
capital was sufficient to absorb all the impact from
the hypothetical shocks of 1 400 basis points (bps)
and 150 bps to domestic and international interest
rates, respectively, at the end of each quarter in 2008
(see Table 25).15 At end-2008, it would take shocks
as much as 3.5 times the magnitudes used in the
stress test, to reduce the system’s CAR below the
regulatory benchmark.

Table 25
DTI’s QUARTERLY INTEREST RATE RISK STRESS TEST RESULTS
  Mar-08 Jun-08 Sep-08 Dec-08
DVBP to Capital Base (%) 3.0 2.4 4.6 5.2
Original CAR (%) 17.03 16.70 16.02 15.15
Post-Shock CAR (%) 17.03 16.70 16.02 15.15
Change in CAR (percentage points) 0.00 0.00 0.00 0.00
 
Notes:
1/ DVBP is the loss in net interest income generated from 100 bps shocks to the system’s foreign and domestic securities portfolio and
reported as a percentage of the system’s capital base.
2/ Shocks of 1 400 bps applied to domestic currency securities portfolio.
Shocks of 150 bps applied to foreign currency securities portfolio.

15 Repricing net gap positions are computed for each repricing bucket
as assets minus liabilities. The change in the market value of net
repricing assets is evaluated by applying the interest rate shock
and duration factor to each repricing gap position. The impact on
capital adequacy is then evaluated.

The Financial System - 36 -

Annual Report 2008

2.2.5. Liquidity Risk (Interest Rate) Stress 2.6.6. Liquidity Risk (Funding) Stress Tests
Tests An assessment of the funding risk of DTI indicated
The risk of losses in net interest income from interest no significant risk to the banking system’s CAR
rate increases declined during 2008, as reflected during 2008 (see Table 27).17 In this regard, all
in a reduction in the end-of-quarter short-term categories of DTI were robust to a first-round 40.0
negative gap positions of the DTIs (see Table 26). per cent reduction in deposits when end-of-quarter
The reduction in the risk of losses was due to an assessments were made for 2008.
improvement in the cumulative 365-day gap position,
relative to end-2007. Concurrently, liquidity shocks
as a result of the hypothetical extreme interest rate
increases did not reduce the banking sector’s CAR
during 2008.16

Table 26
DTI’s QUARTERLY LIQUIDITY RISK STRESS TEST RESULTS
  Mar-08 Jun-08 Sep-08 Dec-08
Cumulative 365-day GAP/total assets (%) -35.8% -35.6% -33.0% -30.7%

Original CAR (%) 17.03 16.70 16.02 15.15

Post-Shock CAR (%) 17.03 16.70 16.02 15.15
Change in CAR (percentage points) 0.0 0.0 0.0 0.0

Memoranda items:
1/ Shocks of 1 400 bps applied to domestic currency securities portfolio and 400 bps applied to domestic currency loans and deposits.
2/ Shocks of 150 bps applied to foreign currency securities portfolio and 20 bps applied to foreign currency loans and deposits.

Table 27

DTI’s QUARTERLY FUNDING RISK STRESS TEST RESULTS

  Mar-08 Jun-08 Sep-08 Dec-08
40.0 per cent decline in deposits
Original CAR (%) 17.03 16.70 16.02 15.15
Post-Shock CAR (%) 17.03 16.70 16.02 15.15
Change in CAR (percentage points) 0.0 0.0 0.0 0.0

Memoranda items:
100 bps to 400 bps reduction in deposits
1/

The assumed ‘hair cut’ (% loss in value) on liquidating each category of assets are: Items in course of collection: 10%; Non-liquid investments:
2/

20%; Accounts Receivables: 20%; Loans & Adv: 21%; Fixed Assets: 26%; Other Assets: 90%.

16 For each maturity bucket, the liquidity gap is computed as assets
minus liabilities. Cumulative gaps within 365 days are computed,
to which hypothetical interest rate shocks are applied. The impact
of the resulting change in net interest income on profitability and
capital adequacy are then evaluated.
17 Hypothetical reductions are applied directly to the deposit base of
the bank. Assets are assumed to be liquidated, in order of liquidity,
so as to satisfy the demand. Haircuts are applied to non-liquid
assets to satisfy further declines in deposits. The resulting impact
on capital adequacy is then evaluated.

- 37 - The Financial System

 Bank of Jamaica

2.6.7. Aggregate Stress Test Results 2.6.8. Early Warning System (EWS) Results18
DTIs were robust to the end-of-quarter aggregate The macro-prudential early warning system (EWS)
stress tests. The aggregate stress tests involved index for the DTIs weakened by approximately 60.0
assessing the impact of combined shocks to credit per cent to 43.0 points at end-2008, relative to end-
quality, the exchange rate of the Jamaica Dollar vis- 2007, signalling deterioration in the macro-economic
à-vis the US dollar, domestic and foreign interest environment. This quarterly index registered an
rates and liquidity conditions on the DTI’s CAR. The improvement for the first half of the 2008, but
prevailing macro-economic conditions during 2008 thereafter deteriorated for the rest of the year,
necessitated an upward revision in some of the consequent on the spill-over effects of the global
Bank’s stress testing assumptions, relative to 2007. financial crisis. The impact of the global financial
More specifically, the revised assumptions were: crisis reflected itself in a rising Central Government
a) 1 500 basis points (bps) and 500 bps increases deficit to GDP ratio, increased volatility in the local
in domestic interest rates on investment assets foreign exchange and stock markets as well as sharp
and other assets, respectively, relative to a 1 upward adjustments in domestic interest rates. The
400 bps and a 400 bps shock at end 2007; performance of the index also reflected a sharp
b) 40.0 per cent increase in non-performing decline in the 12-month growth rate of the JSE Main
loans, relative to a 30.0 per cent increase in Index as well as increased volatility in interest rates
non-performing loans in 2007. and exchange rates.

The other assumptions remained:
c) 10.0 per cent reduction in deposits;
d) 20.0 per cent depreciation in the J$/US$
foreign exchange rate; and
e) 100 bps and 10 bps increase in foreign interest
rates on foreign currency investment assets and
other foreign currency assets, respectively.
The DTI’s post-shock CAR declined by an average
1.9 percentage points over 2008. This decline in the
post-shock CAR reflected the increased vulnerability
of the DTIs to market risk factors such as sharp
movements in interest rate and liquidity risk factors.
Notwithstanding, the aggregate system was robust
to the aggregate stress test as reflected by post-
shock CARs that showed the banking sector to be
well capitalized during 2008 (see Table 28).
The micro-prudential indices (MPIs) for the commercial
banks, FIAs and building societies also increased
during 2008. Notwithstanding this deterioration, the
MPIs for all three sectors remained within the 1996-
1999 financial crisis threshold value of 50.0 points.
The commercial banking sector recorded the highest
MPI, relative to the other sectors. The MPI for the
commercial banks deteriorated sharply to 44.0 points
at end-2008 relative to 25.0 points at end-2007. This
significant increase in the MPI for commercial banks
primarily reflected an increase in the ratios of non-
performing loans to total assets, loan and security
18 The BOJ Early Warning System (EWS) monitors macro- and micro-
economic indicators of the banking sector via a non-parametric
approach to signal banking sector vulnerability. The signal is based
on EWS scores for each indicator, which is computed based on the
number of standard deviations of each indicator from its ‘tranquil
period’ mean value. The scores range from 0 to 5 with a score of 5
representing the most severe signal. Banking sector vulnerability
at a point in time is determined by the trend in the aggregate EWS
score (or index) over the previous eight quarters.

The Financial System - 38 -

Annual Report 2008

Table 28
DTI’s QUARTERLY AGGREGATE STRESS TEST RESULTS
  Mar-08 Jun-08 Sep-08 Dec-08
Original CAR (%) 17.03 16.70 16.02 15.15
Post-Shock CAR (%) 15.26 16.13 13.16 12.80
Change in CAR (percentage points) -1.77 -0.57 -2.86 -2.35

losses provision to total assets and non-performing

loans to total loans. In addition, decreases in the
ratios of capital to assets, deposits to total assets
and deposits and repos to assets also contributed to
the deterioration.

Relative to end-2007, the MPI for the building societies

increased by 33.0 per cent to 30.0 points as at end-
2008. The deterioration in the index was attributable
to an increase in the ratio of non-performing loans
to total assets and a decline in the ratio of capital to
total assets. Similarly, the MPI for the FIAs increased
to 25.0 points as at end-2008, in comparison to the
16.0 points recorded the corresponding period last
year. The weakening in the index was due largely to
increases in the ratios of reserve for loan losses to
total assets and financial institutions’ loans to total
loans, coupled with a decrease in the ratio of liquid
assets to total assets.

- 39 - The Financial System

 3. Money Market Operations

3.1. Bank of Jamaica Operations maturity of this two-week CD in December.

D
For the year, the Bank’s liquidity management
uring 2008, the Bank continued to issue
operations injected $15  577.3 million, with net
certificates of deposit (CDs) as the main
injection occurring in all quarters except the December
instruments through which monetary policy
quarter (see Table 29). The overall injection was
was implemented. In addition to the usual offer of
largely due to the net purchase of foreign currency,
short-term fixed rate CDs with interest paid at maturity,
particularly during the first half of the year when the
the Bank offered two (2) ‘special’ CDs, the terms of
which included quarterly coupon payments based on supply of funds in the foreign exchange market was
variable rates of interest and tenors of 18 months19. buoyant. The total amount injected from this source
These operations were augmented by the issue of a amounted to $22 934.2 million and contributed to the
‘special’ short-term fixed rate CD with a short tenor of stock of CDs increasing by $17 987.6 million during
two weeks and an increase in the cash reserve ratio. 2008 (see Table 31).
The latter two actions were taken in the December
Notwithstanding the overall net outflow of liquidity
quarter to support the achievement of the inflation
emanating from the purchase of foreign currency
objective and the maintenance of macroeconomic
during the year, there was significant absorption via
stability.
net foreign currency sales in the September and
Liquidity Management December quarters. The efforts at restoring relative
The Bank’s liquidity management operations in stability to the market was supported by the increase
2008 involved fewer issues of special CDs, relative in the cash reserve requirement that absorbed $4
to 2007. This was in a context of the relatively 018.2 million in the December quarter.
favourable conditions in the financial market during
the first three quarters and more frequent issues of In a context of uncertainty emanating from the
GOJ debt instruments in the domestic capital market. worsened domestic and international credit
In this regard, three special CDs were issued in 2008, conditions, particularly towards the end of the year,
relative to eight in 2007, two of which coincided with placements on open-market instruments remained
the maturity of previously issued ‘special’ variable rate skewed towards the 30-day tenor. The proportional
CDs. The final special CD offer in November 2008 placements on this tenor accounted for 42.4 per cent
was timed to manage excess liquidity in the banking of the total issues in the March quarter and increased
system. The cash reserve requirement on domestic sharply to 75.1 per cent of open-market instruments
prescribed liabilities of commercial banks, merchant issued by year-end, while averaging 58.1 per cent
banks and building societies was increased to 11.0 for the year. In 2007, the 30-day tenor accounted for
per cent from 9.0 per cent, immediately following the an annual average of 45.8 per cent of open-market
19 The Bank’s usual CDs included the issue of instruments with tenor instruments issued (see Table 30).
ranging from overnight to 365 days

- 40 -
Annual Report 2008

Table 29
BANK OF JAMAICA LIQUIDITY MANAGEMENT
2008
J$BN
March June September December Total
         
Certificates of Deposit 19 535.7 9 471.7 -9 052.4 -16 616.2 3 338.7
       
Sale of Securities - - - - -
       
Change in Cash Reserve
- - - 4 018.2 4 018.2
Requirement
       
Net Sale(+) of net Purchase(-) of -22 852.4 -18 634.3 2 018.3 16 534.1 -22 934.2
Foreign Exchange        
Net Absorption (+)/Injection (-) -3 316.7 -9 162.6 -7 034.1 3 936.1 -15 577.3

Table 30
 TAKE-UP RATIOS (%) IN SELECTED OPEN MARKET INSTRUMENTS
 Quarterly Profile for 2007 & 2008  

  Issue Tenor March June September December Yearly Avg.

2 30-day 38.3 39.3 45.6 60.2 45.8
0 90-day 7.3 8.8 6.8 3.8 6.7
0 180-day 30.5 36.9 20.0 9.2 24.2
7 Other 8.1 10.7 4.1 6.8 7.4
  Special Offers 15.8 4.4 23.5 20.0 15.9
  Issue Tenor          
2 30 - day 42.4 48.2 66.5 75.1 58.1
0 90 - day 6.7 8.8 6.6 9.5 7.9
0 180 - day 14.8 5.0 3.0 3.0 6.4
8 365 - day 25.5 29.3 12.1 8.3 18.8
  Other 5.5 8.7 8.2 4.2 6.6
  Special Offers 5.0 0.0 3.6 0.0 2.2
‘Other’ includes the take-up in the 60-day,120-day and 270-day tenors.  
Special Offers includes VR & FR offers for a limited
time period        

Increased investor appetite for ‘shorter term’ 2008, relative to approximately 15.9 per cent in 2007
instruments coupled with the reduced issuance (see Table 30). Consequently, by the end of the year,
of ‘longer term’ special VR CDs also resulted in a approximately 74.9 per cent of the OMO liabilities
contraction of the maturity profile of the Bank’s open- were due to mature in less than 6 months, increasing
market liabilities. In this regard, the proportion of from 55.5 per cent at the end of the March 2008
placements on ‘special’ CD offers declined to account quarter (see Table 31).
for 2.2 per cent of the total open-market issues in
- 41 - Money Market Operations
 Bank of Jamaica

Table 31
MATURITY RATIOS (%) IN SELECTED OPEN MARKET INSTRUMENTS
Quarterly Profile for 2008 
Time left Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
to maturity (%) (%) (%) (%) (%)
 
< 30-days 31.7 17.4 20.6 21.1 24.4
31-days < m< 60-days 10.5 3.9 9.7 10.5 13.1
61-days < m< 90-days 4.2 5.9 10.0 4.3 15.0
31-days < m< 120-days 2.8 11.9 1.8 5.5 10.2
121-days < m< 180-days 6.3 16.4 6.7 21.1 12.3
181-days < m<270-days 19.3 5.7 24.0 21.0 17.1
271-days < m< 364-days 9.0 26.6 20.6 14.4 5.6
1-yr < m< 2yrs 16.2 12.2 6.6 2.2 2.4
 
Outstanding Stock (J$ mn) : 14 741.3 38 179.3 50 835.9 46 220.0 32 728.9

Primary Dealer Monitoring and Improved Tradability
of OMO CDs
The Primary Dealers (PDs) and commercial banks
continued to be the main institutions through which
the Bank conducted its open market operations.
As at end-2008, the number of designated Primary
Dealers increased to 13 from 12 as at the end-
December 200720. The PDs accounted for 60.0 per
cent of all new CDs issued in 2008, relative to 56.2
per cent in 2007, thereby increasing their holdings of
outstanding CDs to 65.0 per cent from 59.0 per cent
in 2007.
The Bank introduced the new features of its CD
to the market on Monday, 05 May 2008. The re-
designed certificate emanated from discussions with
the Primary Dealers Association (PDA) and features,
in particular, the ability to recognize ownership of
OMO instruments by any individual or entity, thereby
improving the tradability of the Bank’s issues. The
20 The Standard for Retaining Primary Dealer Designation was implemented in 200921.
enhanced, effective 31 July 2008 to include, in particular, the
assessment of the principals and managers of the PD under the
BOJ’s ‘fit and proper’ criteria. The details of the enhancement can be
obtained from Appendix 1 of the Requirements for Primary Dealer
Designation by the Bank of Jamaica document on the BOJ website
at http://www.boj.org.jm.pdf/primary_dealers_requirements.pdf
. bought and sold.
changes required a one day workshop to introduce
the new security features of the BOJ certificates to
the industry as well as the completion of a new Master
Agreement for the Bank’s open market instruments.
The final document that was circulated on 30 April
2008 benefited from the feedback provided by primary
dealers and commercial banks and was intended to:
(i) govern all instruments issued by the Bank of
Jamaica;
(ii) provide the legal context for the engagement
of business between the Bank as issuer, and
buyers for open market instruments; and
(iii) replace the previous Master Agreement,
which predominantly outlined the legal
context for the Bank’s engagement in reverse
repurchase transactions.
Notwithstanding the implementation of this initiative,
the ultimate objective is to dematerialize the BOJ
open-market instruments once the Central Securities
Depository CSD) for fixed income securities is
21 The implementation of the CSD will eliminate the need for the
movement of physical documents whenever there is a change in the
ownership of BOJ securities. Adjustments to individual accounts
will be recorded electronically whenever OMO instruments are

Money Market Operations - 42 -

Annual Report 2008
3.2. Interest Rates
3.2.1. Overview
During 2008, the Central Bank steadily increased
rates on its OMO instruments. In the first half of
the year the Bank’s policy stance was influenced
by inflationary concerns, which were manifested in
a demand for higher yields on domestic instruments
by investors. However, in the latter half, with the
worsening global financial environment, coupled with
relatively buoyant Jamaica Dollar liquidity conditions
which fuelled demand pressures in the foreign
exchange market, there was further tightening of
monetary policy. Against this background, in addition
to interest rate adjustments, the Bank implemented
the following measures during the year:
• the re-introduction of the 365-day tenor to
the regular suite of OMO instruments on 16
January 2008;
• the offer of two special variable rate
certificates of deposit to banks and primary
dealers on 18 January 2008 and 2 September
2008;
• the offer of a special 15-day CD on 18
November 2008; and
• a two percentage point increase in the
statutory cash reserve requirements on 3
December 2008.
Conditions in the financial markets in the first half
of the year were challenged by intermittent bouts of
instability in the foreign exchange market, supported
by buoyant Jamaica Dollar liquidity. Consequently, the
Bank re-introduced the 365-day tenor on 16 January
to encourage investors to lengthen their investment
horizon, thereby reducing the continuous stream of
liquidity flows into the system over the short-term.
This tenor was re-introduced at 13.50 per cent or 0.10
- 43 -
percentage point below the rate on this tenor when
it was withdrawn on 13 April 2006. Additionally, the
Bank issued a special variable rate (VR) CD at a re-
price margin of 1.50 percentage points above the 3-
month weighted average Treasury Bill yield (WATBY)
to replace a corresponding maturity in January and
effected three rounds of interest rate increases on
the entire spectrum of OMO instruments. Given the
challenges to liquidity management that became
apparent from early in the year, interest rates on the
90-day and 180-day instruments were increased by
2.10 and 2.20 percentage points, respectively, by the
end of the March quarter, relative to 11.80 per cent
and 12.00 per cent on the respective instruments
at end-2007. The rate on the 365-day tenor closed
the quarter at 15.00 per cent or 1.50 percentage
points above the re-introductory rate in January.
Notwithstanding some improvement in financial
market conditions in the June 2008 quarter, the Bank
adjusted interest rates by 50 basis points amidst
lingering concerns about inflation expectations.
During the September quarter, interest rates were
maintained at the levels effected on 26 June 2008,
given the generally favourable conditions in the
financial system. However, a special VR CD was
issued in September to provide a reinvestment option
to investors who had received proceeds from a VR
CD which matured in that period. This VR CD was
however issued at a lower re-price margin of 1.25
percentage points above the 90-day WATBY.
Whilst inflationary pressures had significantly
subsided, given the moderation in international
commodity and world oil prices, the ongoing
challenges arising from the severe impact of the
unfolding global financial crisis influenced sharper
Money Market Operations

increases on OMO rates during the December
quarter. Interest rates on the 90-day, 180-day and
365-day instruments were increased by 5.60, 6.80
and 8.50 percentage points, respectively, by the
end of the December quarter, from 14.40 per cent,
14.70 per cent and 15.50 per cent on the respective
instruments at end-September 2008 (see Chart 9).
The more aggressive policy stance was taken by the
Central Bank to alleviate the demand pressures in
the market and to maintain stability in the financial
system. This was in the context of the increasing
attractiveness of foreign currency denominated
Chart 9
Money Market Operations
Bank of Jamaica
assets, due to the sharp rise in yields on emerging
market debt including GOJ global bonds and US
dollar bonds issued by Jamaican companies.
The Bank of Jamaica also introduced the special 15-
day CD in November and effected the increase in the
statutory cash reserves requirement to 11.0 per cent
from 9.0 per cent on 01 December. This was aimed
at large blocks of liquidity emanating from maturing
GOJ instruments which would have supported a
disorderly depreciation in the foreign exchange
market.
- 44 -
Annual Report 2008

Table 32
RATE APPLICABLE ON BOJ CERTIFICATES OF DEPOSIT (%)
In Per Cent Per Annum 
  30-day 60-day 90-day 120-day 180-day 365-day
End December 2007 11.65 11.70 11.80 11.85 12.00 n/a
January 09 12.65 12.70 12.80 12.85 13.00 n/a
January 16 12.65 12.70 12.80 12.85 13.00 13.50
January 12.65 12.70 12.80 12.85 13.00 13.50
February 04 13.50 13.70 13.90 14.00 14.20 15.00
February 13.50 13.70 13.90 14.00 14.20 15.00
March 13.50 13.70 13.90 14.00 14.20 15.00
April 13.50 13.70 13.90 14.00 14.20 15.00
May 13.50 13.70 13.90 14.00 14.20 15.00
June 26 14.00 14.20 14.40 14.50 14.70 15.50
June 14.00 14.20 14.40 14.50 14.70 15.50
July 14.00 14.20 14.40 14.50 14.70 15.50
August 14.00 14.20 14.40 14.50 14.70 15.50
September 14.00 14.20 14.40 14.50 14.70 15.50
October 17 14.65 14.85 15.05 15.15 15.35 16.70
October 14.65 14.85 15.05 15.15 15.35 16.70
November 14.65 14.85 15.05 15.15 15.35 16.70
December 01 17.00 17.50 20.00 20.20 21.50 24.00
December 17.00 17.50 20.00 20.20 21.50 24.00

Market determined interest rates, in particular the
WATBY, also increased during the year. Notably,
both the 3-month and 6-month WATBY reflected
increases, relative to each end-quarter for the year,
albeit at a decelerated pace during the June 2008
quarter. Subsequent increases in the respective
WATBY during the second half of the year were at
increasing spreads above the corresponding OMO
rate (see Chart 10). By end-2008, the 3-month and
6-month WATBY were at 22.01 per cent and 24.45
per cent, respectively (see Table 33).

Chart 10

- 45 - Money Market Operations

 Bank of Jamaica

Table 33

WEIGHTED AVERAGE TREASURY BILL YIELDS (WATBY)

(End Period - 2008)
End Month 3-month 6-month
January 12.97% 13.33%
February 13.93% 14.22%
March 13.97% 14.22%
April 13.95% 14.20%
May 13.92% 14.28%
June 14.19% 14.43%
July 14.46% 14.90%
August 14.58% 15.08%
September 14.81% 15.35%
October 15.21% 16.96%
November 16.92% 19.26%
December 22.01% 24.45%

During 2008, there was one auction of a fixed- 17.65 per cent in the September quarter on a 20-year
rate (FR) medium to long-term instrument by the FR Bond, relative to a yield of 15.50 per cent on a
GOJ. A 5-year Local Registered Stock (LRS) was similar instrument in the March quarter.
offered in the March 2008 quarter and was issued
at a weighted average yield of 16.44 per cent. This
compared with 13.88 per cent on an offer of a similar
tenor in the September 2007 quarter. The re-price
margin on two 3-year VR GOJ offers in the March
2008 quarter was 1.50 percentage points above the
3-month WATBY, with subsequent instruments of a
similar tenor in the June 2008 quarter being offered
at a reduced margin of 1.125 percentage points
above the 3-month WATBY. However, by the end
of the December 2008 quarter, the re-price margin
on a 1.5-year GOJ VR instrument was increased to
1.50 percentage points above the 3-month WATBY.
A similar increase in interest rates was reflected on
long term FR instruments, as evidenced in a yield of

Money Market Operations - 46 -

 4. The Stock Market
T
he Main Jamaica Stock Exchange (JSE)
Index declined sharply in 2008, particularly
in the latter half of the year, reflecting
weak performance across listed companies. This
performance occurred against the background
of the global financial turmoil which contributed
to a slowdown in domestic economic activity and
weakened investor confidence as well as bouts of
instability in the foreign exchange market (see Interest
Rates and The Foreign Exchange Market).22 The
decline in the Main JSE Index was consistent with
the fall-out in equities markets internationally.
Chart 11
22 In an effort to contain the slide of the Jamaica Dollar, the Bank of
Jamaica increased rates on its open market instruments on five
occasions during 2008.
- 47 -
The Main JSE Index ended the year at 80 152.0 points,
reflecting a decline of 25.8 per cent in contrast to
growth of 7.2 per cent the prior year. Similarly, the All
Jamaica Composite and the Jamaica Select indices
fell by 30.7 per cent and 32.2 per cent, respectively,
as most stocks closed the year at prices below their
2007 closing levels (see Chart 11). The annual
declines in the three indices were concentrated in the
final two quarters of the year (see Chart 12). During
those last six months, the Main JSE Index declined
by 27.0 per cent, relative to growth of 1.7 per cent for
the first two quarters of the year.
 Bank of Jamaica

Chart 12

In 2008, there was a notable fall-off in trading activity
as reflected in the 6.4 per cent and 21.5 per cent
declines in the total value of shares traded and the
number of transactions, respectively (see Chart
13). Additionally, approximately sixteen listed stocks
traded at their 52-week low, relative to one stock in
2007, indicative of reduced market sentiments in
comparison to the previous year. The JSE advance-
to-decline ratio for the period also signalled decreased
market momentum and was 8:28, compared to 15:21
in 2007 (see Table 37).23 Declining stocks were
mainly from Financial, Manufacturing, Retail and
Conglomerate, accounting for nine of the top ten
declining stocks (see Table 34).
companies and relative stability in the foreign
exchange market. Price gains during this period were
also fuelled by investors positioning in anticipation of
increased inflows into the regional markets from the
takeover of the RBTT banking group by Royal Bank of
Canada and the acquisition of Lascelles deMercado
by Angostura Holdings Limited. However, the demand
for local equities was constrained by generally weak
investor confidence against the background of
significant inflationary impulses which led to interest
rates adjustments during the first half of the year (see
Monetary Policy Management).

The modest performance of the local stock market

for the first half of 2008 occurred within a context
of favourable earnings results of several listed
23 During the latter part of 2007, there was increased market activity
due to the announcement by Angostura to acquire Lascelles
deMercardo and the then proposed takeover of RBTT by the Royal
Bank of Canada.

The Stock Market - 48 -

Annual Report 2008
Chart 13
The stock market performance deteriorated in the
second half of 2008, consistent with a deceleration
in earnings of listed companies over this period. This
occurred against the background of the instability
in the international financial markets, which led
to increased domestic uncertainty, a faster pace
of depreciation in the foreign exchange rate and
the subsequent upward adjustments in domestic
Chart 14
- 49 -
interest rates. These developments reduced
the attractiveness of equities, relative to foreign
currency holdings and Government securities. This
was evident as investments in equities yielded an
average monthly loss of 2.4 per cent in comparison
to average monthly returns of 1.2 per cent and 1.0
per cent from money market securities and foreign
currency investments, respectively (see Chart 14).
The Stock Market
 Bank of Jamaica

The other major stock exchanges in the region
registered weak performances during 2008. The
composite indices for Barbados and Trinidad &
Tobago declined by 11.9 per cent and 14.2 per cent,
respectively, relative to 2007. The declines in the
indices were reflective of the prospects for reduced
economic growth arising from the global financial crisis
which undermined investors’ optimism (see Chart
15). Official estimates for Barbados and Trinidad &
Tobago indicate that real GDP growth slowed to 1.7
per cent and 3.5 per cent in 2008, relative to 3.3 and
5.5 per cent in 2007, respectively.

Chart 15

Table 34
ADVANCING STOCKS IN 2008
Price at end-2008 Price Change (%)
($) 2008
Manufacturing
Salada Foods 13.00 195.45
Mobay Ice Company 20.00 51.52
Seprod Limited 17.80 26.78
Tourism
Ciboney Group 0.05 400.00
Pegasus Hotel 17.00 59.62
Other
Pulse Investments 5.20 100.00
Palace Amusement 61.00 93.96
Insurance
Guardian Holdings 320.00 10.34

The Stock Market - 50 -

Annual Report 2008

Table 35
TOP TEN DECLINING STOCKS IN 2008

Price at end-2008 Price Change (%)

($) 2008

Manufacturing

Caribbean Cement 3.95 -59.49

Desnoes & Geddes 4.05 -42.14
Financial
Mayberry Investments 2.00 -59.18
Pan Caribbean 12.00 -40.00
First Jamaica 25.00 -39.02
Communication
Gleaner Company 1.73 -59.77
Conglomerates
Pan Jam Investments 25.00 -50.00
GraceKennedy 43.50 -39.16
Retail
Carreras Limited 35.00 -49.28
Hardware & Lumber 10.00 -37.50

- 51 - The Stock Market

 5. Supervision of Deposit-Taking Financial
Institutions

T
5.1. Introduction 5.2. Legislative Framework
he Bank of Jamaica is charged with the The major pieces of legislation and supporting
supervision and periodic examination of Regulations governing the operations of the licensed
deposit-taking financial institutions (DTIs) DTIs are shown in Table 36.
pursuant to provisions under Section 34A of the Bank
of Jamaica Act. Institutions supervised by the Bank These pieces of legislation establish the key principles
are: and powers of supervision which include:
• commercial banks licensed under the Banking • licensing and pre-qualification criteria (inclusive
of fit and proper standards);
Act; • minimum capital requirements (inclusive of
• merchant banks licensed under the Financial risk weighted capital adequacy assessments
Institutions Act (hereafter FIA licensees); and and leverage ratios);
• transaction limits (such as credit, investment
• building societies governed by the Building and fixed asset limits);
Societies Act and the Bank of Jamaica (Building • connected party restrictions;
Societies) Regulations. • cash and liquidity reserve requirements;
• non-performing loan classification and
Additionally, credit unions have been designated provisioning criteria;
by the Minister of Finance as ‘specified financial • non-accrual requirements;
• routine prudential reporting;
institutions’ under the Bank of Jamaica Act, as a • regular on-site examinations;
preliminary step towards placing these institutions • consolidated supervision; and
under the supervisory regime of the Bank of Jamaica. • supervisory sanctions and intervention powers
This specification currently enables the Bank to in instances of statutory violations, unsafe/
unsound practices and insolvency.
obtain information on their operations. Regulations
to establish a formal supervisory framework for
these entities have been drafted after extensive Licensees also have statutory responsibilities
discussions with sector representatives. These which may or may not be peculiar to the nature of
are pending presentation to Parliament by the their business, which devolve from other pieces of
Minister of Finance (see Section 5.5, Legislative/ legislation. These pieces of legislation include, but
Regulatory Developments). are not limited to the Companies Act, the Deposit
Insurance Act, the Proceeds of Crime Act, the
Regulatory responsibility for non-deposit-taking Terrorism Prevention Act as well as Guidance Notes
financial institutions rests with the Financial Services issued by the Supervisory Authority (see also Current
Commission which has supervisory oversight of Issues in Banking Supervision’ and Legislative
the securities, insurance and private pensions Developments).
industries.

- 52 -
Annual Report 2008

Table 36
OVERVIEW OF LEGISLATIVE FRAMEWORK
Type of Legislation
Principal Legislation
Subsidiary Legislation
Title of Statute
• The Bank of Jamaica Act
• The Banking Act
• The Financial Institutions Act
• The Building Societies Act
• The Banking (Establishment of Branches) Regulations
• The Banking (Amalgamation and Transfers) Regulations
• The Banking (Capital Adequacy) Regulations
• The Banking (Licence Fees) Regulations
• The Financial Institutions (Establishment of Branches)
Regulations
• The Financial Institutions (Amalgamation and Transfers)
Regulations
• The Financial Institutions (Capital Adequacy) Regulations
• The Financial Institutions (Licence Fees) Regulations
• The Bank of Jamaica (Building Societies) Regulations
• The Building Societies (Licences) Regulations

5.3. Supervisory Methodology of an entity’s operations such as capital adequacy,

Bank of Jamaica’s supervisory responsibilities for
DTIs are discharged through its Financial Institutions
Supervisory Division (FISD). The supervisory
methodology combines annual on-site examinations
of each licensee with on-going off-site monitoring,
facilitated primarily by prudential reporting
requirements. The process allows for continuous
and timely review of developments in the financial
condition of supervised entities both at the micro
institutional level as well as at the macro systemic
level.
5.3.1. On-site Examinations
On-site examinations are statutorily conducted
at least once each year by the Supervisor. These
examinations include assessments of key aspects
- 53 -
treasury operations, asset quality, earnings
sustainability, market risk sensitivities, information
systems infrastructure and disaster recovery/
business continuity arrangements. In recent years,
the Bank has also been transitioning to a risk focussed
approach to supervision. This involves enhanced off-
site and pre-examination procedures, with increased
scrutiny on licensees’ corporate governance
frameworks, risk management and operational/group
structures. The results of these assessments identify
those areas that pose the greatest potential risk to
each institution’s operations and inform the scope of
on-site reviews and the level and focus of supervisory
resources to be assigned to each examination.
Supervision of Deposit-Taking Financial Institutions
 Bank of Jamaica

A critical component of the on-site exercise is also a risk sensitivities related to market and economic
review of licensees’ frameworks (i.e. policies, controls developments locally and internationally.
and practices) for anti-money laundering and counter
5.3.3. Outcomes
financing of terrorism (AML/CFT). This is to ensureFeedback from the various reviews and assessments
that these meet the requirements of: are provided by the Bank of Jamaica to licensees’
• local legislation (such as the Proceeds of management and Boards26. Issues of concern
Crimes Act and the Terrorism Prevention including those requiring remedial actions within
Act); specified time frames are highlighted. Where there

• Bank of Jamaica Guidelines on Anti-Money is evidence of ‘unsafe and unsound’ practices, the
Laundering and Combatting of Terrorist Bank of Jamaica utilizes sanction powers/measures
as provided under the respective financial legislation
Financing; and
and in accordance with its supervisory “Ladder of
• international obligations and standards
Enforcement” which sets out the graduated series
promulgated by the United Nations (UN) of supervisory actions in response to specified
Security Council Resolutions, the Financial prudential concerns.
Action Task Force (FATF) and the Caribbean
Financial Action Task Force (CFATF) of There is a continuous review of the legal and policy
which Jamaica is a member24, 25. frameworks as well as the supervisory practices to
ensure relevance as the financial markets evolve.
In this regard, the Bank makes recommendations
5.3.2. Off-Site Reviews
Off-site assessments are primarily facilitated by on legislative enhancements and provides formal
prudential returns submitted to the Bank weekly, guidance to the industry through the dissemination
monthly, quarterly and annually, as well as by reviews of Best Practice Standards and Guidelines. Further,
of audit and other external reports. Such reviews the Central Bank actively promotes market discipline
include the use of an ‘Early Warning System’. In this and disclosure through the quarterly publication of
regard, the Financial Stability Department (FINSTAB) un-audited balance sheet data for each licensee,
of the Research and Economic Programming and key prudential indicators for each financial sub-
Division of the Bank of Jamaica generates forecasts sector and the combined deposit-taking system.
and scenario/stress reports based on prudential
information provided. The FISD, in collaboration 5.4. Current Issues in Banking Supervision
with FINSTAB, reviews and assesses system
In the context of the global financial crisis, the Bank
vulnerabilities arising from internal and external
in 2008 heightened its monitoring of the exposure
24 FATF is an inter-governmental body established in 1989, whose
purpose is the development and promotion of national and of licensees to external financial markets, related
international policies to combat money laundering and terrorist domestic risks and the extent of resilience in capital
financing.
25 CFATF is an organization of thirty states of the Caribbean Basin 26 Feedback is provided through a composite of formal meetings,
which agree to implement common counter measures to address official correspondence and written reports on examination
criminal money laundering. findings.

Supervision of Deposit-Taking Financial Institutions - 54 -

Annual Report 2008

buffers built up by local institutions. Against this originally issued in 1996, continued in 2008. The
background, the Bank also continued its programme revised Standard will reflect industry developments
of enhancing the regulatory and policy framework and trends in the credit risk profile of DTIs, as well as
with focus given to the areas of supervision indicated
the evolution in the requirements of internationally-
below. accepted standard setters regarding the management
and reporting of credit risk (such as the Basel
5.4.1. Promotion of Enhanced Risk Management Committee on Banking Supervision (BCBS) and
Frameworks International Accounting Standards Board) 27. It is
The BOJ continued a systematic revision of the anticipated that this revised standard will be issued
current suite of Standards of Best Practices for to the industry during 2009.
Effective Risk Management in recognition of the need
for further strengthening of the risk management and 5.4.2. Core Principles for Effective Banking
corporate governance frameworks in DTIs. In this Supervision
regard, the following two standards were issued to Consequent on the revision of the Basle Core
the industry during 2008: Principles (BCPs) for the Effective Supervision of
Banking Entities by the BCPS in October 2006, the
i. Standard of Best Practice for the Effective Bank of Jamaica commenced a self-assessment
Corporate Governance within Deposit-Taking exercise, to benchmark its supervisory systems and
Entities. This Standard is the overarching standards with this revised internationally-accepted
governance benchmark that establishes the best practice standard, which was updated inter alia,
minimum expectations of the Supervisory to:-
Authority for the implementation of an effective
governance framework in DTIs; and • reflect greater consistency with other global
best practice standards, such as the Basel II
ii. Revised AML/CFT Guidance Notes. These capital adequacy framework;
were issued to the industry for comment. • promote enhanced risk management and
Revisions incorporated the provisions of the corporate governance frameworks in banking
Proceeds of Crime Act (POCA) and the POCA entities; and
(Money Laundering Prevention) Regulations • promote enhanced supervisory approaches and
which were promulgated in 2007. The industry techniques by supervisory bodies/agencies.
feedback is currently being reviewed and
on completion, the Guidance Notes will be
submitted to the Ministry of National Security
for approval and gazetting. 27 The Basel Committee on Banking Supervision (BCBS) is the
international standard setting body for banking supervisors
worldwide. The Committee is represented by central banks and
bank regulators from Belgium, Canada, France, Germany, Italy,
Additionally, the process of revision of the existing Japan, Luxemburg, the Netherlands, Spain, Sweden, Switzerland,
Credit Risk Management Standard, which was United Kingdom and the United States.

- 55 - Supervision of Deposit-Taking Financial Institutions

 Bank of Jamaica

This self-assessment process continued in 2008 placing particular focus on areas such as IT security,
with the resultant updating of a revised Action business continuity planning and outsourcing of IT
Plan28. The process is expected to continue in services. The assessment exercise involved targeted
2009 with the simultaneous activation of the Action on-and off-site reviews of the IT framework of selected
Plan. It is expected that this initiative will facilitate systemically important institutions in 2008.
a smooth transition to the Basel II Capital Adequacy
Framework. 5.4.5. Applications for Commercial Banking
Licence
5.4.3. Consolidated/Conglomerate Supervision The Bank is charged with the statutory responsibility
In 2008, the Bank of Jamaica continued the monitoring for assessing applications for DTIs licences and to
of the reorganization/restructuring of financial groups make recommendations to the Honourable Minister of
of which DTIs are a part, pursuant to the deposit- Finance (HMF) who is statutorily empowered to issue
taking statutes. The statutes require groups to which and revoke such licenses. The licensing application
deposit-taking licensees belong, to reorganize, such assessment involves, inter alia, assessment of the
that, the licensee is directly owned by a financial financial strength and suitability of the applicant and
holding company, which does not own other the financial group to which it belongs, fit and proper
companies within the group unless those companies assessment of proposed directors and managers, as
are regulated or supervised. This provision is aimed well as the reasonableness/soundness of business
at ensuring that groups are established as supervise- plans, including financial projections.
able financial groups. Progress was also made in
During 2008, the BOJ received two applications
the drafting of the proposed legal framework for
for commercial banking licences. While one was
conglomerate supervision as part of the Omnibus
assessed as not meeting all the requirements for
Bill (see also Section 5.5: Legislative/Regulatory
a positive recommendation to the HMF, the other
Developments).
application was in a process of review at year-end.

5.4.4. Specialised Reviews of the Information

5.5. Legislative/Regulatory Developments
Technology Frameworks
During 2008, in addition to the updating and issuing
Information technology and e-banking services
of standards of best practice, (see Section 5.4.1)
have become central to the operations of DTIs,
the Bank was also involved in the developments/
while presenting significant risks to their ongoing
initiatives noted below.
operations. Consequently, the Bank has been
placing specific emphasis on the assessment of
5.5.1. Draft Omnibus Statute
the adequacy of the risk management framework
This statute seeks to consolidate the provisions of
governing the IT operations of its DTI licensees
existing deposit-taking statutes (i.e. Banking Act, the
28 An independent assessment was conducted by the IMF/World
Financial Institutions Act, and the Bank of Jamaica
Bank during 2005 when Jamaica’s supervisory framework was (Building Societies) Regulations) into one Omnibus
rated as fully or largely compliant with 22 of the 25 original BCPs
issued in 1997. Bill.
Supervision of Deposit-Taking Financial Institutions - 56 -
Annual Report 2008
This exercise is aimed at
• removing inconsistencies and eliminating
regulatory arbitrage opportunities within the
existing statutes; and
• incorporating holding company provisions
as well as effecting legislative amendments
necessary for Basel II implementation and
full compliance with Basel Core Principles
(see Financial Legislation).
5.5.2. Credit Regulations
The redrafting of Credit Regulations continued in
2008 to take account of, inter alia, Basel Standard
for Sound Credit Risk and Valuation for Loans as well
as impairment requirements prescribed under the
International Financial Reporting Standards (IFRS)
to achieve greater convergence in regulatory and
accounting provisioning methodologies.
5.5.3. Qualifications of Auditors Regulation
Draft regulations that specify expectations for auditors
in undertaking an external audit of a supervised
financial institution were with the HMF for approval.
Among other things, the criteria specified in these
regulations relate to the independence, experience
and academic qualification of the external auditors.
These proposed regulations would also require
prior notification to the Bank of Jamaica in respect
of proposed appointments. The Bank would also
be empowered to object to the appointment of an
external auditor if there was evidence that such an
auditor was not in compliance with the provisions of
the regulations.
5.5.4. Bank of Jamaica (Credit Union)
Regulations
Regulations to establish the supervisory regime
- 57 -
that will be applicable to credit unions have been
drafted and are pending presentation to Parliament
by the HMF. These regulations will, among other
things, prescribe prudential criteria and minimum
solvency standards covering, inter alia, essential
areas such as capital adequacy, liquid assets, credit
and provisioning, submission of financial statements
and remedial action that can be taken by supervisory
authorities with respect to unsafe and unsound
practices or insolvency.
5.5.5. Building Societies (Licences)
Regulations
The Building Societies (Licence) Regulations are
being amended to harmonise the annual licensing
fees payable by building societies, on the granting
of a licence, with the rates applicable to commercial
banks and FIA licensees.
5.5.6. Financial Investigations Division Bill
The Financial Investigations Division (FID) Bill
was tabled in Parliament in November 200829.
When passed, the FID legislation will, among other
matters, establish the FID on a statutory basis,
thereby increasing the independence of this Unit and
facilitating the Unit’s admission to membership of
the Egmont Group (the international body of FIUs);
expand the investigative tools available to the FID for
the investigation of suspected financial crimes; and
establish specific penalties for non-compliance with
directives or requests for information issued by the
FID.
29 The BOJ, by virtue of its chairmanship of the Task Force on
Financial Crime has been involved in the development of a law
to govern Jamaica’s Financial Intelligence Unit (FIU), namely the
Financial Investigations Division (FID).
Supervision of Deposit-Taking Financial Institutions

5.6. Supervisory Cooperation and Interaction
5.6.1. Financial Regulatory Council
The Financial Regulatory Council (the Council)
continued to meet during 2008. During the review
period the Council examined issues affecting
the financial industry as well as issues specific
to corporate groups comprising financial entities
which are supervised by the Bank and the Financial
Services Commission. The Council comprises the
following members:
• the Governor of the Bank of Jamaica,
Chairman;
• the CEO, Financial Services Commission;
• the CEO, The Jamaica Deposit Insurance
Company;
• the Financial Secretary; and
• the Solicitor-General.
5.6.2. Regional Interaction
5.6.2.1. The Caribbean Group of Banking
Supervisors
During 2008, the Bank continued to administer the
Secretariat for the Caribbean Group of Banking
Supervisors (CGBS) through a Unit in the FISD30.
The Secretariat coordinated three administrative
meetings, two technical working group meetings, and,
in conjunction with the Central Bank of Barbados, the
XXVI Annual Conference. Four training programmes
were organized for the region with international
facilitators from organizations such as Federal
30 The CGBS was established in 1983 under the aegis of the
Central Bank Governors of member countries of the Caribbean
Community (CARICOM) with the specific mandate to co-ordinate
the enhancement of bank supervisory practices in the English
speaking Caribbean, consistent with internationally accepted
standards. The CGBS was later extended to banking supervisors
from non-CARICOM Caribbean territories and now comprises
membership from fourteen regional jurisdictions, nine of which are
presently core members of CARICOM.
Supervision of Deposit-Taking Financial Institutions
Bank of Jamaica
Reserve System (USA), Office of the Superintendent
of Financial Institutions (Canada) and the Financial
Stability Institute 31.
The Bank participated in its own right, in the two
technical working groups which were respectively
mandated to propose minimum standards for effective
consolidated supervision; and develop a regional plan
for financial crisis management of entities with cross
border operations. At year-end, both working groups
were in the process of developing policy documents
in the two areas.
5.6.2.2. Information Sharing
During 2008, under powers of the Information Sharing
Agreement, the Bank was engaged in discussions
and exchanged relevant information with regional
jurisdictions. Further, through the CGBS, the Bank
proposed and commenced the development of a
Supplementary Protocol to the MOU which will serve
to clarify the expectations of respective signatories
when relying on the MOU32. Bank of Jamaica also
participated in a number of regional supervisory
colleges to discuss matters of mutual interest
pertaining to cross border banking groups.
5.6.2.3. ASBA
In 2008, the Bank as an active member of the
hemispheric group, the Association of Banking
Supervisors of the Americas (ASBA) participated
in the official programme for the annual assembly
31 The Financial Stability Institute was jointly established by the Bank
for International Settlements and the Basel Committee on Banking
Supervision to assist supervisors around the world in improving
and strengthening their financial systems.
32 The Information Sharing Agreement is signed by twelve CGBS
members, to facilitate cross-border cooperation between home
and host supervisory authorities for regional banking entities.
- 58 -
Annual Report 2008
and also in the ASBA Working Group on Corporate
Governance in Banking Institutions33. The objective
of this work group is to issue a standard for member
jurisdictions to guide the assessment of corporate
governance frameworks in banking institutions. At
year-end, a draft document had been produced by
that working group.
5.6.2.4. Caribbean Financial Action Task Force
In another area of regional involvement, the Senior
Deputy Governor (Deputy Supervisor of Banks)
continued to serve as the Principal Contact for
Jamaica to the Caribbean Financial Action Task Force
(CFATF). During 2008, a third member of FISD was
trained as a peer assessor for the CFATF’s Mutual
Evaluation Programme. This officer and a member of
the Legal Department also participated as ‘financial
sector experts’ on CFATF’s AML/CFT Country
Reviews of two regional member jurisdictions.
5.6.3. Other External Interactions
In 2008, the Bank in its role of Secretariat for the
Caribbean Group of Bank Supervisors, prepared and
submitted an update on supervisory developments
for inclusion in the BCBS’ biennial publication on
International Supervisory Developments. The Bank
also participated in BCBS’s biennial International
Conference of Banking Supervisors (ICBS) which
was co-hosted by the National Bank of Belgium
and the Belgian Banking, Finance and Insurance
Commission in Brussels, Belgium, during September
2008.
33 ASBA is a regional grouping of 37 Banking Supervisory Authorities
whose membership spans 35 jurisdictions encompassing North,
Central and South America and the Caribbean, with one non-
regional member, Spain.
- 59 -
5.7. The Supervised Deposit-Taking System
At 31 December 2008, the total number of licensed
DTIs remained unchanged at 14 (see Table 37).
There was however, a reduction in the number of
licensees under the Financial Institutions Act to 3 from
4 and a corresponding increase in commercial banks
to 7 from 6, as a result of the former PanCaribbean
Merchant Bank’s surrender of its licence under the
Financial Institutions Act, on the granting of a licence
under the Banking Act in June 2008. With the
granting of the new licence, the entity changed its
name to PanCaribbean Bank.
Additionally, pursuant to the earlier acquisition of the
Dehring Bunting and Golding Limited (DB&G Limited)
by Scotia Group Jamaica Limited, the name of DB&G
Merchant Bank Limited was changed to Scotia DBG
Merchant Bank Limited during March 2008. 
The licensed DTIs operated through a combined
island-wide branch network of 183 at the end of 2008
as compared to 179 as at 31 December 2007.
5.7.1. Authorised Foreign Exchange Dealers
All the licensed DTIs are approved foreign exchange
dealers, enabling them to not only buy and sell foreign
currencies, but also accept deposits, make loans and
conduct other dealings in foreign currencies. While
cambio licences allow for the buying and selling of
foreign currencies, and are issued to any applicant
successfully meeting the licensing criteria, only
licensed deposit takers are eligible to undertake
authorized foreign currency dealing activities.
Supervision of Deposit-Taking Financial Institutions
 Bank of Jamaica

Table 37

MARKET COMPOSITION – NUMBER OF LICENSED DEPOSIT-TAKING ENTITIES*

Supervised Entities 2004 2005 2006 2007 2008

Commercial Banks 6 6 6 6 7
FIA Licensees 5 5 5 4 3
Building Societies 4 4 4 4 4
Total 15 15 15 14 14

Table 38

LICENSED DEPOSIT-TAKING INSTITUTIONS

AS AT 31 DECEMBER 2008
Sub-sector Institution Name Related Deposit-taking Institution
Commercial Banks Bank of Nova Scotia Jamaica Limited Scotia Jamaica Building Society
Scotia DB&G Merchant Bank Limited
Citibank N. A.
FirstCaribbean International Bank (Jamaica) FirstCaribbean International Building Society
Limited
First Global Bank
National Commercial Bank Jamaica Limited
PanCaribbean Bank
RBTT Jamaica Limited
FIA Licensees Capital & Credit Merchant Bank Limited
Scotia DB&G Merchant Bank Limited Bank of Nova Scotia Jamaica Limited
Scotia Jamaica Building Society
MF&G Trust and Finance
Building Societies FirstCaribbean International Building Society FirstCaribbean International Bank (Jamaica)
Limited
Jamaica National Building Society
Scotia Jamaica Building Society Bank of Nova Scotia Jamaica Limited
Scotia DB&G Merchant Bank Limited
Victoria Mutual Building Society

5.7.2. System Performance Review
5.7.2.1. Overview
The balance sheets of licensed DTI were not immune
to the developments in international financial markets
during 2008. The impact of these developments
resulted in a 6.6 per cent ($15.1 billion) decline in
investments (inclusive of repurchase agreements)
which was partly offset by a 24.2 per cent ($64.2
billion) growth in loans and advances (net of provision
for losses). Accordingly, the share of investments in
total assets declined to 29.4 per cent from 34.0 per
cent at end-2007. On the other hand, the ratio of
loans to total assets increased to 45.1 per cent at
end-2008 from 39.2 per cent at end-2007.
Cash and bank balances increased marginally by
$1.7 billion (1.5 per cent) compared to growth of
$18.0 billion (18.1 per cent) for the previous year.
The slower increment reflected the liquidation of

Supervision of Deposit-Taking Financial Institutions - 60 -

Annual Report 2008
placements at overseas institutions to meet margin
call obligations related to holdings of GOJ global
bonds (see Chart 16).
Chart 16
The system’s foreign currency assets decreased
by US$156.0 million or 3.8 per cent, compared
to growth of US$525.0 million or 14.8 per cent for
2007. Foreign currency liabilities also declined by
US$92.0 million (2.3 per cent) as against accretion
of US$360 million (10.1 per cent) during 2007. These
movements were reflected in a net long foreign
currency position of US$104 million for the system
at year-end. Commercial banks’ foreign currency
portfolios expanded by US$89.0 million, lower than
the US$416.0 million increase in 2007. In contrast,
the foreign currency assets of FIA licensees and
building societies contracted by US$198.0 million and
US$47.0 million, respectively, compared to growth of
US$112 million reported by building societies and a
marginal decline of US$3.0 million at FIA licensees
for 2007.
- 61 -
Against the background of the foregoing, growth in
total assets for licensed DTI decelerated to 8.1 per
cent, from 14.2 per cent for 200734. At end-2008,
total assets were $729.2 billion.
The increase in the assets of DTI was funded primarily
from additional borrowings of $30.4 billion (25.3 per
cent) as well as incremental deposits of $19.2 billion
(4.5 per cent). Domestic currency deposits expanded
by $14.1 billion and accounted for 73.7 per cent
of the overall increase in deposits. While foreign
currency deposits contracted in US dollar terms,
when converted to Jamaica Dollars these deposits
reflected an increase due to the depreciation of the
Jamaica Dollar for the year. At year-end domestic
currency deposits represented 61.4 per cent of total
deposits, up from 60.8 per cent at end-2007.
In terms of capital, although shareholders’ equity
grew, the impact of this was tempered by fair value
losses on investment portfolios. Regulatory capital
remained adequate for the level of risk-weighted
assets held by the supervised entities and provided
a buffer above minimum statutory capital adequacy
requirements.
5.7.2.2. Market Share
Commercial banks continued to command the
largest share of DTI’s assets, accounting for 76.3
per cent at end-2008, up from 74.8 per cent at end-
2007, partly reflective of the transferred business of
PanCaribbean Bank. Building societies accounted
for a slightly higher 19.0 percent of the market as
against 18.2 per cent at year-end 2007. In contrast,
34 Assets include guarantees/letters of credits and are shown net
of provision for losses under International Financial Accounting
Standards
Supervision of Deposit-Taking Financial Institutions
 Bank of Jamaica

FIA Licensees reflected a reduced market share of 4.6 reserve and liquid assets requirements were
per cent compared to 7.0 per cent end 2007, impacted increased by 2.0 percentage points to 11.0 per cent
significantly by PanCaribbean Merchant Bank’s exit and 25.0 percent respectively, during December

Table 39

ASSET SHARE OF LICENSED DEPOSIT-TAKING INSTITUTIONS

31-Dec-06 31-Dec-07 31-Dec-08
Sub-sector $BN % $BN % $BN %
Commercial Banks 438.4 74.2 504.2 74.8 556.7 76.4
Buildings Societies 105.6 7.9 122.8 18.2 138.4 19
FIA Licensees 46.5 4 47.2 7 33.9 4.7
SYSTEM TOTAL 590.5 100 674.2 100 729 100

from the sub-sector, as well as a combination of 2008. The foreign currency cash reserve and liquid
balance sheet restructuring and lower investment assets requirements remained unchanged at 9.0 per
values at another licensee (see Table 39).
National Commercial Bank Jamaica Limited and
Bank of Nova Scotia Jamaica Limited remained the
market leaders, accounting for a combined 68.9 per
cent of the total asset base at end-2008. With regard
to building societies, Jamaica National Building
Society (JNBS) and Victoria Mutual Building Society
(VMBS) maintained market leadership of that sub-
sector, reflecting respectively, assets growth of $7.1
billion and $5.2 billion and accounting for 51.9 per
cent and 35.4 per cent of that market.
During 2008, the assets of FIA licensees declined by
$13.3 billion to $33.9 billion. The reduction largely
reflected PanCaribbean Merchant Bank’s exit from
that sub-sector. Abstracting for this development, the
sub-sector’s assets would have contracted by 11.5
per cent in 2008, compared to a decline of 1.3 per
cent in 2007.
5.7.2.3. Liquidity
The statutory minimum domestic currency cash
cent and 23.0 per cent, respectively, throughout the
year35. The differential cash reserve requirement
of 1.0 per cent and liquid assets requirement of 5.0
per cent that apply to building societies satisfying a
residential mortgage threshold of 40.0 per cent of
deposit base, also remained in effect. At year-end,
all building societies qualified for the lower ratios for
both the domestic and foreign currency requirements.
At end-2008, DTIs had liquid assets of 5.4 per cent
above the liquid assets requirement of 25.0 percent.
5.7.2.4. Asset Quality
At end-2008, there was some deterioration in
the asset quality of the DTIs, as the ratio of non-
performing loans 3 months & over (NPLs) to total
loans increased to 2.9 per cent, from 2.3 per cent at
end-2007 (see Chart 17). This, however, remained
35 The Central Bank announced its intention to increase the domestic
currency requirements by a further 3.0 percentage points.
Changes to the domestic and foreign currency requirements
were effected in January 2009. In February, there was a further
percentage point adjustment in respect of the domestic currency
requirements. Foreign currency cash reserve and liquid assets
statutory requirements are held in US dollar, Canadian dollar and
Pound Sterling.

Supervision of Deposit-Taking Financial Institutions - 62 -

Annual Report 2008

well within the international benchmark maximum of increase of $0.8 billion or 14.2 per cent during 2007
10.0 per cent of the total loan portfolio. In nominal (see Chart 18).
terms, NPLs increased by $3.6 billion or 57.6 per
cent during 2008 to $9.8 billion, compared to an

Chart 17

Chart 18

- 63 - Supervision of Deposit-Taking Financial Institutions

 Bank of Jamaica

Provision for loan losses (which represent a system recorded a pre-tax profit margin of 27.2 per
combination of assessments under IFRS and cent at end-2008 (26.7 per cent at end-2007). The
incremental amounts required in accordance with ROAA was 3.7 per cent for 2008 as against 3.4
the Central Bank’s prudential guidelines) provided per cent at end-2007, with all licensees individually
reduced coverage of 88.2 per cent of NPLs, down reporting positive results.
from 103.4 per cent recorded at the end of 2007,
while regulatory capital plus provisions provided a The improved system performance, although
buffer of 804.2 per cent of the value of NPLs (1 099.5 impacted by extra-ordinary income from sale of
per cent at the end of 2007). investments by one licensee, was also reflective
of incremental revenues of $11.6 billion (14.0 per
5.7.2.5. Capital cent) generated from operations. The increase in
revenue from operations was influenced by the shift
Growth in shareholders’ equity slowed to $1.7
in assets profile from investments and placements
billion or 2.0 per cent during 2008 to total $88.1
with overseas institutions, to higher yielding loans
billion, tempered by fair value losses on investment
(incremental revenues of $8.3 billion) and a higher
portfolios. This compares with the increase of $8.0
contribution from non-interest income sources such
billion or 10.3 per cent which obtained during 2007.
as service charges, fees and commissions ($1.5
Nonetheless, licensees strengthened regulatory
billion) and foreign exchange gains of $1.9 billion.
capital bases by $8.2 billion or 13.3 per cent ($6.5
billion or 11.7 per cent during 2007) through transfers
from realised profits to statutory reserve funds. System expenses increased by $9.5 billion (15.2
per cent), reflecting higher staff costs ($3.0 billion),
interest expenses ($2.1 billion) and other operating
The faster growth in regulatory capital vis-à-vis assets
costs ($1.9 billion). The Net Interest Margin (NIM)
during 2008 resulted in the system, as a whole,
remained fairly stable at 11.4 per cent at end-2008,
reflecting a stronger primary ratio (regulatory capital
compared to 10.9 per cent at end-2007.
to total assets) of 9.6 per cent (9.2 per cent at end-
2007). Similarly, the risk-weighted capital adequacy
ratio increased to 16.0 per cent from 15.8 per cent 5.8. Credit Unions
at end-2007. At end-2008, all licensees continued to 5.8.1. Supervisory Developments
maintain primary and risk weighted capital adequacy
During 2008, the Bank continued its dialogue with
ratios in excess of the minimum requirements of 6.0
the credit union industry regarding the draft Credit
per cent and 10.0 per cent, respectively.
Union Regulations. This was with a view to finalize
and submit same to the HMF for tabling in Parliament
5.7.2.6. Profitability and subsequent approval. It is anticipated that sign-
Based on unaudited earnings and expenditure results off will take place during 2009.
submitted by licensees to the Bank of Jamaica, the

Supervision of Deposit-Taking Financial Institutions - 64 -

Annual Report 2008

In anticipation of the passage of the Regulations by During 2008, several credit unions obtained the
Parliament, the Bank continued its programme of on- approval of their membership to amend their rules to
site examinations of credit unions, which included the allow for the issue of permanent shares to strengthen
provision of feedback to the Board and Management. capital. This arose from their recognition that
This provided the basis for strengthening of the withdrawable share savings do not qualify as capital
overall operations and practices of most credit unions and are not to be treated as such under the draft
as they prepared their institutions for licensing under Bank of Jamaica (Credit Unions) Regulations or IFRS
the imminent regulations. The Central Bank also requirements. This will facilitate a transition from the
continued its off-site monitoring of credit unions long standing tradition and practice of recognizing
by way of analysis of the monthly and quarterly withdrawable members’ share savings as part of a
prudential returns submitted to the Bank. In addition credit union’s institutional capital.
to prudential returns, the 2007 audited financial
statements for all credit unions were submitted to the 5.8.2.
Credit Union Performance Highlights
Bank. As at 31 December 2008, total assets of the credit
union sub-sector was $50.7 billion, representing a
The number of registered credit unions stood at $6.4 billion or 14.6 per cent increase over 2007. Loans
48 at end-2008. The BOJ was also advised of the increased by $3.8 billion (12.4 per cent) to account
signing of a memorandum of understanding between for $34.8 billion or 68.7 per cent of overall assets as
another two credit unions to merge their operations. at 31 December 2008.  Total savings of $39.5 billion
Of the 48 registered credit unions at end-2008, two which reflected growth of $5.1 billion or 15.0 per cent
remained outside of the umbrella organization, the over the balance at end-2007, provided the primary
Jamaica Cooperative Credit Union League (JCCUL). source of funding new lending to members.  Overall,
Nonetheless, the credit unions submitted prudential credit union membership increased by 50 060 to 970
returns to the Bank. At end-2008, there were also 922 during the year (see Tables 40 and 41).
two credit unions under the ‘supervision’ (a form of
temporary management) of the JCCUL.

Table 40

KEY CREDIT UNION INDICATORS

Dec-08 Dec-07 Change Change %

Indicator
No. of Credit Unions 48 48 0 -
Membership (actual) 970 922 920 862 50 060 5.4
Total Savings Fund ($BN) 39.54 34.40 5.14 15.0
Total Loans ($BN) 34.84 31.01 3.83 12.4
Total Assets ($BN) 50.71 44.27 6.44 14.6
Data is at December 2008 – Revised February 2009

- 65 - Supervision of Deposit-Taking Financial Institutions

 Bank of Jamaica

Table 41
SELECT CREDIT UNION DATA
2004 – 2008
Year End No. Of Credit Membership Total Savings Total Loans Loans/ Total Assets
Unions Fund ($BN) (Gross) ($BN) Savings Ratio ($BN)
(%)

2004 50 759 958 17.4 77.3 28.5

22.5
2005 48 811 920 25.5 21.3 83.5 32.6

2006 48 874 805 30.4 25.9 85.2 38.5

2007 48 927 613 34.4 31.0 90.1 44.3

2008 48 970 922 39.5 34.8 88.1 50.7

1
Lascelles and Carreras Co-op Credit Unions merged in September 2005
2
Carib Cement Co-op Credit Union merged with Palisadoes Co-op Credit Union in July 2008.
Superclubs Co-op Credit Union was registered in 2007 but commenced submitting returns to BOJ in 2008. This entity is
not reflected in ‘No. of Credit Unions’ at Year End 2007.
Status Date: 27 February 2009

Supervision of Deposit-Taking Financial Institutions - 66 -

 ANNUAL PRUDENTIAL INDICATORS OF COMMERCIAL BANKS,
LICENSEES UNDER THE FINANCIAL INSTITUTIONS ACT (FIA) AND BUILDING SOCIETIES
PUBLISHED PURSUANT TO SECTION 16 (6) OF THE BANKING ACT AND THE FIA
Table 42
AND REGULATION 49 OF THE BANK OF JAMAICA (BUILDING SOCIETIES) REGULATIONS, 1995
31-Dec-08
COMMERCIAL BANKS FIA LICENSEES BUILDING SOCIETIES System Total (aggregation of all 3 sectors)
Dec-06 Dec-07 Dec-08 Dec-06 Dec-07 c Dec-08 b Dec-06 Dec-07 Dec-08 Dec-06 Dec-07 Dec-08
Number of institutions in operation 6 6 7 5 4 3 4 4 4 15 14 14
1 438 437 504 224 46 449 47 195 122 823 590 476 674 242
Total Assets (incl. contingent accounts) 556 650 33 892 105 590 138 612 729 154
2 427 099 487 896 45 624 46 432 122 753 578 245 657 081
Total Assets (excl. contingent accounts) 544 653 32 655 105 522 138 532 715 840
Cash & Bank Balances 79 544 91 328 97 133 2 846 3 595 1 288 16 918 22 338 20 568 99 308 117 261 118 989
Annual Report 2008

Investments [incl. Securities Purch.] (net of prov.) 165 914 167 374 161 265 29 658 27 129 18 685 38 495 34 806 34 308 234 067 229 309 214 258
Total Loans (gross) 153 449 195 103 246 168 11 147 14 207 10 818 43 776 58 966 76 098 208 372 268 276 333 084
Total Loans (net of IFRS prov.) a 150 579 192 039 242 479 11 088 14 130 10 710 43 088 58 258 75 415 204 755 264 427 328 604
Total Deposits 282 926 321 053 333 960 14 017 17 153 14 519 73 585 84 377 93 285 370 528 422 583 441 764
Borrowings (incl. repos) 71 557 85 989 117 028 22 635 20 020 12 781 10 482 13 967 20 561 104 674 119 976 150 370
Non-Performing Loans [NPL] (3 mths & >) 3 408 3 903 6 443 493 531 583 1 537 1 774 2 759 5 438 6 208 9 785
Provision for Loan Losses 4 288 5 037 6 845 171 221 455 1 046 1 158 1 333 5 505 6 416 8 633
3 38 055 42 623 5 268 5 415 13 805 55 373 61 843
Capital Base 50 510 4 163 12 050 15 384 70 057
Contingent Accts [Accept., LC’s & Guarantees] 11 338 16 328 11 997 825 763 1 237 68 70 80 12 231 17 161 13 314
Funds Under Management 0 0 229 193 209 0 0 0 0 193 209 229
Repos on behalf of or for on-trading to clients n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Rate of Asset 1 Growth 16.6% 15.0% 10.4% 3.4% 1.6% -28.2% 18.2% 16.3% 12.9% 15.8% 14.2% 8.1%
Rate of Deposit Growth 14.9% 13.5% 4.0% 15.5% 22.4% -15.4% 14.8% 14.7% 10.6% 14.9% 14.0% 4.5%

- 67 -
Rate of Loans Growth (gross) 16.2% 27.1% 26.2% 28.6% 27.5% -23.9% 19.9% 34.7% 29.1% 17.5% 28.7% 24.2%
Rate of Capital Base Growth 14.0% 12.0% 18.5% 10.9% 2.8% -23.1% 11.5% 14.6% 11.4% 13.2% 11.7% 13.3%
Rate of NPL (3 Mths &>) Growth 11.0% 14.5% 65.1% 14.1% 7.7% 9.8% -5.6% 15.4% 55.5% 6.0% 14.2% 57.6%
Investments :Total Assets 1 37.8% 33.2% 29.0% 63.9% 57.5% 55.1% 36.5% 28.3% 24.8% 39.6% 34.0% 29.4%
Loans (net of prov.):Total Assets 1 34.3% 38.1% 43.6% 23.9% 29.9% 31.6% 40.8% 47.4% 54.4% 34.7% 39.2% 45.1%
Fixed Assets:Total Assets 1 1.8% 1.7% 1.7% 0.7% 0.3% 1.0% 2.0% 1.7% 1.7% 1.8% 1.6% 1.7%
Loans (gross) : Deposits 54.2% 60.8% 73.7% 79.5% 82.8% 74.5% 59.5% 69.9% 81.6% 56.2% 63.5% 75.4%
Average Domestic Currency Cash Reserve: Average Prescribed 9.0% 9.0% 10.9% 9.0% 9.0% 10.6% 1.0% 1.0% 1.0% 7.0% 7.1% 8.3%
Average Domestic Currency Liquid Assets: Average Domestic 42.3% 30.0% 37.0% 33.4% 46.9% 23.2% 24.4% 8.2% 12.4% 37.7% 25.0% 30.4%
Prov. For Loan Losses:Total Loans (gross) 2.8% 2.6% 2.8% 1.5% 1.6% 4.2% 2.4% 2.0% 1.8% 2.6% 2.4% 2.6%
Prov. For Loan Losses: NPL (3 Mths &>) 125.8% 129.1% 106.2% 34.7% 41.6% 78.0% 68.1% 65.3% 48.3% 101.2% 103.4% 88.2%
NPL (3 Mths &>):Total Loans (gross) 2.2% 2.0% 2.6% 4.4% 3.7% 5.4% 3.5% 3.0% 3.6% 2.6% 2.3% 2.9%
+ Provision for loan losses) 0.8% 0.8% 1.1% 1.1% 1.1% 1.7% 1.4% 1.4% 2.0% 0.9% 0.9% 1.3%
Deposits + Borrowings: Capital (:1) 9.4 9.6 9.0 7.1 7.0 6.7 7.1 7.2 7.5 8.6 8.8 8.5
Capital Base:Total Assets 1 8.7% 8.5% 9.1% 11.3% 11.5% 12.3% 11.4% 11.2% 11.1% 9.4% 9.2% 9.6%
5
Capital Adequacy Ratio [CAR] 16.1% 14.5% 13.9% 21.1% 23.5% 20.0% 19.3% 19.9% 19.8% 17.1% 16.0% 15.2%
NPL (3 mths &>):Capital Base+Prov for loan losses 8.0% 8.2% 11.2% 9.1% 9.4% 12.6% 11.7% 11.9% 16.5% 8.9% 9.1% 12.4%
6
Pre - tax Profit Margin (for the Calendar Quarter) 22.6% 26.0% 24.4% 5.8% 15.6% 10.4% 24.2% 19.7% 11.3% 21.8% 24.5% 21.7%
Pre - tax Profit Margin (for the Calendar Year) 25.9% 29.0% 28.8% 17.6% 18.7% 16.1% 22.6% 17.6% 21.9% 24.8% 26.7% 27.2%
Return on Average Assets (for the Calendar Quarter) 0.8% 0.9% 0.9% 0.2% 0.4% 0.3% 0.7% 0.5% 0.4% 0.7% 0.8% 0.8%
Return on Average Assets (for the Calendar Year) 3.5% 3.9% 4.1% 1.9% 1.9% 1.5% 2.6% 1.9% 2.5% 3.2% 3.4% 3.7%
7

Supervision of Deposit-Taking Financial Institutions

Income Assets/Expense Liabilities 102.7% 102.5% 102.3% 115.1% 114.4% 105.5% 108.8% 108.3% 108.8% 104.8% 104.4% 103.7%
 Notes:
n.a. data not available
n/a not applicable
- Based on unaudited data submitted to BOJ by supervised institutions up to 20 February 2009. Prior years indicators may have revisions arising from amendments.
a
- The composition of “Provision for Loan Losses” has been segregated into two (2) distinct components being:
i) provision for losses computed in accordance with IFRS; and
ii) any incremental provisioning necessary under prudential loss provisioning requirements (treated with as an appropriation from net profits).
Consequently, “Total Loans (net of prov.)” represents gross loans net of IFRS loan loss provisions
b
- Effective 19 March 2008, DB&G Merchant Bank Ltd, was renamed Scotia DBG Merchant Bank Ltd. This follows the 2007 acquisition of majority interest in Dehring Bunting & Golding Ltd, the immediate
parent company of DB&G Merchant Bank, by Scotia Group Jamaica Ltd. Similarly, effective 31 March 2008, Dehring Bunting & Golding Limited was also renamed to Scotia DBG Investments Ltd.
- The Minister of Finance approved the granting of a commercial banking licence to PanCaribbeanBank Limited, (formerly Pan Caribbean Merchant Bank Limited), with effect from 23 June 2008.
Consequently, the merchant banking licence previously issued to Pan Caribbean Merchant Bank Limited under the Financial Institutions Act was surrendered.
c
- Effective 31 Oct 06, Citimerchant Bank transferred its Assets and Liabilities to Citibank N.A. (Jamaica Branch), where these Assets and Liabilities were held in trust
until 5 Mar 07, when Citimerchant Bank surrendered its deposit - taking licence.
1
Total Assets and Liabilities reflected net of Provision for Losses and include Contingent Accounts (Customer Liabilities for Acceptances, Guarantees and Letters of Credit).

Supervision of Deposit-Taking Financial Institutions

In keeping with IFRS, total assets and liabilities include contingent accounts as defined above.
2
Total Assets and Liabilities net of Provision for Losses and Contingent Accounts (Customer Liabilities for Acceptances, Guarantees and Letters of Credit).
3
Capital Base - Banks & FIA Licensees: (Paid - up Capital + Reserve Fund + Retained Earnings Reserve Fund + Share Premium) less impairment by net losses of individual institution.
- Building Societies: (Permanent Capital Fund + Deferred Shares + Capital Shares + Reserve Fund + Retained Earnings Reserve Fund ) less impairment by net losses of individual society.
4
Prescribed Liabilities include:
(i) deposit liabilities, (ii) reservable borrowings and interest accrued and payable on (i) & (ii).

- 68 -
5
Capital Adequacy Ratio (CAR): Qualifying Capital (Tier 1 + Tier 2 capital items less prescribed deductions) in relation to Risk Weighted Assets and Foreign Exchange Exposure.
6
Data includes extraordinary income/expenditure and adjustments for prior period.
7
Income Assets comprise FC Cash Reserves, Placements, Investments, Repo Assets and Loans less Non-Performing Loans (3 months & over).
Expense Liabilities comprise Deposits and Borrowings including Repo Liabilities (from BOJ, Banks, OFI etc).
COMMERCIAL BANKS FIA LICENSEES BUILDING SOCIETIES**
Dec-06 Dec-07 Dec-08 Dec-06 Dec-07 Dec-08 Dec-06 Dec-07 Dec-08
Required Cash Reserve Ratio 9.0% 9.0% 11.0% 9.0% 9.0% 11.0% 1% / 9% 1% / 9% 1% /11%
Required Liquid Assets Ratio (incl Cash Reserve) 23.0% 23.0% 25.0% 23.0% 23.0% 25.0% 5% / 23% 5% / 23% 5% / 25.0%

Effective 3 December 2008, the domestic currency cash reserve and liquid assets ratios for supervised licensees were increased to 11.0% and 25.0% respectively.

* The requirements are differentially applied to societies not meeting the prescribed threshold of residential mortgage lending in relation to savings funds.
Societies that meet the prescribed ‘qualifying assets’ threshold attract the lower reserve requirements indicated above. Societies which do not,
are requested to meet the requirements which apply to banks and FIA licensees.

SUBSEQUENT EVENT
Effective 6 February 2009, the domestic currency cash reserve and liquid assets ratios for supervised licensees were increased to 14.0% and 28.0% respectively.
Effective 2 January 2009, the domestic currency cash reserve and liquid assets ratios for supervised licensees were increased to 13.0% and 27.0% respectively.
and foreign currency cash reserve and liquid assets ratios for supervised licensees were increased to 11.0% and

Financial Institutions Supervisory Division

Bank of Jamaica

Bank of Jamaica
 6. Supervision of Cambios and Remittance
Companies

I
n 2008, the Central Bank continued to supervise 6.1. Cambios
cambios and remittance companies, as stipulated During 2008, 9 new cambios were granted approval
by the Bank of Jamaica Act, through on-site to operate while the licences for 6 cambios were
inspections as well as in-house monitoring. The key voluntarily surrendered. In addition, 2 licences were
objective of the on-site inspections was to assess revoked by the Bank for breaches of the Bank of
the level of compliance with the Bank of Jamaica Jamaica Operating Directions. Consequently, at the
Operating Directions for Remittance Companies end of 2008, a total of 147 cambios were in operation,
(Operating Directions) and the Anti-Money compared to 146 at the end of 2007 (see Table 43).
Laundering (AML) regulations of the Proceeds of
Crime Act (POCA). In-house monitoring continued to At the end of the review year, the parishes of Kingston
focus primarily on ensuring that all relevant persons and St. Andrew continued to account for the largest
(directors and shareholders of the companies and concentration of cambios.
the manager with responsibility for the operation of
each location) satisfied the Bank’s ‘Fit and Proper’
criteria prior to the issuance and renewal of licences
1
. In this regard, 249 persons were assessed by the

Table 43
STATUS OF CAMBIO LICENCES
AS AT 31 DECEMBER 2008
2007 2008
New Locations Licensed 9 9
Locations Closed 8 8
Number of Locations 146 147
Number of Entities 65 66

Bank’s ‘Fit and Proper’ Committee in 2008. Of this

number, 183 persons were connected to remittance
companies and the remainder to cambios. The
monitoring units also ensured that cambios and
remittance companies complied with their respective
reporting requirements.

- 69 -
 Bank of Jamaica

Table 44

GEOGRAPHIC DISTRIBUTION OF CAMBIOS (%)

AS AT 31 DECEMBER 2008

2007 2008
Kingston & St. Andrew 28.8 29.9
St. James 14.4 15.7
St. Ann 11.0 10.2
St. Catherine 11.0 9.5
Manchester 7.5 8.8
Clarendon 7.5 7.5
Westmoreland 6.2 6.1
Others 13.6 12.3
Total 100.0 100.0

Table 45
STATUS OF REMITTANCE LICENCES
AS AT 31 DECEMBER
  2007 2008
New Discrete Locations Licensed 117 45
Discrete Licensed Locations Cancelled 26 57
Number of Discrete Locations 496 484
Total Number of Applications 731 697
Number of Primary Agents 13 12

The cambios continued to be a significant player in
the foreign exchange market by maintaining their
market share of approximately 31.3 per cent of
foreign exchange purchases in the review year.
6.2. Remittance Companies
A total of 12 remittance primary agents were in
operation at the end of 2008, relative to 13 at end-
2007 as one primary agent voluntarily relinquished
its licence in May 2008 (see Table 45).
At the end of the review year, the 12 primary agents
operated from 484 discrete locations, relative
to 496 such locations at end-2007. The largest
concentration of remittance locations was in the
Kingston & St. Andrew region, which accounted for
24.0 per cent, relative to 22.8 per cent at the end of
2007 (see Chart 19).

Supervision of Cambios and Rimittance Companies - 70 -

Annual Report 2008

There were 697 applications recorded at end-

December 2008, representing a decline of 4.7 per
cent, relative to end-2007 (see Table 45). Of the
total number of applications on record at the end
of the review period, 643 represented approved
applications while the remaining 54 were being
processed.

Chart 19

- 71 - Supervision of Cambios and Rimittance Companies

 7. External Sector Developments

7. External Sector Developments interest rates, the impact of the international financial
7.1. International Economic Developments crisis prompted governments to loosen monetary
policy and launch fiscal stimulus packages.
7.1.1. Overview
Conditions in the global economy deteriorated in
7.1.2. Output
2008. High inflation, the result of rapid increases
In the context of the international financial crisis,
in international commodity prices, characterized
global economic growth is estimated to have
the first half of the year. During the second half, the
decelerated by 2.2 percentage points to 3.0 per cent
turmoil in US financial markets, that had its origins
in 2008, reflecting a slowdown in growth for both the
in the sub-prime mortgage market, extended to
advanced and developing economies.
global financial markets and the real economy.36
Consequently, most advanced economies moved
into recession in the last quarter of the year. Growth
in developing countries also slowed in the latter part
of the year, after accelerating in the first half of the
year as a result of increased production in response
to rising international commodity prices. Although
high inflation led some central banks to raise target

Table 46

INDUSTRIAL ECONOMIES
REAL GDP, CONSUMER PRICES AND UNEMPLOYMENT RATES
(Annual Percentage Change and per cent of Labour Force)
CB Target
Country GDP Unemployment Rate Inflation Rate**
Interest Rates***
  2007 2008* 2007 2008* 2007 2008* 2007 2008*
Advanced Economies 2.7 0.6 5.3 6.4 2.2 3.4
of which
USA 2.1 0.4 4.8 7.2 2.9 3.8 4.25 0.00 – 0.25
UK 2.6 0.7 5.3 5.7 2.3 3.6 5.50 2.00
Euro Area 2.7 0.7 7.4 7.5 2.1 3.3 4.00 2.50
Canada 2.5 0.4 6.0 6.1 2.1 2.4 4.25 1.50
Japan 2.3 -0.7 3.9 4.0 0.0 1.4 0.50 0.30
Source: The World Economic Outlook, , International Labour Office, Statistics Offices of individual countries
*Estimates
** Annual average
*** End-of-period

36 Several major financial institutions in mid-2008 announced

significant losses from sub-prime related investments. The impact
of this was reflected in a tightening of credit conditions, particularly
in October, as well as large declines in global stock market
indices.

- 72 -
Annual Report 2008

For the advanced economies, economic growth
decelerated by 2.1 percentage points to 0.6 per cent
(see Table 46). This slowdown reflected tightened
credit conditions, downturns in housing markets in
several economies, as well as the impact of high oil
prices. All developing economies also experienced
a slowdown in growth (see Table 47). A decline in
exports, particularly for countries that had strong
trade links with the US and Europe, was the major
factor underpinning the moderation in growth for this
set of economies.

Table 47

SELECTED DEVELOPING COUNTRIES

REAL GDP & CONSUMER PRICES
(Annual Per Cent Change)
GDP Inflation Rate**
Country
2007 2008* 2007 2008*
Developing Countries 8.3 6.3 6.4 9.2
Western Hemisphere 5.7 4.6 5.4 7.9
Argentina 8.7 6.5 8.8 8.6
Brazil 5.7 5.8 3.6 5.7
Chile 5.1 4.5 4.4 8.7
Colombia 7.7 4.0 5.5 7.0
Dominican Republic 8.5 4.7 6.1 10.6
Ecuador 2.5 3.0 2.3 8.4
Mexico 3.2 1.8 4.0 5.1
Peru 8.9 9.2 1.8 5.8
Uruguay 7.4 6.5 8.1 7.9
Venezuela 8.4 6.0 18.7 30.4
Caribbean*** 6.6 3.9 2.9 6.8
Antigua & Barbuda 6.5 1.8 1.4 5.3
Barbados 3.4 0.2 4.0 8.1
Dominica 2.5 3.2 3.2 6.3
Guyana 5.4 3.0 12.3 8.1
Jamaica 1.5 -0.9 9.2 22.0
St. Kitts & Nevis 4.2 4.6 4.5 5.4
St. Vincent & Grenadines 8.0 -0.6 6.9 10.1
Trinidad & Tobago 5.5 3.5 7.8 12.1
Developing Asia 10.0 7.8 5.4 7.5
China 13.0 9.0 4.8 5.9
India 9.3 7.3 6.4 8.3
Indonesia 6.3 6.1 6.0 9.8
Malaysia 6.3 5.8 2.0 5.4
Philippines 7.2 4.4 2.8 9.3
Thailand 4.8 4.7 2.2 5.5
Middle East 6.4 6.1 11.2 15.0
Sources: The World Economic Outlook, January 2009, Statistics Offices of individual countries,
* Estimates, **Annual average, ***GDP weighted

- 73 - External Sector Developments

 Bank of Jamaica

7.1.3. Inflation 7.1.5. Commodity Markets

Influenced by significant increases in international Commodity prices, as measured by the IMF’s Index
commodity prices during the first half of the year, of Primary Commodity Prices (IPCP), rose by 27.6
inflation in the advanced economies increased per cent in 2008, following an 11.8 per cent rise in
in 2008 by 1.2 percentage points, relative to 2007. The acceleration in the rate of increase in the
the preceding year, to 3.4 per cent. Inflation for IPCP was attributed to a faster growth rate of the
developing countries accelerated by 2.8 percentage energy sub-index, the result of a significant increase
points, reflecting increases in both international fuel in crude oil price. The impact of this increase on the
and non-fuel prices (see Tables 46 & 47). IPCP was partly offset by a deceleration in the rate of
growth in the non fuel sub-index.
7.1.4. Selected Exchange Rates
The currencies of selected industrialised economies Crude oil prices, as measured by the West Texas
appreciated against the US dollar by an average Intermediate benchmark, averaged US$99.56
of 3.2 per cent in 2008, following an appreciation per barrel (bbl) in 2008, representing an increase
of approximately 5.7 per cent in the previous year of 37.7 per cent, relative to 9.4 per cent in 2007.
(see Table 48). In particular, the Japanese Yen This movement primarily reflected the impact of
appreciated by 12.3 per cent vis-à-vis the US dollar, strong demand in the first half of the year. Supply
reflecting the unwinding of carry trade positions.37 concerns arising from geopolitical tensions in Africa
The Euro appreciated against the US dollar by 7.2 and the Middle East also contributed to the rise in
per cent as a result of the widening of the US/Euro prices. However, as the turmoil in the financial crisis
interest rate differential. spread to the real sector, rapidly declining demand
Table 48
ADVANCED ECONOMIES: EXCHANGE RATES
(ANNUAL AVERAGE)
  US Dollars per Unit of National Currency Annual Percent Change
  2007 2008 2007 2008
Canadian Dollar 0.936 0.943 6.1 0.8
Japanese Yen/1 117.6 103.1 1.1 -12.3
Pound Sterling 2.002 1.852 8.6 -7.5
Euro 1.371 1.470   9.2 7.2
1. Expressed as local currency per unit of US dollars (in accordance with international Convention)
Source: US Federal Reserve
contributed to a fall in prices to US$44.60 per bbl at
end-December from a record high of US$145.29 per
bbl on 3 July.38
38 The International Energy Agency (IEA) reported a decline of 0.4 per cent in world
oil demand to 85.7 million barrels per day (bpd) in 2008, following an increase of
1.1 per cent in 2007. Most of the decline in consumption came from the Americas
and Europe. World supply rose by 1.0 per cent during the year to 86.4 million bpd,
37 Carry trade is a strategy in which an investor borrows a certain currency associated a significant acceleration, relative to the 0.1 per cent growth rate in 2007. The faster
with a relatively low interest rate and uses the funds to purchase a different curren- growth in supply primarily reflected the increased production by the Organization of
cy associated with a higher interest rate. Petroleum Exporting Countries (OPEC).

External Sector Developments - 74 -

Annual Report 2008

Within the non-fuel sub-index of the IPCP, the price 7.1.6. International Trade Developments
of industrial inputs fell by 5.8 per cent, compared with 7.1.6.1. World Trade Organization (WTO)
a growth rate of 13.2 per cent in 2007. This primarily Negotiations
reflected an 8.0 per cent decline in the prices of The Doha Round of the WTO negotiations broke down
metals, compared with a growth rate of 17.3 per cent on 29 July 2008 as trade ministers were unable to
in 2007 as demand declined in the construction and reach a compromise. Despite accord on most areas,
automotive sectors in advanced economies. There including the agriculture and non-agricultural market
was also a contraction of 0.9 per cent in the prices of access issues, negotiations stalled on the extent to
agricultural raw materials in 2008, after rising by 5.0 which developing countries would be able to raise
per cent in 2007 (see Table 49). tariffs to protect farmers from import surges under
the “special safeguard mechanism” (SSM). One of
the main issues of contention regarding the SSM
was whether, and by how much, countries should
Table 49
SUMMARY OF WORLD COMMODITY PRICES
Annual Average Per Cent Change
  2007 2008
All Primary Commodities 11.8 27.6
1. Non-fuel Commodities 14.0 7.4
1.1 Edibles 15.0 23.3
(a) Food 15.2 23.3
(b) Beverages 13.7 23.3
1.2 Industrial Inputs 13.2 -5.8
(a) Agricultural Raw Materials 5.0 -0.9
(b) Metals 17.3 -8.0
2. Energy 10.4 40.3
Petroleum /1 9.4 37.7
Sources: IMF Primary Commodity Price Index

/1 West Texas Intermediate measure

In contrast to the decline in the metals sub-index,
the edibles sub-index increased by 23.3 per cent in
2008, primarily reflecting a rise in the price of grains,
particularly rice and corn, during the first half of year.
Export bans by major exporting countries, such as
India and Thailand, contributed to a 99.7 per cent rise
in rice prices. For corn, strong demand for the grain
as an input into ethanol production led to a rise of
36.0 per cent in prices. However, during the second
half of the year, all commodity prices declined as a
result of waning global demand.
be allowed to impose safeguard duties in excess of
current tariff ceilings.39
7.1.6.2. The EU-CARIFORUM Economic
Partnership Agreement (EPA)
The text of the EPA was formally signed on 15
39 The initial proposal would have allowed safeguard duties to surpass bound tariff
rates by 15.0 percentage points if import volumes rose by 40.0 per cent over a
three-year average. However, the G-33 group of countries, led by India and China,
said that this “trigger” was insufficient to ensure that farmers would not be hurt by
sharp increases in subsidized agricultural imports from developed countries. They
proposed that SSM remedies be triggered by increases of at least 10.0 per cent in
import volume over the relevant period, with safeguard duties of 30.0 percentage
points above bound levels.

- 75 - External Sector Developments

 Bank of Jamaica

October 2008 by 13 members of the CARIFORUM

group of countries and the EU40. Under the EPA, all
CARIFORUM exports, with the exception of rice and
sugar, are granted duty-free and quota-free access
to European markets. 41 In exchange, CARIFORUM
countries will liberalize 86.9 per cent of the value of
imports (or 90.2 per cent of currently traded tariff lines)
on a phased basis with a three-year moratorium.
Jamaica, in particular, committed to liberalizing 79.4
per cent of the value of imports or 79.0 per cent of
the tariff lines. In the case of sugar exports to the EU,
the Sugar Protocol will continue to hold.42 However,
the CARIFORUM quota was increased. Quotas for
CARIFORUM rice exporting countries were also
increased until end-2009. Thereafter, rice will be sold
to the EU on a duty-free, quota-free basis.

The EU has also granted market access to more

than 90.0 per cent of its service sectors. In return,
CARIFORUM has committed to liberalizing between
65.0 per cent and 75.0 per cent of its service
sectors.

40 The members who signed on 15 October were: Antigua and Barbuda, Bahamas,
Barbados, Belize, Dominica, the Dominican Republic, Grenada, Jamaica, Saint
Lucia, Saint Vincent and the Grenadines, Saint Kitts and Nevis, Suriname, and
Trinidad and Tobago. Guyana signed on 20 October.

41 The EPA is intended to replace the trade component of the Cotonou Agreement,
which is a preferential, non-reciprocal arrangement governing relations between the
EU and African, Caribbean and Pacific (ACP) countries.

42 Under the EU Sugar Protocol, limited quantities of sugar from CARIFORUM member
countries are granted duty-free access to the EU at guaranteed prices which are
renegotiated annually.

External Sector Developments - 76 -

Annual Report 2008
The International Financial Crisis
The global financial turbulence that had its
origins in the US sub-prime mortgage market
intensified in 2008. This resulted in the collapse
of several financial institutions that encountered
solvency issues arising from asset write-downs
and losses. Consequently, firms were forced
to merge, seek government support or file for
bankruptcy protection. This led to increased
uncertainty about the exposure of financial
institutions to subprime mortgage linked assets,
triggering an extraordinary tightening in global
liquidity conditions and eroding the ability of
some firms to meet their obligations. Additionally,
the losses suffered by many financial institutions
reduced both their ability to lend as well as
the willingness of other institutions to facilitate
counterparty transactions.
The intensification of the international financial
crisis was largely reflected in increased investor
risk aversion, tightening of lending standards by
banks and the erosion of wealth. Notably, the
Dow Jones Industrial Average (DJIA) fell by 33.8
per cent over the year to 8 776.39 points at end-
2008.
The difficulties in the financial markets extended
to the real sector of the advanced economies. For
example, growth in real GDP in the U.S. for the
year slowed to 0.4 per cent, following an annual
average growth of 2.8 per cent for the period 2004-
2007. Economic growth also contracted in the
U.K. and the Euro Area. Developing economies
were also affected through reductions in export
demand by the major developed economies and
- 77 -
reduced access to credit. In emerging Europe,
several economies such as Iceland and Hungary
encountered problems in their banking sectors
due to exposure to the US sub-prime mortgage
market.
In order to address the difficulties in the global
financial system, the central banks in the major
advanced economies embarked on coordinated
interest rate reductions and also injected liquidity
in the financial markets. Deposit insurance
programmes were expanded, while a money
market insurance programme was announced
with a view to stabilising LIBOR rates. In February
2008, the US government approved a US$168.0
billion plan that provided rebate cheques for
American taxpayers. In October, legislation was
also passed to establish a US$700.0 billion fund
to inject capital into adversely affected financial
institutions, as well as to purchase legacy
assets. For the U.K. the government launched
a rescue plan amounting to £521.0 billion,
while the European Commission introduced an
economic recovery plan valued at €200.0 billion.
In addition, a two-year fiscal stimulus package
amounting to 4 trillion Yuan was announced by
the Chinese government during the year.
The Federal Reserve also agreed to provide
US$30.0 billion each in currency swaps to the
central banks of Brazil, Mexico, South Korea
and Singapore, expanding its effort to unfreeze
money markets. The International Monetary Fund
and other multilateral institutions also developed
strategies to respond quickly to urgent requests.
External Sector Developments
 Bank of Jamaica

7.2. Balance of Payments

1.1.1. Overview
Jamaica’s balance of payments (BOP) continued to Within the capital and financial account, net private
deteriorate in 2008, influenced by the impact of a and official investment inflows were not sufficient to
worsening global economic climate on commodity finance the current account deficit. Consequently,
prices, the major foreign exchange earning the NIR of the BOJ declined by US$104.8 million to
sectors and capital inflows into the economy (see US$1 772.9 million as at 31 December 2008, with
International Economic Developments). The gross reserves representing 14.5 weeks of projected
current account deficit is estimated to have widened imports of goods and services.
by US$755.7 million to US$2 793.9 million (20.0
per cent of GDP). An increase in the deficit on the
merchandise trade account was the main factor
influencing the worsening of the current account
over the review period. All of the other sub-accounts
registered improvements, relative to 2007.

Chart 20

External Sector Developments - 78 -

Annual Report 2008

Table 50
SUMMARY OF BALANCE OF PAYMENTS
(US$MN)
  20071/ 20082/ Change
   
CURRENT ACCOUNT -2 038.2 -2 793.9 -755.7
   
A. GOODS BALANCE -3 841.3 -4 802.9 -961.6
Exports (f.o.b.) 2 362.6 2 743.9 381.3
Imports (f.o.b.) 6 203.9 7 546.8 1 342.9
   
B. SERVICES BALANCE 424.8 427.6 2.8
Transportation -5 40.4 -644.9 -104.5
Travel 1 611.9 1 707.4 95.5
Other Services -646.7 -634.9 11.8
   
GOODS & SERVICES BALANCE -3 416.5 -4 375.3 -958.8
   
C. INCOME -661.6 -568.2 93.4
Compensation of employee 64.8 83.7 18.9
Investment income -726.4 -651.9 74.5
   
D. CURRENT TRANSFERS 2 039.9 2 149.6 109.7
General Government 133.0 100.7 -32.3
Other Sectors 1 906.9 2 048.9 142.0
   
2. CAPITAL & FINANCIAL A/C 2 038.2 2 793.9 755.7
   
A. CAPITAL ACCOUNT -35.5 18.1 53.6
General Government 0.7 48.6 47.9
Other Sectors -36.2 -30.5 5.7
   
B. FINANCIAL ACCOUNT 2 073.7 2 775.8 702.1
Official Investment 653.0 518.6 -134.4
Private Investment3/ 980.9 2 152.4 1 171.5
Reserves4/ 439.8 104.8
1/ Revised
2/ Provisional
3/ Includes Errors & Omissions
4/ Minus denotes increase

7.2.1 Merchandise Trade Exports

The deficit on the merchandise trade account
expanded by US$961.6 million in 2008 (see Table
50). This deterioration reflected an increase of 21.6
per cent in the value of imports (f.o.b.), which was
partially offset by an increase of 16.1 per cent in
earnings from exports.
The estimated growth in export earnings resulted
primarily from a 14.9 per cent expansion in earnings
from General Merchandise Exports, which largely
emanated from an expansion in the value of Non-
Traditional Exports. This was supported by increased
earnings from Major Traditional Exports (see Table
51).

- 79 - External Sector Developments

 Bank of Jamaica

Non-Traditional Exports grew by 44.4 per cent to
US$939.6 million in 2008. The increase was due
largely to higher receipts from chemicals and mineral
fuel exports. Increased earnings from these exports
primarily reflected a 37.7 per cent rise in the price
of oil on the international market. The movement
in oil prices resulted from strong global demand for
commodity derivatives over the first half of the fiscal
year (see International Economic Developments).
Total earnings from Major Traditional Exports
increased by 2.3 per cent in 2008 to US$1 449.3
million, largely reflecting growth of 3.0 per cent in
earnings from alumina exports. This was influenced
by an increase of 0.6 per cent in the price of alumina
as well as a 2.4 per cent increase in export volumes.
Partly offsetting the growth in earnings from alumina
was a cessation of earnings from banana exports,
due primarily to the destruction of the crop by Tropical
Storm Gustav.
Other Traditional Exports declined by 4.9 per cent to
US$80.6 million in 2008. This was primarily related
to decreased earnings of 11.6 per cent, 4.4 per
cent and 42.3 per cent from coffee, rum and cocoa
respectively (see Table 51). The declines were
partially offset by growth in earnings from gypsum
which was associated with a 302.4 per cent increase
in the average realised price. Goods Procured in
Ports increased by 47.0 per cent in 2008, driven by
the increase in oil prices, while Free-Zone Exports
increased by 6.7 per cent.

Table 51
TRADITIONAL & NON-TRADITIONAL EXPORTS
(US$MN)
  20071/ 20082/ Change % Change

GENERAL MERCHANDISE EXPORTS 2 202.8 2 531.8 329.0 14.9

DOMESTIC EXPORTS 2 151.9 2 469.5 317.6 14.7
Major Traditional Exports 1 416.4 1 449.3 32.9 2.3
Bauxite 112.9 114.5 1.6 1.4
Alumina 1 194.0 1 230.5 36.5 3.0
Sugar 100.3 104.3 4.0 4.0
Bananas 9.2 0.0 -9.2 -100.0
   
Other Traditional Exports 84.8 80.6 -4.2 -4.9
Citrus 2.2 2.1 -0.1 -4.5
Cocoa 2.6 1.5 -1.1 -42.3
Coffee 31.8 28.1 -3.7 -11.6
Pimento 2.1 2.1 0.0 0.0
Rum 45.7 43.7 -2.0 -4.4
Gypsum 0.4 3.1 2.7 675.0
Non Traditional Exports 650.6 939.6 289.0 44.4
RE-EXPORTS 51.0 62.2 11.2 22.0
FREEZONE EXPORTS 56.5 60.3 3.8 6.7
GOODS PROC. IN PORTS 103.3 151.9 48.6 47.0
GRAND TOTAL 2 362.6 2 743.9 381.3 16.1
1/ Revised
2/ Provisional

External Sector Developments - 80 -

Annual Report 2008

Imports
Total expenditure on imports (c.i.f.) increased by 20.9
per cent to US$8 524.8 million in 2008, relative to
an average annual growth of 14.0 per cent over the
previous 5 years. This expansion was influenced
primarily by General Merchandise Imports, which
reflected robust growth in Mineral Fuels, Food and
Manufactured Goods (see Table 52). The increase
in the values of fuel and food imports reflected the
growth in commodity prices in 2008 (see International
Economic Developments).
Transportation
Net payments for transportation services were
estimated at US$644.9 million in 2008, an increase
of 19.3 per cent, relative to 2007. The widening of
the deficit resulted from an increase of 12.8 per cent
in gross payments, mainly associated with freight
charges on higher volumes of imported goods.
Partly offsetting this expansion was an increase in
gross inflows, which grew by 4.8 per cent. This was
attributed to a rise in stopover visitor arrivals.

Table 52
VALUE OF IMPORTS BY SITC (C.I.F.)
(US$MN)

  20071/ 20082/ Change % Change

GENERAL MERCHANDISE IMPORTS 6 893.9 8 361.0 1 467.1 21.3

0. FOOD 730.7 886.3 155.6 21.3
1. BEVERAGE. & TOBAC. 93.2 93.5 0.3 0.3
2. CRUDE MATS. 67.6 73.4 5.8 8.6
3. MINERAL FUELS 2 429.9 3 354.8 924.9 38.1
4. ANI. & VEG. OIL 31.6 53.9 22.3 70.6
5. CHEMICALS 849.0 951.0 102.0 12.0
6. MANUF. GOODS 753.4 883.6 130.2 17.3
7. MACH. & TRANSP. 1 252.4 1 264.3 11.9 0.9
8. MISC. MANUF. GOODS 591.2 682.0 90.8 15.4
9. MISC. COMMDS. 95.1 118.3 23.2 24.4
FREEZONE 18.5 20.3 1.8 9.7
GOODS PROC. IN PORTS 137.0 143.5 6.5 4.7
GRAND TOTAL 7 049.4 8 524.8 1 475.4 20.9
1/ Revised
2/ Provisional

7.2.3 Services Travel

Net earnings from Services increased by 0.7 per cent
to US$427.6 million in 2008, influenced primarily by
an increase in the net surplus on Travel, as well as a
reduction in the deficit on Other Services (see Table
50). There was a partial offsetting increase in the
deficit on Transportation.
The surplus on Travel increased by 5.9 per cent to
US$1 707.4 million (12.2 per cent of GDP). This
growth was partly attributed to an estimated increase
in the average daily expenditure of stop-over visitors
as well as a decline of US$18.4 million (7.7 per

- 81 - External Sector Developments

 Bank of Jamaica

cent) in the total expenditure of Jamaicans travelling growth in the review year resulted from increased
overseas. Gross earnings from visitor expenditure promotional activities by the Jamaica Tourist Board
were estimated to have increased by 6.4 per cent to (JTB) and was accommodated by an expansion in
US$1 975.5 million (14.1 per cent of GDP) in 2008. room capacity during the review period. All regions of
the US market recorded increases.
Accounting for the increase in earnings were
respective expansions of 4.3 per cent and 3.9 per There was a strong expansion of 23.9 per cent in
cent in the average daily expenditure and number of arrivals from Canada, largely attributed to a higher
arrivals of stopover visitors. Earnings from tourism purchasing power of visitors, associated with the
were, however, negatively affected by a 3.1 per cent appreciation of the Canadian dollar vis-à-vis the US
decline in the average length of stay of visitors and a dollar during the review period. The growth in arrivals
7.7 per cent contraction in cruise visitor arrivals (see from Canada also reflected the strengthening of the
Table 53). economy in the context of the increases in oil prices
on the international market. Arrivals from the United
The growth in stopover arrivals was primarily
Kingdom (U.K.), Jamaica’s second largest source
influenced by an expansion in visitors from Canada
market, grew by 1.5 per cent. This growth was
and the USA. All other major source markets, in
related to the introduction of new airlift, as well as an
particular Europe (excluding the United Kingdom)
increase in JTB’s promotional campaigns throughout
recorded declines in arrival, reflecting the impact of
the U.K.
the global economic crisis. Stopover arrivals from the
USA, the largest source market, increased by 1.6 per Overall, there was a 1.5 per cent decline in visitor
cent in 2008, a deceleration, relative to the 4.3 per arrivals from the European market, which stemmed
cent growth recorded from this source in 2007. The from contractions in all regions except the Central/
Eastern region.

Table 53
VISITOR ARRIVAL STATISTICS
  2007 1/ 2008 2/ % Change
   
Total Stopovers 1 700.8 1 767.3 3.9
Foreign National Stopovers 1 573.3 1 623.7 3.2
Non-resident Jamaican Stopovers 127.5 143.6 12.6
   
Cruise Passengers & Armed Forces 1 179.5 1 088.9 -7.7
   
Total Visitors 2 880.3 2 856.2 -0.8
   
Gross Estimated Expenditure (US$MN) 1 856.7 1 975.5 6.3
1/
Revised
2/
Provisional

External Sector Developments - 82 -

Annual Report 2008

The cruise passenger industry in 2008 was affected
by the decision of some of the major cruise lines to
re-route their itineraries to Alaska, Europe and Asia.
In this context, a 7.7 per cent decline was recorded
in the number of cruise passengers calling at the
Island’s ports during the year, continuing the trend
since 2007. This outturn reflected respective declines
of 15.0 per cent and 1.3 per cent in the number of
cruise ship calls at the Ocho Rios and Montego Bay
ports. During the year, six calls to Ocho Rios and
two to Montego Bay were cancelled due to adverse
weather conditions.
Growth in stopover arrivals to Jamaica outperformed
the average for the Caribbean during the period
January to October, 2008 (see Table 54). With regard
to cruise passenger arrivals, however, Jamaica
lagged slightly behind the average for the region (see
Table 55).

Table 54
STOPOVER VISITOR ARRIVALS
(SELECTED CARIBBEAN COUNTRIES)
  %
  2007 2008 Change
Antigua & Barbuda 261.8 265.6 1.5
Bahamas 1 519.8 1 479.1 -2.7
Barbados 574.5 563.1 -2.0
Cayman Islands 291.5 302.9 3.9
Cuba 2 152.2 2 348.3 9.1
Dominican Republic 3 979.6 3 979.7 0.0
Jamaica 1 700.8 1 767.3 3.9
Martinique 503.1 480.2 -4.6
St Lucia 287.4 295.8 2.9
Total 11 270.7 11 481.9 1.9
Source: Caribbean Tourism Organization
*Preliminary

Table 55
CRUISE VISITOR ARRIVALS
(SELECTED CARIBBEAN COUNTRIES)
  %
  2007 2008* Change
Antigua & Barbuda 672.8 580.9 -13.7
Bahamas 2 970.7 2 799.8 -5.7
Barbados 616.4 570.8 -7.4
Cayman Islands 1 715.7 1 553.1 -9.5
Dominican Republic 384.9 417.7 8.5
Jamaica 1 179.5 1 088.9 -7.7
St Lucia 610.2 619.7 1.6
St. Maarten 1 421.9 1 307.9 -8.0
Total 9 572.0 8 938.7 -6.6
Source: Caribbean Tourism Organization
*Preliminary

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 Bank of Jamaica

Table 56
CURRENT TRANSFERS
(US$MN)
  20071/ 20082/ Change % Change
TOTAL RECEIPTS 2 385.6 2 488.5 102.9 4.3
General Government 141.2 107.2 -34.0 -24.1
Private Sector 2 244.4 2 381.3 1 36.9 6.1
 
TOTAL PAYMENTS 345.8 339.0 -6.8 -2.0
General Government 8.3 6.5 -1.8 -21.7
Private Sector 337.5 332.5 -5.0 -1.5

NET CURRENT TRANSFERS 2 039.8 2 149.5 109.7 5.4

1/ Revised
2/ Estimates

Other Services 7.2.5 Current Transfers

The deficit on Other Services narrowed by 1.8 per cent The surplus on Current Transfers increased by
to US$634.9 million in 2008, principally influenced 5.4 per cent to US$2 149.5 million in 2008, a
by a reduction of US$10.7 million in outflows.43 The deceleration, relative to the 16.7 per cent expansion
estimated contraction in outflows mainly reflected recorded in 2007 (see Table 56). This resulted from a
a US$30.1 million decline in payments for other reduction in the growth of gross private inflows to 6.1
business services. Increases of US$14.4 million per cent, relative to an expansion of 15.9 per cent in
and US$6.7 million in payments for insurance and 2007. This slowdown in growth was associated with
Government services partly offset this contraction. weaker economic expansion in the major developed
economies, particularly in the USA. Partly offsetting
7.2.4 Income this deceleration was a decline of 24.1 per cent
The deficit on the Income account narrowed by 14.1 in gross official inflows, due primarily to the non-
per cent to US$568.3 million in 2008. This lower repetition of grant flows associated with hurricane
deficit largely reflected a contraction of US$156.4 relief in 2007. Gross private outflows grew by 1.5 per
million in the imputed profit remittances of the cent in 2008 when compared with 2007.
direct investment companies due to the downturn
in the bauxite/alumina sector in the review period, Remittance companies continued to be the major
particularly during the second half of 2008. However, channel for private transfers in 2008, accounting for
this was partially offset by a contraction of US$60.8 51.9 per cent of total inflows, relative to 59.4 per cent
million in BOJ’s interest income from its foreign in 2007. The share of inflows through the financial
assets, as well as higher official interest payments of system declined to 33.0 per cent in 2008 from 35.5
US$18.6 million (see Table 50). per cent the previous year.
43 Other services include communication, computer & information,
other business and Government services.

External Sector Developments - 84 -

Annual Report 2008

Table 57
FOREIGN EXCHANGE RESERVES
(US$MN)
AS AT 31 DECEMBER
  20071/ 20082/ Change
GROSS FOREIGN ASSETS 1 905.7 1 795.1 -110.6
Bank of Jamaica 1898.2 1 787.5 -110.7
Central Government 0.6 0.7 0.1
Other Official Institutions 6.9 6.9 0.0
GROSS FOREIGN LIABILITIES 28.1 22.5 -5.6
NET INTERNATIONAL RESERVES 1 877.6 1 772.6 -105.0
Weeks of estimated imports of goods and services 10.0 14.5 4.5
1/ Revised
2/ Provisional

7.2.6 Capital and Financial Account Net Official Investment Inflows declined by US$134.4
The capital account recorded a surplus of US$18.1 million in 2008, reflecting a reduction of US$185.8
million in 2008, relative to a deficit of US$35.5 million in gross official receipts (see Table 58).
million in 2007. The surplus on the financial account The decline in gross official investment inflows
increased by US$702.1 million to US$2 775.8 million reflected a reduction in Government debt raising
(see Table 50). Within the financial account, net on the international bond market. Gross official
private and official investment inflows of US$2 671.0 inflows included proceeds from a Eurobond issue
million were not sufficient to finance the deficit on
of US$350 million in June 2008. Total outflows for
the current account. As a result, the NIR declined by
the year amounted to US$797.2 million or US$51.4
US$104.8 million. Similarly, there was a decrease in
million lower than the outturn for 2007. This reflected
official gross foreign assets to US$1 795.1 million
a reduction in GOJ debt payments, which was
as at end-December 2008, representing 14.5 weeks
supported by lower outflows from the Bank.
of projected imports of goods and services (see
Table 57).
Table 58
OFFICIAL INVESTMENT FLOWS
(US$MN)
  20071/ 20082/ Change
GROSS OFFICIAL INFLOWS 1 501.6 1 315.8 -185.8
Project Loan 90.2 212.2 122.0
Other Assistance 1 411.4 1 103.6 -307.8
 
GROSS OFFICIAL OUTFLOWS 848.6 797.2 -51.4
Government Direct 484.9 369.9 -115.0
Bank of Jamaica 262.3 225.5 -36.8
 Other Official 101.4 201.7 100.3
NET OFFICIAL INVESTMENTS 653.0 518.6 -134.4
1/ Revised
2/ Provisional

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 Bank of Jamaica

7.3. Foreign Exchange Management
7.3.1. Bank of Jamaica International Reserves
The net international reserves (NIR) of the BOJ
amounted to US$1 772.9 million at end-December
2008, a decline of US$104.8 million compared to
the stock at end-December 2007 (see Table 59).
The decline in the NIR was largely attributed to net
payments of GOJ external obligations, as well as the
impact of foreign currency loans under the special
facility to financial institutions.
The gross foreign assets (GFA) of the Bank amounted
to US$1 795.4 million as at end- 2008, US$110.4
million lower than the stock at end-2007 (see Table
59 and Table 60). The lower stock, relative to
2007, primarily resulted from net payments of GOJ
obligations and outflows relating to the provision of
loans to financial institutions to refinance margin
arrangements.
Total foreign liabilities declined by US$5.6 million to
US$22.5 million at the end of 2008 (see Table 59).
Notably, the Bank’s foreign liabilities increased in
the June quarter, consequent on the receipt of GOJ
Eurobond proceeds of US$340.9 million. These
funds were held on deposit with the Central Bank
and utilized to settle GOJ external debt obligations
during the year.

Table 59

BANK OF JAMAICA
NET INTERNATIONAL RESERVES (NIR)
(End of Period)
US$MN
Annual
  2007   2008  
Change
  Dec.   Mar.   June   Sept.   Dec.   ($)
                       
NIR 1 877.7   2 083.4   2 228.8   2 251.1   1 772.9   -104.8
                       
Gross Foreign Assets 1 905.8   2 105.9   2 476.8   2 280.5   1 795.4   -110.4
                       
Foreign Liabilities 28.1   22.5   248.0   29.4   22.5   -5.6

External Sector Developments - 86 -

Annual Report 2008

Table 60
BANK OF JAMAICA
GROSS FOREIGN ASSETS
as at end-December 2008  
US$MN
         
  Opening Gross Foreign Assets (GFA) 1 905.8    
  Inflows 2 346.2    
  Outflows (2 460.0)    
/1 Adjustment to GFA 3.4    
  Closing Gross Foreign Assets 1 795.4    
         
         
  /1 - Unrealized gain on foreign currencies and other investments.  

         
Foreign Exchange Inflows and Outflows Total GOJ foreign currency receipts amounted to
US$711.5 million during 2008, reflecting a marginal
Inflows
increase compared to 2007 (see Table 61). A
During 2008, foreign exchange inflows to the Bank
significant portion of these inflows occurred in
totalled US$2 346.2 million, reflecting an increase of
the second quarter, consequent on the receipt of
US$378.9 million, relative to 2007. Consistent with
proceeds of US$340.9 million relating to the Eurobond
historical trends, the main sources of inflows were
issued by the Government in June. In addition, GOJ
purchases from the market as well as from the GOJ.
foreign currency inflows during the year included
Together, they accounted for 76.8 per cent of total
US$90.0 million in budgetary support from the Inter
inflows during 2008 (see Table 61).
American Development Bank (IADB) and US$63.7
Purchases from the market totalled US$1 090.5 million from the sale of a portion of the GOJ shares
million, an increase of US$219.0 million relative to in the Petroleum Corporation of Jamaica. Purchases
2007. Of this amount, market surrenders totalled from the bauxite sector declined by 28.4 per cent to
US$519.6 million. Other purchases from the US$169.5 million in 2008.
market amounted to US$570.9 million, an increase
of US$181.2 million. These receipts represented
approximately 52.0 per cent of total market purchases,
and were largely influenced by flows from the sale of
a local rum manufacturing company to a Trinidadian
firm. Under the surrender arrangement a total of
US$519.6 million was purchased.44
44 Under the surrender arrangement, authorized dealers and cambios
agree to sell to the BOJ a minimum of 5% of their purchases from
their clients.

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 Bank of Jamaica

Table 61          

INFLOWS OF FOREIGN EXCHANGE

US$MN 
       
  Inflows   Change  
  2007 2008   ($)  
           
Bauxite Receipts 236.6 169.5   -67.1  
           
Market Purchases 871.5 1 090.5   219.0  
           
Surrenders to BOJ          
- Authorised Dealers 337.5 355.9   18.4  
           
- Cambios 144.3 163.7   19.4  
           
Other purchases (net) 389.7 570.9   181.2  
           
GOJ Foreign Currency Receipts 707.5 711.5   4.0  
           
- Eurobond 492.0 340.9   -151.1  
           
- IDB 0.0 90.0   90.0  
           
- Local US$ bond 0.0 55.8   55.8  
           
- Divestment 0.0 63.7   63.7  
           
- Other GOJ 205.4 137.2   -68.2  
of which Air Jamaica 122.9     -122.9  
of which Universal Access Fund   50.4   50.4  
           
- Grants 10.1 23.9   13.8  
           
Investment Income 120.7 57.7  
-63.0  
       
   
USD Credit Facility -Deposits 0.0 143.6  
143.6  
       
   
USD Credit Facility - Repo 0.0 124.0  
124.0  
     
   
USD Credit Facility - Repayment
of Loan (Margin Calls) 0.0 12.0  
12.0  
31.0 37.4  
6.4  
Other Receipts*
Total Cash Inflows 1 967.3 2 346.2   378.9  
* - includes net prudential reserve inflows and funds lodged to sundry GOJ accounts at the BOJ.

External Sector Developments - 88 -

Annual Report 2008

Outflows
Foreign currency outflows from the Bank declined by
US$29.0 million in 2008 to US$2 460.0 million. The
lower outflows in 2008 reflected a US$411.2 million
fall to US917.8 million in the Bank’s intervention
sales to the foreign exchange market (see Table 62).
Notably, foreign currency outflows were lower, despite
the provision of approximately US$168.8 million to
financial institutions, under a Special Loan Facility in
foreign currency, to liquidate margin arrangements
with overseas brokers (see The Foreign Exchange
Market). Foreign currency payments by the Bank
in respect of GOJ debt obligations amounted to
US$1 049.1 million, US$35.4 million higher than
the payments in 2007 (see Table 62). Principal
payments, which included amortization of a regional
bond valued at US$50.0 million, declined during the
year while interest payments increased by US$84.6
million, relative to 2007.

Table 62      
OUTFLOWS OF FOREIGN EXCHANGE
US$MN
     
  Outflows  
  2007 2008 ($)
       
Public Debt 1 013.8 1 049.1 35.3
- Principal 521.2 471.9 -49.3
- Interest 492.6 577.2 84.6
       
Other GOJ Payments 116.6 129.7 13.1
       
Market Sales 1 329.0 917.8 -411.2
       
USD Credit Facility -Repayment 0.0 24.7 24.7
of Deposits      
USD Credit Facility - Repo 0.0 123.9 123.9
USD Credit Facility      
Margin Calls 0.0 168.8 168.8
Other Payments* 29.6 46.0 16.4
Total Cash Outflow 2 489.0 2 460.0 -29.0
       
*- Includes Central Bank payments for notes and coins.    

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 Bank of Jamaica

7.3.2. Reserve Management
7.3.2.1. The Foreign Investment Environment in
2008
During 2008, the escalating challenges of the
global financial crisis influenced the central banks
of the major industrialized countries to provide
unprecedented levels of financial support to their
worst affected institutions, particularly those in the
USA. The central banks also reduced lending rates
and provided credit facilities to leading domestic
financial institutions in an effort to unlock the tight
credit markets. The deteriorating condition of the
global capital markets restricted access of developing
and emerging economies to the international capital
markets as investors sought safer havens.
7.3.2.2. Bank of Jamaica’s Response to the
Financial Crisis
The Bank’s investment strategy in 2008 was
informed by the escalation of the global financial
crisis, reflected in illiquid credit markets and
increased risk aversion. As both the impact of the
credit crunch and increasing losses in asset values
of marquee financial institutions escalated, the Bank
implemented an intensified system to continuously
monitor the financial condition of its counterparties as
a critical element of risk mitigation. Simultaneously, a
Table 63
DISTRIBUTION OF INVESTMENTS BY ASSET CLASS
AT 31 DECEMBER
Assets
  US$mn
Money Market Investments
programme was put in place to reduce the level of
term deposits with counterparties by not renewing
maturing investments. The severity of the economic
crisis, and by extension, the liquidity crunch, dictated
that a high level of liquidity be maintained throughout
the year. This strategy was particularly important
during the last quarter of the year when the Bank
was called upon to supplement the supply of foreign
currency in the domestic market.
7.3.2.3. Portfolio Distribution
The Bank maintained the bias in its portfolio toward
US dollar dominated investments throughout the year.
However, there was a marked change in distribution
between classes of assets (see Table 63). The
switch from bonds to money market instruments
was engendered by calls on the bond portfolio as
interest rates declined. Within the money market
class of assets, there was a marked switching of
term deposits with counterparties to deposits with the
Federal Reserve (Fed) and the Bank of International
Settlements (BIS). This switch was a part of the
risk mitigation strategy employed as maturing
deposits were placed with these institutions instead
of designated commercial banks. At 31 December
2008, US$692.0 million of term deposits was held
with the Fed and the BIS compared to US$466.0
million at the end of 2007.
2007 2008
% US$mn %
985.58 51.71 1 096.64 61.08

Bond Holdings 794.42 41.68 565.21 31.48

External Fund 125.84 6.60 133.59 7.44

TOTAL 1 905.84 100.00 1 795.44 100.00

External Sector Developments - 90 -

Annual Report 2008

7.3.2.4. Portfolio Performance A return of 3.32 per cent per annum on investment
The returns on foreign investments for 2008 amounted was achieved in 2008 compared to a return of 5.81
to US$67.8 million, US$60.8 million (47.3 per cent) per cent per annum in 2007. Income from money
less than the amount earned in 2007 (see Table market investments, which contributed 47.1 per
64). The main factor responsible for the decreased cent of total income for the period, was driven by
earnings was the reduction in interest rates across investments in Eurodollar deposits and repurchase
the spectrum of instruments in the portfolio. The agreements.
reduction in yields was due primarily to cuts in the
Fed Funds overnight rate which declined by 425
basis points during the year. An additional factor
was the reduction in the percentage of the portfolio
invested in bonds which offered higher yields.

Table 64
FOREIGN INVESTMENT INCOME
FOR THE YEAR ENDED 31 DECEMBER
2007 2008
Assets
US$mn % of Earnings US$mn % of Earnings

Money Market Investments 67.88 52.78 31.92 47.07

Bond Holdings 55.46 43.13 31.80 46.90
External Fund 5.26 4.09 4.09 6.03
Total 128.60 100.00 67.81 100.00
Average Income earning Assets 2 271.00 2 041.00
Rate of Return (%) 5.81 3.32

- 91 - External Sector Developments


7.3.3. The Foreign Exchange Market
The foreign exchange market was generally stable
in the first three quarters of 2008, underpinned by
improved flows to the market. At the end of the third
quarter there was an emergence of strong demand
pressures, largely due to the generally tight conditions
in the international financial market. Against this
background, the Jamaica Dollar depreciated by 12.2
per cent vis-à-vis its US counterpart during 2008,
compared to a depreciation of 4.9 per cent in 2007.
During 2008, total reported purchases and sales
by institutions increased by 4.9 per cent and 6.5
per cent, respectively. Daily purchase and sales
volumes (excluding intervention) each averaged
US$47.8 million compared to US$43.7 million
and US$43.0 million, respectively for 2007 (see
Table 66). Authorized dealers increased their market
share by 1.4 percentage points during the year,
accounting for 70.1 per cent of total foreign exchange
sales, with cambios accounting for 29.9 per cent.
Despite the sharp depreciation in the WASR,
the average trading spread remained at 0.4 per
cent in 2008. This outturn occurred in a context
of extraordinary inflows to the market prior to the
December quarter, as well as a slowdown in the pace
of growth in sales vis-à-vis purchase volumes in the
second half of the year.
During the first half of the year, the foreign exchange
market benefited from capital flows associated with
the takeover of a local manufacturing firm (Lascelles
DeMercado Limited) by an overseas entity (Angostura
Holdings Limited). The US dollar flows from this
takeover contributed significantly to an increase in
the average daily inflow to US$29.2 million during the
External Sector Developments
Bank of Jamaica
first half of 2008 compared to US$23.5 million in the
corresponding period of 2007. As a consequence,
the Jamaica Dollar depreciated by 1.8 per cent
against its US counterpart, slower than the 2.1 per
cent for the corresponding period of 2007. Similarly,
intervention sales by the BOJ to address bouts of
market instability amounted to US$225.5 million
during the first half of 2008, lower than the US$641.3
million for the corresponding period of 2007.
Favourable market conditions continued into the
September 2008 quarter, as supply conditions
were positively impacted by the second tranche of
US-dollar proceeds from the takeover of Lascelles
DeMercado Limited. Simultaneously, demand for
foreign exchange was tempered in the context of a
widening of the interest differential between Jamaica
Dollar and US dollar assets, particularly over the
first two months of the quarter. However, the last
two weeks of the quarter was characterized by
heightened demand pressures, given the escalation
of the tightened international credit market conditions
following the collapse of a major US investment
bank (Lehman Brothers) on 15 September 2008.
Notwithstanding, given the favourable supply
conditions in the earlier part of the quarter, the pace
of depreciation of the Jamaica Dollar slowed to 1.1
per cent for the September 2008 quarter, similar to
that for the June 2008 quarter and 2.6 per cent for
the September 2007 quarter.
The significant demand pressures that emerged
towards the end of the September quarter continued
into the December quarter, largely reflecting the
impact of the response of local financial institutions
to the general tightening of credit conditions in
international financial markets. This was fuelled by
- 92 -
Annual Report 2008

negative international investor sentiment toward responses by the BOJ. They included:
emerging market debt, including those for Jamaica
sovereigns. This was reflected in downgrades in • a special US dollar credit facility to assist
emerging market bonds. Consequently, there was financial institutions in their efforts to meet
a sharp slippage in GOJ global bond prices which overseas credit obligations;
led to calls by international investment banks for • intervention sales totalling US$431.2
increased collateral for loans that were backed by million compared to US$260.1 million in the
these securities (margin calls) and the non-renewal September 2008 quarter and US$281.4 million
of US dollar repurchase agreements. Additionally, in the December 2007 quarter;
access to international credit lines was reduced. • the offer of a Special 14-day CD fixed at 20.5
These developments forced a number of local per cent per annum;
institutions to aggressively source US dollars in the • increases in interest rates on all BOJ OMO
foreign exchange market. instruments on two occasions;
• a facility to intermediate in financial institutions
Market inflows were also negatively affected by the repo trades for both Jamaica Dollar and US
decline in receipts from tourism and remittances, dollar transactions;
consequent on the deterioration in the global • an increase in the cash reserve requirement
economy. During the December 2008 quarter, daily for deposit-taking institutions to 11.0 per cent
foreign currency flows averaged US$25.6 million from 9.0 per cent effective 03 December.
compared to US$27.0 million in the September 2008
quarter and US$26.1 million in the December quarter Notwithstanding these actions, the Jamaica
of 2007. Dollar depreciated by 9.7 per cent during the
December quarter compared 0.3 per cent during the
The foregoing conditions prompted several policy corresponding quarter of 2007.

Table 65

PURCHASES AND SALES OF FOREIGN EXCHANGE

(US$MN)
Quarter Purchases Sales
  2007 2008 2007 2008
March 3 076.8 3 127.5 3 030.9 3 157.0
June 3 046.0 3 209.6 3 005.0 3 258.6
September 3 044.8 3 278.8 2 988.8 3 239.1
December 3 042.6 3 197.3 3 002.9 3 157.0
TOTAL 12 201.2 12 813.2 12 027.6 12 811.7

Includes BOJ Intervention        

- 93 - External Sector Developments

 Bank of Jamaica

Table 66

DAILY AVERAGE TRADING VOLUMES

(US$MN)
2008
Purchases Sales
Quarter from Earners Inter-Dealer Total to End-Users Inter-Dealer Total
March 34.1 15.7 49.9 34.5 15.8 50.4
June 31.7 16.2 47.9 32.5 16.2 48.7
September 31.4 17.4 48.8 30.5 17.6 48.2
December 28.7 15.8 44.5 27.9 16.0 43.9
Average per diem 31.5 16.3 47.8 31.4 16.4 47.8
             
2007
Quarter from Earners Inter-Dealer Total to End-Users Inter-Dealer Total
March 26.5 16.5 43.0 25.9 16.4 42.3
June 27.9 16.8 44.7 27.2 16.9 44.0
September 28.6 14.7 43.3 27.6 14.8 42.3
December 30.3 13.6 43.8 29.4 13.8 43.2
Average per diem 28.3 15.4 43.7 27.5 15.5 43.0
             
Excludes BOJ Intervention  
         

External Sector Developments - 94 -

 8. Production and Prices

8. Production and Prices
8.1. Production
8.1.1. Overview
The Jamaican economy contracted by 0.9 per cent
in 2008, relative to growth of 1.5 per cent in 2007
and average annual growth of 2.0 per cent since
2003 (see Chart 21). The contraction was primarily
attributed to the general slowdown in external and
domestic demand as a result of the global financial
crisis. To a lesser extent, the reduction in growth was
partly due to the passage of Tropical Storm Gustav.
Weak domestic demand emanated from heightened
economic uncertainty, decline in real income and
slower remittance inflows consequent on reduced
income in Jamaica’s source countries. Agriculture,
Forestry & Fishing, Manufacture, Construction
and Transport, Storage & Communication were
the main industries that contracted. Partly offsetting
the impact of the contraction was growth in Finance
& Insurance Services, Real Estate, Renting &
Business Activities and Hotels & Restaurants45
(see Table 67).

Chart 21

GDP Growth
4
3.5
3.5
3 2.7
2.5
2
1.3 1.4 1.5
1.5 1.0
0.9 1.0
%

1
0.5
-0.9
0
-0.5
-1 2000 2001 2002 2003 2004 2005 2006 2007 2008
-1.5
Year

45 The industries used in the national accounts have been reclassified

in line with the revised Jamaica Industrial Classification 2005 (JIC
2005) which is a local adoption of the United Nations International
Standard for Industrial Classification of all Economic Activities (ISIC
Rev3.)

- 95 -
 Bank of Jamaica

Table 67
INDUSTRIAL CONTRIBUTION TO GDP GROWTH (%)
Contribution
Sectors Jan –Dec 2008
(2008)
1. GOODS -4.0 111.4
AGRICULTURE, FORESTRY & FISHING -5.2 32.6
MINING & QUARRYING -2.5 10.6
MANUFACTURE -1.4 14.3
CONSTRUCTION -6.7 54.5
 
2. SERVICES 0.1 -7.9
Electricity & Water 0.9 -3.2
Wholesale and Retail Trade, Repairs & Installation Machinery -0.2 3.3
Hotels & Restaurants 2.2 -11.2
Transport, Storage & Communication -2.3 28.3
Financing & Insurance Services 0.8 -9.6
Real Estate, Renting & Business Activities 1.2 -12.5
Producers of Government Services -0.1 0.9
Other Services 0.5 -3.2

3. Financial Intermediation Services Indirectly Measured (FISIM) -0.6 3.5

 
TOTAL GDP -0.9 100.0
Source: STATIN

Revisions to GDP Sectoral Developments

Jamaica’s current price Gross Domestic Product
(GDP) estimates for the period 1998 to 2007 were
revised upwards during 2008 by an average of 14.4
per cent, relative to the estimates based on the 1968
SNA. Real growth in the economy over the period
was also revised upwards, albeit marginally. There
were revisions to the methodology and classification
schemes in Jamaica’s System of National Accounts
(SNA). The revisions to the estimates have noteworthy
implications for Jamaica’s macroeconomic indicators.  well as the prolonged heavy rains in October 2007.
In this regard, for example, the country’s average
debt stock as a percentage of GDP for the period
2003 to 2007 was revised down by 18.3 percentage
points, relative to the previous average.
Agriculture, Forestry & Fishing contracted by 5.2
per cent in 2008, following a decline of 5.8 per cent in
the previous year. This contraction reflected declines
in both domestic and export agriculture.
Domestic crop production decelerated to 6.4 per
cent in 2008, following a contraction of 8.7 per cent
in 2007. The reduction in output continued to reflect
the lagged adverse impact of Hurricane Dean as
Output in the March 2008 quarter was also affected
by dry spells in key agricultural parishes as well as
a cutback in the use of fertilizer due to the spiralling
cost, which led to a reduction in crop establishment
and yield. Consequently, domestic crop production
recorded a decline of 16.6 per cent in the first half
of 2008, relative to growth of 4.9 per cent for the
corresponding period in 2007. During the September

Production and Prices - 96 -

Annual Report 2008

2008 quarter, production was negatively affected of Hurricane Dean which was exacerbated by the
by the passage of Tropical Storm Gustav which passage of Tropical Storm Gustav in the second half
dampened the recovery process in the industry. In of the year.
the last quarter, there was partial recovery in output
levels for all crop groups. This growth was facilitated, Tropical Storm Gustav destroyed approximately 79.0
in part by the support received from the Ministry of per cent of the banana crop, 6.0 per cent of coffee
Agriculture in the form of technical guidance and and 6.0 per cent of sugar cane production47. In this
the provision of lower cost fertilizer. Additionally, the context, the export of banana and cocoa declined by
recovery process was enhanced by the Ministry of 99.8 per cent, and 21.8 per cent, respectively, while
Agriculture’s continued efforts to boost productivity sugar-cane production fell by 9.8 per cent. Citrus and
in the industry through various programmes46. The pimento sustained minimal damage from Tropical
recovery in the last quarter, however, was not strong Storm Gustav and recorded respective growth of
enough to offset the earlier declines and all categories 41.6 per cent and 89.3 per cent in exports due to
of domestic crop production, with the exception of recoveries in these industries (see Table 69).
fruits and cereals declined in 2008 (see Table 68).
Table 69
Table 68 SELECTED AGRICULTURAL EXPORTS

SELECTED DOMESTIC CROP PRODUCTION

Crop 2007 2008 % Change
Exports (‘000 tonnes)
Production (‘000 tonnes)
Crop Group Banana 17.5 0.04 -99.8
2007 2008 % Change
Citrus 4.1 5.7 41.6
Yams 113.1 101.9 -9.9
Cocoa 0.7 0.5 -21.8
Vegetables 149.2 144.6 -3.1
Coffee 1.1 1.4 30.5
Other tubers 35.8 31.9 -11.1
Pimento 0.52 0.97 89.3
Fruits 39.6 42.3 6.7
Condiments 28.9 26.3 -9.0 Production (000’ tonnes)
Plantains 19.1 15.0 -21.2 Sugar cane 153.3 138.2 -9.8
Potatoes 33.5 30.7 -8.4 Sources: Bank of Jamaica Estimates & Sugar Corporation of
Legumes 5.6 4.6 -17.9 Jamaica 
Cereals 1.7 1.9 13.4
Total 427.3 400.1 -6.4
Source: Ministry of Agriculture
Manufacture declined by 1.4 per cent during the
review year, following average contraction of 1.0
Traditional Export Agriculture declined by 11.8 per per cent between 2003 and 2007. This performance
cent in 2008, much sharper than the contraction of was attributed primarily to the declines in both Other
2.8 per cent in 2007. Output for the year reflected Manufacturing and Food & Beverages.
three consecutive quarters of declines with a partial
recovery in the December quarter. Value-added in The decline in Other Manufacturing was attributed
the sector continued to reflect the adverse impact mainly to decreases in Non-Metallic Mineral
46 The Ministry has been engaged in a restructuring exercise to im- Products, Chemical Products and Metal Products.
prove its service quality through its various agencies. Focus has
been placed on extension services, research, marketing, business 47 The impact of Tropical Storm Gustav resulted in negligible exports
facilitation and farmer training as well as counseling in best prac- of 39 tonnes of bananas, relative to an average of 26,000 metric
tices and modern technology. tonnes over the last five years.

- 97 - Production and Prices

 Bank of Jamaica

The performance of the non-metallic mineral sub-
sector reflected a decrease of 5.1 per cent in cement
production, arising from lower demand by the
domestic construction industry as well as increased
competition from imported cement. The contraction
in the chemical sub-sector partly reflected a fallout
of 35.9 per cent in fertilizer production as a result
of decreased demand due to high prices in the first
half of the review period as well as Government’s
decision to directly import fertilizer in the last quarter
of the year.
per cent in 2008, reversing the trend annual average
growth of 4.7 per cent from 2003 to 2007. The
contraction in the industry emanated from declines
in private sector investment projects, public sector
capital projects and residential construction. The
performance of the industry was partly inferred from
a decline of 7.8 per cent in cement sales in the year.
Lower residential construction was indicated by
declines of 58.6 per cent and 17.3 per cent in the
National Housing Trust housing completions and
starts, respectively, for 2008.

A decline of 1.5 per cent was recorded in Food & Following a contraction of 2.6 per cent in 2007,
Beverages. This decline was associated with a Mining & Quarrying is estimated to have declined
contraction in the beverage sub-sector as food by 2.5 per cent during the review year. The decline
processing expanded. The contraction in the in 2008 was in comparison to an average annual
beverage sub-sector was attributed, in part, to growth of 1.7 per cent from 2003 to 2007. In the first
downtime at one of the carbonated beverage plants half of the year the impact of Island-wide electrical
to facilitate expansion as well as reduced consumer outages as well as mechanical problems at one of
demand. The improvement in food processing the alumina companies affected output. Following
reflected increased output of animal feeds, edible this, the demand for aluminium on the world market
fats and flour (see Table 70). declined significantly in the third quarter as end-use
markets, such as the construction and automotive
Table 70 industries, contracted as a result of the world-wide
SELECTED FOOD PROCESSING ITEMS slowdown in economic growth. The mining industry
Production (‘000 tonnes) was also faced with increased production costs
Item 2007 2008 % Change which negatively affected its profitability. Energy is
Poultry Meat 106.6 106.3 -0.3 the major component in the production of alumina.
Edible Oils 21.3 20.6 -3.1 Its high prices in 2008 contributed to the increased
Edible Fats 76.8 79.7 3.8 production costs of that commodity. During the
Cornmeal 10.7 7.0 -34.9
year, the capacity utilisation rate for the alumina
Condensed Milk 13.3 13.2 -0.1
industry declined marginally to 87.8 per cent from
Flour 124.9 132.4 6.0
88.3 per cent during 2007. This was in comparison
Animal Feeds 377.0 390.9 3.7
to average annual capacity utilisation rate of 93.7
Sugar 163.0 140.6 -13.7
Source: Planning Institute of Jamaica per cent for the alumina industry from 2003 to 2007.
Additionally, significant declines were reflected in
Economic activity in Construction declined by 6.7 Quarrying (including Gypsum) which was severely

Production and Prices - 98 -

Annual Report 2008

affected by inclement weather and damage to major Travel Initiative48 that commenced in the March 2007
infrastructure. quarter, as well as the aggressive advertisements in
Europe and the United States by the Government
There was a marginal expansion of 0.9 per cent in and key industry players. The second half of the
Electricity & Water, which was below the industry’s year was characterized by the intensification of the
five year average growth of 2.5 per cent. A contraction global recession and the consequent weakening of
of 1.6 per cent was observed in the first half of the global demand for vacations. In this context, total
year, followed by growth of 3.5 per cent in the second stopover arrivals grew by 8.4 per cent in the first half
half. During the first half of the year, the decline in of 2008 but declined marginally (by 0.8 per cent) in
electricity production was attributed primarily to the second half.
technical difficulties at one of the plants of the main
power company. The strong performance in the latter Transport, Storage & Communication contracted
half of 2008 reflected recovery over the decline in the by 2.3 per cent in 2008, below the average annual
latter half of 2007, stemming from the disruption in growth of 2.8 per cent since 2003. The industry’s
electricity generation caused by Hurricane Dean. For value-added contracted consistently throughout
the review year, total electricity generation improved the year. The performance of the industry mainly
moderately by 1.2 per cent, while electricity sales reflected decline in economic activity in water and
declined by 1.9 per cent. Industrial electricity sales air transportation. The reduction in water transport
remained flat, while ‘Other’ declined by 3.4 per cent. was indicated by declines of 4.6 per cent and 0.6 per
The growth in the industry was also influenced by a cent in the number of ships calling at Jamaican ports
marginal increase of 0.3 per cent in water production, and in total domestic cargo movements, respectively.
relative to the previous year. These contractions were in contrast to average
annual growth rates of 0.3 per cent and 3.7 per cent,
Hotels & Restaurants expanded by 2.2 per cent for respectively, since 2003. The fallout in ship calls was
2008, compared to a marginal increase of 0.3 per primarily attributed to weakening global demand
cent in 2007. For the year, total stopover arrivals for vacations as well as a shift in the itinerary of
increased by 3.9 per cent, compared to growth of 1.3 selected cruise lines away from the Caribbean. Air
per cent in the previous year. This was marginally transportation was negatively affected by problems
below the average annual growth since 2003. In faced by the national carrier.
contrast, cruise ship arrivals declined by 7.7 per
cent, relative to the previous year. This was below
the average annual growth of 6.4 per cent since
2000. During the first half of the review year, the
industry (Hotels and Restaurants) grew by 6.0
per cent but fell by 0.9 per cent in the second half.
The growth in the first half was attributed, in part, to 48 requires
The US Western Hemisphere Travel Initiative is a U.S. law that
all travellers within the western hemisphere, including U.S.
normalization following the US Western Hemisphere and Canadian citizens, to present a valid passport when travelling
to, through or from the United States.

- 99 - Production and Prices


8.2. Prices
8.2.1. Overview
Inflation was 16.8 per cent in 2008, similar to the
outturn in 2007. Core or underlying inflation in 2008,
as measured by the trimmed mean and the Consumer
Price Index without food and fuel (CPIFF), was higher
at 10.3 per cent and 10.8 per cent, respectively,
relative to 9.4 per cent and 9.3 per cent in 2007. The
index for the Greater Kingston Metropolitan Area
(GKMA) increased by 17.0 per cent, while the indices
for Rural Areas and the Other Urban Centres (OUC)
each increased by 16.8 per cent. This relatively
uniform outturn across the three regions was largely
reflective of changes in Food & Non-Alcoholic
Beverages and offsetting movements between
Housing, Water, Electricity, Gas & Other Fuels
and Transport (see Table 72).
Headline inflation was influenced chiefly by adverse
international developments, mainly in the early half
of the year. These developments included sharp
increases in international grain and crude oil prices
over that period, which were partially reversed in the
latter part of the year. As a consequence, inflation
was 11.5 per cent over the first six months of the
year, compared to 4.8 per cent in the last half of the
year. Other factors affecting inflation over the year
included supply shocks to the domestic agricultural
sector from the impact of the passage of Hurricane
Dean in August 2007 and Tropical Storm Gustav
in August 2008. Further, there were adjustments in
administered prices, such as the national minimum
wage, water rates, bus and taxi fares and motor
vehicle licence fees. The impact of the sharp
depreciation of the foreign exchange rate on prices,
following the intensification of the global financial
crisis in September, was evident in the last quarter.
Production and Prices - 100 -
Bank of Jamaica
8.2.2. Contribution to Inflation
The movement in the Consumer Price Index (CPI)
in 2008 largely reflected increases in Food & Non-
Alcoholic Beverages, Miscellaneous Goods
& Services, Transport and Housing, Water,
Electricity, Gas & Other Fuels. These divisions
expanded by 24.0 per cent, 17.7 per cent, 9.6 per
cent and 9.3 per cent, collectively contributing 78.2
per cent to the year’s outturn (see Table 71).
Chart 22
Within Food & Non-Alcoholic Beverages, price
increases were mainly reflected in Bread & Cereals,
Vegetables & Starchy Foods and Meat. Bread &
Cereals, which increased by 33.5 per cent, accounted
for 12.4 per cent of overall inflation. Vegetables &
Starchy Foods increased by 29.7 per cent and also
contributed 12.4 per cent to the year’s inflation. Meat
rose by 15.8 per cent and contributed 7.4 per cent of
the outturn.
Miscellaneous Goods & Services was affected
by the higher costs of personal care products
and services, visa fees and jewelry. This division
increased by 17.7 per cent and contributed 9.0 per
cent of annual inflation.
Annual Report 2008
Transport primarily reflected the administered
adjustments to bus and taxi fares and motor vehicle
fees and licences. This division was responsible for
7.5 per cent of the year’s inflation.
The main class that contributed to inflation in
Housing, Water, Electricity, Gas & Other Fuels
was Water Supply & Miscellaneous Services Related
to the Dwelling, which increased by 35.6 per cent
and contributed 2.8 per cent to overall inflation.
Electricity, Gas & Other Fuels increased by 4.7 per
cent, accounting for 2.0 per cent of inflation in the
year.
8.2.3. Factors Influencing Inflation
International Commodity Prices
The most significant impetus to inflation was from
the movements in international commodity prices,
mainly those for grains and crude oil. For the first half
of the year corn, rice and soybean prices increased
by 59.3 per cent, 115.0 per cent and 21.3 per cent,
respectively. Rice and corn prices reached records
in April and June, respectively, while soybean prices
peaked in July. For the latter half of the year, corn, rice
and soybean prices declined by 44.9 per cent, 31.5
per cent and 42.4 per cent, respectively. Food price
inflation, as measured by the Bank’s Food Index,
was 14.3 per cent during the January to June period
but slowed to 8.7 per cent in the July to December
period. These impulses helped to propel Bread &
Cereals and Meat, to account for approximately one-
fifth of annual inflation.
The pattern of price changes for crude oil prices during
the year was similar to that of grains. The average
price of the benchmark West Texas Intermediate
- 101 -
(WTI) crude oil rose by 46.6 per cent over the first six
months of 2008 to US$133.93 per barrel at June. A
record price of US$145.29 per barrel was attained in
July (see International Developments). The sharp
and historic movements in crude oil prices induced
record levels for domestic household energy and
petrol prices.
Chart 23
In the latter half of the year, crude oil prices fell
steeply on fears that the deepening credit crisis
would cut demand for the commodity. This fall
led to an average price of US$41.44 per barrel at
December, a decline of 69.1 per cent compared to the
measure at June. Consequently, significant declines
were observed in the cost of utilities and household
and automotive fuels, given the sharp reversal.
However, these were not sufficient to completely
reverse the effect of the earlier increases. Largely as
a consequence of the foregoing developments, the
Bank’s estimate of imported inflation, the increase in
the Import Price Index (IPI), was 26.9 per cent for
first six months of 2008, compared to 6.1 per cent
for the comparable period in 2007. In the context of
these price movements, the Fuel and Raw Materials
(Food) components of the index increased by 46.6
per cent and 16.3 per cent, respectively, over the first
Production and Prices
 Bank of Jamaica

half of the year. Consistent with these developments, and taxi fares were increased by 25.0 per cent but
over the first half of the year the Bank’s Fuel Index only in the OUC and Rural Areas and accounted
increased by 11.4 per cent but declined by 1.2 per for approximately 1.5 percentage points of inflation.
cent in the latter half of the year. Along with higher motor vehicle licence and user
fees, these were the main impulses in Transport.
Domestic Agricultural Supply The annual adjustment to the national minimum wage
Despite a strong 14.4 per cent rebound in the was 15.6 per cent, while a 17.0 per cent increase in
production of domestic crops in the last quarter, overall wages was granted to industrial security guards49.
output fell by 6.4 per cent in 2008. The effect of the These increases accounted for approximately 0.2
passage of Hurricane Dean in 2007 was protracted percentage point and were reflected in Furnishings,
on particular crops such as banana and plantain. Household Equipment & Routine Household
As a consequence, banana and plantain production Maintenance. Artisans’ wages were also increased
were below pre-hurricane levels for over a year. by 12.0 per cent and represented the second
Subsequently in August 2008, Tropical Storm Gustav adjustment in a two-year 24.0 per cent agreement
caused extensive damage to these crops with an with the Incorporated Masterbuilders Association of
estimated loss of between 70 per cent and 85 per cent Jamaica. This increase contributed to the movement
of the then existing cultivation. As a consequence of in Housing, Water, Electricity, Gas & Other Fuels.
the foregoing, the output of plantain declined by 21.2
per cent for the year. Damage to short-term crops was There were also other administered price adjustments
less severe but approximately 19.0 per cent, 14.0 per such as increased water rates, higher special
cent and 7.5 per cent of condiments, vegetables and consumption tax (SCT) on cigarettes as well as the
legumes under cultivation were lost. Roots crops and annual tariff increase at the electric utility. These
tubers fared much better, given the milder impact of adjustments had a direct impact of approximately 1.0
Gustav’s passage. Output of key commodities such percentage point on overall inflation.
as yams, potatoes and condiments declined by of 9.9
per cent, 8.4 per cent and 9.0 per cent, respectively Exchange Rate Depreciation
for the year. These reductions resulted in higher In 2008, the weighted average selling rate (WASR) of
prices for major crops such as yellow yam, sweet the Jamaica Dollar vis-à-vis the US dollar depreciated
potato, lettuce and tomato and attendant significant by 11.2 per cent with more than 85.0 per cent of this
movements in the CPI. Consequently, Vegetables & movement occurring in the last three months of the
Starchy Foods and Fruit increased by 29.7 per cent year. This sharp movement primarily resulted from the
and 13.7 per cent, respectively, accounting for 13.3 increase in demand due to an imbalance influenced
per cent of annual inflation. by the global financial crisis (see Foreign Exchange
Market). However, lags in the transmission and
Administered Prices
The most significant administered price adjustment 49 The minimum wage was increased from $3 200 to $3 700 per
40-hour work week and primarily affected household helpers and
in 2008 was the increase in bus and taxi fares. Bus gardeners while security guards wages were increased from $4
700 to $5 500.

Production and Prices - 102 -

Annual Report 2008

weak demand limited the effects of the depreciation

on inflation in the calendar year.

- 103 - Production and Prices

 Bank of Jamaica

Table 71

JAMAICA: COMPONENT CONTRIBUTION TO INFLATION

2008
Inflation (%) Weighted % Contribution
Divisions/Groups/Classes Weights
2008 Inflation to Inflation
FOOD & NON-ALCOHOLIC BEVERAGES 37.46 24.0 9.00 54.6
FOOD 35.12 24.7 8.68 52.6
- Bread and Cereals 6.10 33.5 2.05 12.4
- Meat 7.66 15.8 1.21 7.4
- Fish and Seafood 5.33 17.6 0.94 5.7
- Milk, Cheese and Eggs 3.11 24.2 0.75 4.6
- Oils and Fats 1.64 43.4 0.71 4.3
- Fruit 1.14 13.7 0.16 0.9
- Vegetables & Starchy Foods 6.86 29.7 2.04 12.4
Vegetables 2.21 38.4 0.85 5.1
Starchy Foods 4.64 10.2 0.47 2.9
- Sugar, Jam, Honey, Chocolate & Confectionery 1.72 20.3 0.35 2.1
- Food Products n.e.c. 1.55 24.5 0.38 2.3
NON-ALCOHOLIC BEVERAGES 2.35 13.1 0.31 1.9
- Coffee, Tea and Cocoa 0.66 8.2 0.05 0.3
- Mineral Waters, Soft Drinks, Fruit & Vegetable Juices 1.69 15.0 0.25 1.5
ALCOHOLIC BEVERAGES & TOBACCO 1.38 27.0 0.37 2.3
CLOTHING & FOOTWEAR 3.33 14.4 0.48 2.9
CLOTHING 2.12 11.2 0.24 1.4
FOOTWEAR 1.22 19.5 0.24 1.4
HOUSING, WATER, ELECTRICITY, GAS & OTHER
12.76
FUELS 9.3 1.19 7.2
RENTALS FOR HOUSING 3.01 8.3 0.25 1.5
MAINTENANCE AND REPAIR OF DWELLING 0.80 18.0 0.14 0.9
WATER SUPPLY AND MISCELLANEOUS SVCS 1.32 35.6 0.47 2.8
ELECTRICITY, GAS AND OTHER FUELS 7.12 4.7 0.34 2.0
FURNINSHINGS, HOUSEHOLD EQUIPMENT &
4.93
ROUTINE HOUSEHOLD MAINTENANCE
16.3 0.80 4.9
- FURNITURE AND FURNISHINGS 0.69 21.1 0.15 0.9
- HOUSEHOLD TEXTILES 0.32 14.1 0.04 0.3
- HOUSEHOLD APPLIANCES 0.56 11.7 0.07 0.4
- GLASSWARE, TABLEWARE AND H/H UTENSILS 0.05 17.9 0.01 0.1
- TOOLS AND EQUIPMENT FOR HOUSE & 0.15 11.1 0.02 0.1
GARDEN
- GOODS & SERVICES FOR ROUTINE H/H
3.16 16.5 0.52 3.2
MNTCE
HEALTH 3.29 9.1 0.30 1.8
- MEDICAL PRODUCTS, APPLIANCES AND
1.22 10.6 0.13 0.8
EQUIP
- HEALTH SERVICES 2.07 8.2 0.17 1.0
TRANSPORT 12.82 9.6 1.23 7.5
COMMUNICATION 3.99 0.0 0.00 0.0
RECREATION & CULTURE 3.36 12.8 0.43 2.6
EDUCATION 2.14 16.5 0.35 2.1
RESTAURANTS & ACCOMODATION SERVICES 6.19 13.8 0.85 5.2
MISCELLANEOUS GOODS & SERVICES 8.37 17.7 1.48 9.0

ALL GROUPS 100.0 16.8 16.5 100.0

Source: STATIN & BOJ’s Calculations

Production and Prices - 104 -

Annual Report 2008

Table 72

REGIONAL INFLATION
2008
Weight in GKMA Rural
Divisions / Groups/Classes OUC (%)
CPI (%) Areas (%)
FOOD & NON-ALCOHOLIC BEVERAGES    0.3746 24.4 22.9 24.3
- FOOD    0.3512 24.4 23.9 25.2
Bread and Cereals 0.0610 29.2 35.9 34.8
Meat 0.0766 19.4 15.4 13.4
Fish and Seafood 0.0533 18.5 17.2 17.3
Milk, Cheese and Eggs 0.0311 31.8 22.3 20.0
Oils and Fats 0.0164 55.1 42.5 37.9
Fruit 0.0114 19.5 12.2 6.0
Vegetables and Starchy Foods 0.0686 23.1 24.8 37.4
Vegetables 0.0221 26.9 28.4 53.4
Starchy Foods 0.0464 16.1 17.6 2.4
Sugar, Jam, Honey, Chocolate and Confectionery 0.0172 26.1 18.8 18.1
Food Products n.e.c. 0.0155 22.2 24.0 26.2
- NON-ALCOHOLIC BEVERAGES    0.0235 22.5 9.1 9.7
Coffee, Tea and Cocoa 0.0066 15.1 7.8 5.1
Mineral Waters, Soft Drinks, Fruit and Vegetable Juices 0.0169 24.9 9.5 11.7
ALCOHOLIC BEVERAGES & TOBACCO    0.0138 37.3 17.5 25.0
CLOTHING & FOOTWEAR 0.0333 24.8 6.0 11.9
HOUSING, WATER, ELECTRICITY, GAS & OTHER FUELS    0.1276 12.3 8.3 6.9
- RENTALS FOR HOUSING 0.0301 13.5 1.4 1.3
- MAINTENANCE & REPAIR OF DWELLING    0.0080 21.4 16.8 16.7
- WATER SUPPLY AND MISC SERVICES RELATED TO THE
     0.0132 35.6 35.7 35.7
DWELLING
- ELECTRICITY, GAS AND OTHER FUELS 0.0712 4.8 6.0 4.1
FURNISHINGS, HOUSEHOLD EQUIPMENT & ROUTINE MNTNCE      0.0493 19.9 17.5 13.0
HEALTH    0.0329 8.6 10.1 9.0
TRANSPORT    0.1282 1.0 14.4 13.1
COMMUNICATION    0.0399 0.1 0.1 0.0
RECREATION & CULTURE 0.0336 10.6 9.2 15.9
EDUCATION 0.0214 13.3 19.1 19.0
RESTAURANTS AND ACCOMODATION SERVICES 0.0619 16.9 20.6 8.0
MISCELLANEOUS GOODS & SERVICES   0.0837 20.5 18.4 15.4
ALL DIVISIONS    1.0000 17.0 16.8 16.8
Source: STATIN

- 105 - Production and Prices

 Bank of Jamaica

Chart 24

Production and Prices - 106 -

 9. Public Finance

F
9.1. Central Government Performance
or the fiscal year to December 2008, the
Government incurred a deficit of $57.2 billion
or 5.2 per cent of GDP, compared to the
budgeted amount of $47.7 billion or 4.3 per cent of
GDP (see Tables 73 and 74). The deviation from
budget reflected a shortfall in Revenue & Grants,
partly offset by lower than budgeted Expenditure. As
such, the primary surplus was 3.4 per cent of GDP,
relative to a target of 4.2 per cent of GDP, while the
current deficit was 3.6 per cent of GDP, significantly
above the deficit of 1.9 per cent of GDP implicit in the
budget. Further, Interest Payments to GDP was 8.6
per cent, slightly above the target of 8.5 per cent.

Table 73
  CENTRAL GOVERNMENT SUMMARY ACCOUNTS
  FY 2008/09
  (J$MN)

  FY 2008/09 Budget
Variance %
Q1- Q3 Q1- Q3

  Revenue & Grants 196 111.8 212 495.2 -16 383.4 -7.7

  Revenue 193 269.7 208 353.9 -15 084.2 -7.2

  Tax Revenue 176 344.2 188 694.6 -12 350.4 -6.5
  Non-Tax Revenue 11 984.5 11 700.0 284.4 2.4
  Bauxite Levy 4 150.4 6 362.9 -2 212.5 -34.8
  Capital Revenue 790.7 1 596.4 -805.7 -50.5
  Grants 2 842.1 4 141.3 -1 299.2 -31.4

  Expenditure 253 313.0 260 204.6 -6 891.7 -2.6

  Recurrent Expenditure 232 543.8 227 776.9 4 766.8 2.1
  Programmes 54 412.3 56 220.5 -1 808.3 -3.2
  Wages & Salaries 83 119.8 77 655.0 5 464.9 7.0
  Interest 95 011.7 93 901.4 1 110.3 1.2
  Domestic 67 942.5 67 199.1 743.4 1.1
  Foreign 27 069.2 26 702.3 366.9 1.4

  Capital Expenditure 20 769.2 32 427.7 -11 658.5 -36.0

 
  Fiscal Balance -57 201.2 -47 709.5 -9 491.7 19.9
 
  Current Balance -40 064.7 -21 019.4 -19 045.3 90.6
  Primary balance 37 810.6 46 192.0 -8 381.4 -18.1

- 107 -
 Bank of Jamaica

Table 74

FISCAL PERFORMANCE RATIOS

FY2008/09
(%)
FY 2008/09 Target
Q1- Q3 Q1- Q3
Borrowing Requirement/GDP 5.2 4.3
Current Balance/GDP -3.6 -1.9
Primary Balance/GDP 3.4 4.2
Interest Payments/GDP 8.6 8.5
Fiscal Stability Ratio -1.3 -1.2
Non-Interest Expenditure 14.3 15.0
Key
BR = Borrowing Requirement = Fiscal Balance as a percent of GDP
CB= Current Balance = Current Revenue-Current Expenditure as a percent of GDP
PB= Primary Balance = Total Revenues-Total Expenditures less Interest Payments (IP) as a percent of GDP
IP= Interest Payments as a percent of GDP
FSR=Fiscal Stability Ratio = (Overall Balance/ Total Revenue) - 1
International Benchmarks
BR greater than 3% of GDP often indicates serious fiscal imbalance
FSR closer to zero indicates more stable government finances
Negative CB ratio of less than 1% indicates dissaving or a need for fiscal adjustment as the public sector is borrowing
for consumption
PB ratio above zero indicates major fiscal adjustment to cover interest on past obligations
* Recurrent Expenditure includes programmes, wages and salaries and interest payments.

Revenue & Grants for April to December 2008 were
7.7 per cent below budget, but exceeded receipts
for the comparable period in FY2007/08 by 12.1 per
cent. Tax Revenue was 6.5 per cent below budget,
reflecting primarily, lower than budgeted GCT and
SCT receipts. The lower than budgeted Tax Revenue
and Bauxite Levy also reflected a slowdown in
economic activities which was partly the result of the
global economic downturn.

Table 75
C-EFFICIENCY RATIO
April - December
(J$ Millions)
           
2005/06 2006/07 2007/08 2008/09* 3 YR AVG

Consumption 405 010.8 484 277.3 557 093.7 700 577.7 482 127.3
GCT 35 044.0 42 397.4 48 706.7 52 314.8 42 049.4
GCT/Consumption (%) 8.7 8.8 8.7 7.5 8.7
Standard Rate (%) 16.5 16.5 16.5 16.5 16.5

C-Efficiency Ratio (%) 52.4 53.1 53.0 45.3 52.8

           

*For Fiscal Year 2008/09, consumption figures used are BOJ estimates

Public Finance - 108 -

Annual Report 2008

The C-Efficiency ratio for April to December 2008
was 45.3 per cent, compared to 53.0 per cent for
the corresponding period of FY2007/08 and was
below the 52.8 per cent 3-year average (see Table
75)50. The movement in the C-Efficiency ratio was
consistent with the shortfall in GCT receipts for the
period.
The shortfall in revenue relative to budget, however,
disguised buoyant inflows resulting from the
Government’s tax amnesty. The amnesty which
ran from June to October 2008, offered reduced
penalties on outstanding tax balances, to individuals
and companies (see Table 76). Revenue collected
during the amnesty period was significantly above
the anticipated amount with over 70.0 per cent of the
inflows coming from outstanding PAYE, Company
Income Tax and Individual Income Tax.

Table 76

ORIGINAL TAX TERMS OF AMNESTY ADJUSTED TAX TERMS OF AMNESTY

(Announced April 2008) (Announced July 2008)

Date Waiver (%) Date Waiver (%)

June 100.00    

July 80 July 100

August 50 August 90

September 40 September 80

October 20 October 70

50 The C-Efficiency ratio is the share of value-added tax (VAT)

revenue in consumption.

- 109 - Public Finance

 Bank of Jamaica

Expenditure was 2.6 per cent below the budget for
the period April to December. The shortfall largely
reflected lower than budgeted Capital Expenditure,
partly offset by higher than projected Wages & Salaries.
Capital Expenditure was 36.0 per cent below budget,
largely reflecting delays in project implementation.
Higher than anticipated Wages & Salaries was due
largely to above budgeted payments to teachers and
police during the December quarter51. In the latter
part of the quarter, the Government announced a
stimulus package aimed at providing some relief to
sectors affected by the global economic slowdown
and financial fall out. The package was estimated at
$862.4 million (see Table 77).

Table 77

2008/09 STIMULUS PACKAGE

J$mn

Reduction in GCT levied on Tourism Sector by 50% 431.9

Reduction in Transfer Tax from 6% to 5% 170.0

Lower Band allowed for Capital Equipment Depreciation to 1-year 12.5

Removal of Customs User Fees (Capital and Raw Material) 114.0

Removal of Customs Duty (Individual Customs) 84.0

Elimination of Tax on Dividends for Locally Owned Companies 10.0

Increase in GCT Threshold for Businesses 40.0

Total 862.4

51 The higher than budgeted disbursements to teachers reflected the

realignment of teachers’ salaries, closer to market rates.

Public Finance - 110 -

Annual Report 2008
Financing
During the April to December period, the Government
utilized higher than targeted financing, largely reflected
in higher than budgeted net issue of domestic debt
instruments. Foreign financing was also higher than
budgeted, reflecting the receipt of US$90.0 million
from the Inter-American Development Bank (IDB) in
December.
Debt Analysis
Government of Jamaica’s total debt at end-December
was $1 118.2 billion (100.9 per cent of GDP) or $117.5
billion above the stock at end-March 2008 when the
stock was 107.5 per cent of GDP (see Chart 25).
The growth in the debt stock reflected increases
of 16.1 per cent and 8.3 per cent in external debt
and domestic debt, respectively. At end-December,
domestic debt was 55.0 per cent of GDP, relative to
60.4 per cent at end-March 2008, while external debt
was 46.0 per cent of GDP, relative to 47.1 per cent
at end-March.
Chart 25
Select Debt Indicators
- 111 -
Domestic Debt
In a context of increasing uncertainty in the financial
markets, variable rate instruments accounted for
54.3 per cent of domestic debt issued (excluding
Treasury Bills), in the April to December period (see
Table 78). The variable rate portion of the domestic
debt stock, however, declined marginally to 61.9 per
cent from 62.4 per cent at end-March. The weighted
average age of debt issued over the period declined
to an average of 2.9 years from an average of 5.5
years for the comparable period in the previous fiscal
year. Consequently, short-term debt accounted for
64.9 per cent of domestic debt at end-December,
relative to 62.4 per cent at end-March, resulting in
higher refinancing risk. The increase in interest rates
during the latter part of the review period resulted
in the weighted average interest rate on new debt
increasing to 14.9 per cent at end-December 2008,
relative to 12.5 per cent for the similar period in the
previous fiscal year. The foreign currency-related
portion of the debt increased to 15.0 per cent at
end-December from 12.1 per cent at end-March,
largely resulting from a net issue of US dollar-linked
instruments, as well as the depreciation in the
exchange rate52.
52 Foreign currency related debt includes US$ indexed and US$
denominated instruments.
Public Finance
 Bank of Jamaica

Table 78
GOJ PUBLIC ISSUES OF INSTRUMENTS (EXCLUDING T-BILLS)
APRIL-DECEMBER 2006/07 – 2008/09
                   
                   
  Number of Issues Value of Issues Proportion of Total
  (J$ millions) (%)
   
  2006/07 2007/08 2008/09 2006/07 2007/08 2008/09 2006/07 2007/08 2008/09
 
Variable Rate 9 9 14 72 916.9 56 236.3 45 764.06 67.4 60.9 54.3
Fixed Rate 16 10 8 32 190.5 30 061.1 23 475.3 29.8 32.6 27.9
US$ Indexed - 1 3 0.0 6 047.5 11 002.8 - 6.6 13.1
US$ Denominated 1 - 1 3 057.8 0.0 4 057.4 2.8 - 4.8
 
TOTAL 26 20 26 108 165.2 92 344.9 84 299.5 100.0 100.0 100.0
 
 
Short and Medium-term 5 10 21 21 674.6 57 995.2 68 254.8 20.0 60.6 81.0
Long-term 21 10 5 86 490.6 34 349.7 16 044.7 80.0 39.4 19.0
 
TOTAL 26 20 26 108 165.2 92 344.9 84 299.5 100.0 100.0 100.0
   
   
  2006/07 2007/08 2008/09  
   
Weighted Average Age of New Debt (yrs.) 9.8 5.5 2.9
   
Weighted Average Interest Rate on New Debt (%) 13.0 12.5 14.9
                   

External Debt
The increase in external debt during the review
period reflected a US$209.7 million net increase in
Central Government debt, mainly due to the issue
of a US$350 million Eurobond. The proportion of
bonds in the external debt portfolio increased over
the period to 65.3 per cent at end-December from
64.0 per cent at end-March. External debt at end-
December continued to be dominated by long-term
fixed rate instruments.

Public Finance - 112 -

Annual Report 2008

Table 79
EXTERNAL DEBT BY BORROWER CATEGORY
March 2008 - December 2008
(in millions of US dollars)

March June Sept. Dec.

Central Government 5 231.9 5 530.6 5 393.3 5 441.6

Government Guaranteed 936.6 925.2 910.6 901.7
BOJ 0.8 0.7 0.4 0.4

Total 6 169.3 6 456.5 6 304.3 6 343.7

Source: Ministry of Finance

- 113 - Public Finance

 10. Economic Outlook

T
he outlook for the domestic economy in anticipated to fall by 3.4 percentage points to 5.8 per
2009 is for further weakening in output and cent. Much of the anticipated deceleration in inflation
a moderation in inflation. This projection is is attributed to the expected significant declines in
based on the expectation that the global recession commodity prices; in particular, crude oil and grain
will deepen during the year. The tradable sectors prices, as a result of falling global demand.
of the economy are anticipated to decline, while
the non-tradable sectors should experience at best With regard to international trade negotiations, political
negligible growth. Despite the potential effect of the changes in the US and Europe may constrain further
recent demand pressures on the exchange rate, it is progress in the WTO Doha Round (see International
anticipated that inflation will moderate on the premise Economic Developments). In addition, the impact of
of lower incomes. A deeper and more protracted the global financial crisis has shifted the focus of many
downturn in the global economy, in particular in the countries towards protectionist policies. Although
United States, poses the main risk to output and the WTO will continue to enforce the existing set of
growth in the domestic economy in 2009. global trade rules, several countries have expressed
concerns about whether non-binding commitments
10.1. International Economy offered in the course of these negotiations will be
The IMF projects (in its World Economic Outlook, honoured.
April 2009 Update) that global growth will contract by
1.4 per cent in 2009, relative to growth of 3.4 per cent 10.2. Domestic Economy
in 2008. Real GDP is expected to decline by 2.0 per 10.2.1. Growth
cent in the developed countries, despite attempts The continued uncertainty in the global financial
by governments to revive economic activity. Growth markets and the slowdown in the world economy
in developing economies is expected to decelerate are expected to adversely affect domestic economic
by 3.0 percentage points to 3.3 per cent in 2009, activity in 2009. In particular, domestic activities will be
relative to 2008. The outlook for developing countries adversely affected by declining demand for exports,
reflects an anticipated decline in demand for exports lower capital inflows and a decline in remittance
in light of the economic slowdown in the advanced flows. In this context, economic activity is forecasted
economies. to contract in 2009. Most of the forecasted decline
in output is attributed to the tradable industries,
World inflation is expected to decelerate in 2009 by in particular Mining, Hotels & Restaurants and
similar margins in both developed and developing Transport. The lower value added in Mining is in
countries. Inflation in the advanced economies is the context of reduced demand for alumina, hence
expected to be 0.3 per cent, compared to 3.5 per cent a significant cut in capacity utilization. Despite the
in 2008, while inflation in the developing economies is expansion in hotel room capacity, the tourism trade

- 114 -
Annual Report 2008

will decline, given the economic downturn in the 10.2.3. Monetary Policy
country’s main source market, the United States. Against the background of a deepening global
Within the non-tradable sector, Construction is economic crisis, the maintenance of relative stability
expected to contract significantly due to declines in the domestic financial markets, in particular the
in private sector investment, public sector capital foreign exchange market, will be the main challenge
spending and residential construction. While for monetary policy in 2009. This challenge will
Agriculture is anticipated to record partial recovery, be in the context of lower capital inflows, falling
the rest of the non-tradable industries such as retail export earnings and remittances. The Bank will
trade should reflect weak or no growth. ensure that there is adequate liquidity in both the
money and foreign exchange markets. Against this
10.2.2. Inflation background, the Bank of Jamaica will maintain a
Inflation in 2009 is expected to moderate, relative conservative monetary policy stance so as to ensure
to 2008. The moderation is expected to emanate macroeconomic stability. The maintenance of stability
from reduced import prices for commodities such is an important prerequisite for ensuring recovery
as grains, edible oils and crude oil. This projected in the economy when global economic conditions
decline in prices is underpinned by the impact of the improve.
global recession on world demand. Locally, increases
in the prices for domestic items are anticipated to be
restrained by waning demand as the developments
in the global economy should have an adverse effect
on employment, credit and incomes. The main areas
of moderation in prices are expected in the Food &
Non-Alcoholic Beverages and Transport divisions
of the Consumer Price Index. The moderation in the
former will be led by reductions in the grain related
subdivisions such as Bread & Cereals, Oils & Fats
and Milk, Cheese & Eggs, while Vegetables &
Starchy Foods should benefit from the anticipated
recovery in domestic agricultural sector. The slower
increase in Transport will be due to the lower cost of
operating motor vehicles, consequent on a projected
reduction in crude oil prices, relative to 2008. While
there will be some inflationary impulses arising from
the significant depreciation in the exchange rate, the
pass-through is expected to moderate.

- 115 - Economic Outlook

 Corporate & Administrative Review
11. Banking Services and Currency Operations

In providing banking services to the Government, the

D
11.1. Banking Services
uring 2008, the Bank continued to provide a Bank continued
variety of banking services to its customers.53 • to effect the settlement of GOJ primary
In its undertaking of banking services to issues in the domestic securities market;
these customers, the Bank continued to provide • the redemption of GOJ Treasury Bills; and
operational support to the Systemically Important • the payment of external and domestic debt
Payment Systems (SIPS) in Jamaica. The SIPS obligations.
are comprised of the automated clearing house
(ACH) and the Customer Inquiry Funds Transfer Services provided to other institutional customers
System (CIFTS). The ACH is owned and operated included settlement of open market operations,
by the seven commercial banks while the CIFTS equities traded on the Jamaica Stock Exchange
is owned and operated by the Bank. With regard (JSE) the issue and redemption of currency and
to the Automated Clearing House (ACH), the Bank regional payments through CARICOM bilateral
operated in the following capacities: arrangements.
• participant - negotiating cheques drawn on
commercial banks, as well as sending and Throughout the year, the Bank also continued to offer
receiving electronic files with the cheque over-the-counter services on a limited scale to the
data to and from the ACH Operator;
general public. These services included the exchange
• settlement bank - effecting the settlement
of mutilated Jamaica Dollar notes, the redemption of
of clearing balances on the accounts of
coins, the purchase of foreign currencies and the
commercial banks;
sale of souvenir coins.
• providing oversight to the payments system;
and
• supervising the manual clearing process for
items that do not qualify for the ACH as well
as foreign currency cheques which qualify
for domestic clearing.

The BOJ also continued to provide operational

support for the Customer Inquiry Funds Transfer
System (CIFTS) during 2008.54
53 The Bank’s customers include the Government, licensed financial
institutions, primary dealers, selected brokers of the Jamaica
Central Securities Depository (JCSD) and regional central banks.
54 CIFTS is a medium for the electronic transfer of funds between the
accounts held at the BOJ by commercial banks, primary dealers
and the participants of the JSCD.

- 116 -
Annual Report 2008

11.2. Currency Operations Coins in circulation were valued at $2.4 billion,

11.2.1. Currency in Circulation
Banknotes and coins in circulation as at 31 December
2008 were valued at $49.6 billion, reflecting an
increase of 3.8 per cent, relative to end-2007. Of this
amount, $47.2 billion or 95.1 per cent were banknotes,
relative to $45.5 billion or 95.3 per cent at end-2007
(see Table 80). The $1 000 note accounted for 72.9
per cent of total currency in circulation, in comparison
to 71.5 per cent at the end of the previous year. The
$500 denomination accounted for 15.5 per cent,
relative to 15.8 per cent at end-2007.
reflecting an increase of 9.2 per cent, relative to the
previous year. The $20 denomination reflected the
highest circulation value of $949.0 million or 39.1
per cent of the total value of coins in circulation. The
$10, $5 and $1 denominations were also significant
circulatory coins, accounting for 21.4 per cent, 15.3
per cent and 18.8 per cent, respectively, of the
circulation value.

Table 80

BANKNOTES IN CIRCULATION

 (Billions of Dollars)
As at 31 December

Denomination 2007 2008 % Change

$1000 34.1 36.2 6.2  
$ 500 8.2 7.7 -6.1  
$ 100 2.4 2.5 4.2  
$ 50 0.6 0.6 0.0  
Others 0.2 0.2 0.0  
TOTAL   45.5   47.2   3.7  

- 117 - Banking Services and Currency Operations

 Bank of Jamaica

Currency Issued Banknotes Sorted

During 2008, the Bank issued 346.7 million pieces A total of 302.6 million pieces of banknotes valued
of banknotes valued at $191.8 billion. This value at $187.3 billion was sorted during 2008, of which
reflected an increase of 20.9 per cent, relative to the 153.9 million pieces or 50.9 per cent were deemed
$158.7 billion issued during the preceding year. The fit for reissue to the public. The $100 denomination
$1 000 and $500 denominations accounted for 70.5 accounted for 39.7 per cent of banknotes destroyed
per cent and 24.1 per cent, respectively, of the value while the $1,000 and $500 notes were 31.2 per cent
of notes issued in 2008. and 28.7 per cent, respectively, of the total. The
$100 banknote continued to be the most highly used
Coins issued for the year in review reflected a 14.3 denomination.
per cent decline to $487.8 million, relative to the
value in 2007. The $20 coin accounted for 50.9 per
Counterfeit Detection
cent of the value issued, followed by the $10 coin
In 2008, the value of counterfeit notes detected
with 26.8 per cent. The demand for the $5 coin
amounted to $4.3 million, relative to $4.0 million
declined by 21.3 per cent while that for the $10 and
in 2007. Similar to previous years, most of these
the $0.10 decreased by 16.0 per cent and 12.7 per
notes (65.6 per cent) were detected by commercial
cent, respectively, relative to 2007.
banks at their counters, with the balance (34. 4 per
cent) detected by the Bank in lodgements received
Currency Redeemed
from financial institutions. Notably, the number of
A total of 343.5 million pieces of banknotes valued
counterfeit notes detected for 2008 declined by 6.9
at $190.2 billion was redeemed during 2008. This
per cent to 5 349 pieces, reflecting an increase in the
represented a decline of 23.5 per cent, relative to
detection of higher value counterfeit notes.
the value of banknotes redeemed in 2007. The
redemption of $1 000, $500 and $100 notes increased
The $1 000 note accounted for 90.0 per cent of the
by 31.4 per cent, 9.4 per cent and 3.8 per cent,
value of counterfeit notes detected in 2008 as this
respectively. However, the redemption of $50 notes
denomination continued to be the main target of
declined by 0.9 per cent, relative to 2007.
counterfeiters. The $500 and $100 notes accounted
Coins redeemed increased by 5.6 per cent in value for 8.0 per cent and 2.0 per cent of the value of
to $283.4 million. Redemption increased for all counterfeit notes detected, respectively, during the
denomination of coins except the $1 coin which review year.
experienced a 7.4 per cent decline relative to 2007,
as retailers and consumers retained more of this The counterfeit $1,000 notes detected represented a
denomination for transaction purposes. The $20 ratio of 3.7 pieces per million genuine $1,000 notes
coin dominated redemptions and accounted for 55.6 in circulation while $500 and $100 represented 2.7
per cent of value, followed by the $10 and $5 coins and 1.4 pieces per million, respectively. These ratios
which accounted for 29.3 per cent and 12.4 per cent, were relatively low, compared to the experiences of
respectively. other countries.

Banking Services and Currency Operations - 118 -

12. Payments System Developments

12.1. Introduction applications and linkages;

D
• the establishment of an electronic CSD
uring 2008, several milestones were for Government of Jamaica and Bank of
achieved in relation to the Payments System Jamaica (domestic) securities;
Reform agenda, the most significant of which • the establishment of an appropriate legal
was the delivery of both the RTGS and the CSD to and regulatory framework for the payments
the Bank by the developers in September 2008. The system; and
Bank was also able to train and certify all participants • enhancement of the oversight function
in the use of both systems by end-2008. Other for payments and securities settlement
significant milestones included the drafting of the systems.
rules and procedures that will guide the systems.
Following the completion of the solution procurement
The payments system oversight was focussed phase in February 2008, work continued on the
on continuously monitoring the activities of the establishment of the legal framework and the
Systemically Important Payment Systems (SIPS) in payments system oversight function (PSOF). Of
accordance with international standards. Examination significance was the delivery of the systems in
of the payments system data confirmed that several September 2008. The systems were subsequently
issues, including the implementation of the RTGS integrated, tested, and made available to all
and CSD, were prerequisites for the completion of participants on 24 November 2008. Training and
the first phase of the reform agenda. certification of all participants (38 institutions) in the
use of both systems were completed by end-2008,
Reform of the National Payments System with user acceptance testing and full implementation
Efficient systems and procedures for the clearing and scheduled for completion in the first quarter of 2009.
settlement of payments and securities are crucial to the
overall stability of the financial system. Accordingly, A draft bill on the new Payments System Legislation
the Bank, as part of its mandate to implement a safe was received from the Chief Parliamentary Counsel
and efficient payments system continued its focus on (CPC) for review by the Bank. Based on the
completing the first phase (phase 1) of the Payments afore-mentioned developments, the Bank drafted
System Reform Programme. memoranda of understanding which will be used until
the laws have been passed or amended.
Phase 1 focuses on the implementation of the
payments and settlement infrastructure. This Oversight of the Payments System
includes: During 2008, the Bank’s principal oversight
• an  RTGS system as well as related responsibility was carried out through continuous
- 119 -
 Bank of Jamaica

monitoring of the activities of SIPS according to products/payment instruments to facilitate same day
international standards. The two designated SIPS settlement of large value transactions have been
are: initiated.
• the Customer Inquiry Funds Transfer
System (CIFTS) - the Central Bank owned Systemically Important Payment System (SIPS)
and operated large value system which will Transactions valued at $5.7 trillion were processed
be replaced by the RTGS system; and over SIPS in 2008, an 11.8 per cent increase over
• the Automated Clearing House (ACH) which the value for 2007. CIFTS transactions accounted
is owned and operated by the commercial for $2.9 trillion ($2.6 trillion: 2007). ACH transactions
banks to facilitate the electronic clearing accounted for $2.8 trillion in 2008, relative to $2.5
of cheques and the electronic transfer of trillion in 2007.
funds.
Emphasis was placed on the assessment of systems The volume of interbank transfers processed through
usage and utilization to inform policy decisions CIFTS in 2008 declined marginally by 0.4 per cent. A
that will impact the establishment and functioning total of 25 626 transactions valued at $2.9 trillion were
of the new RTGS. The scope of the oversight processed in 2008, yielding an average transaction
function included the periodic review of System value of $113.2 million, the highest value recorded
Wide Important Payment Systems (SWIPS) or retail for the previous five years (see Chart 26). The
payments systems, the clearing and settlement growth in value of settlements and transfers through
of selected foreign currency items and analysis of CIFTS underscored the current emphasis placed on
payments data from commercial banks. payments and settlement system reform which will
mitigate risk to the stability of the financial system.
In keeping with the reform objective of reducing
or eliminating risks in the payments system, it is
necessary to ensure that the ACH operates as a retail
payment system, processing low value transactions.
Accordingly, a threshold for the ACH was agreed
for implementation which will lead to the removal of
80.0 per cent of the value of the transactions passing
through the ACH, while at the same time only
reducing transactions volume by 2.5 per cent. The
proposed value threshold for ACH transactions is one
million Jamaica Dollars ($1mn). Hence, the value of
transactions equal to or greater than this amount will
be subject to alternative settlement arrangements
agreed upon with the participating banks. In addition,
plans that will result in the development of new

Payments System Development - 120 -

Annual Report 2008

Chart 26

During 2008 cheques accounted for the majority of number of large value cheques processed in the ACH
non-cash payments, with the ACH being the major exacerbates systemic risk and further underscores
cheque-processing system. Total cheque payments the need for payments system reform, hence the
comprising ACH and proprietary transactions recommendation to impose a threshold on the ACH.
increased by 12.2 per cent to $5.5 trillion, relative to
$4.9 trillion in 2007. Proprietary or ‘On us” Cheques
For the reporting year, the total number of proprietary
For the ACH, 10.2 million cheques with a value of cheques processed in commercial banks was 12.9
$2.7 trillion were processed in 2008. This represented million valued at $2.8 trillion compared to the 12.4
a marginal decrease (approximately 1.9 per cent in million valued at $2.4 trillion in 2007. This represented
volume) and an 8.0 per cent increase in value when an increase in volume and value of 4.0 per cent and
compared to 10.4 million with a value of $2.5 trillion 16.7 per cent, respectively. During 2008, the average
processed in 2007. The average cheque value in proprietary cheque value increased to $217 000 from
the ACH increased to $263 053 in 2008 from $240 $192 059, surpassing the average value of cheques
000 in 2007, a 9.6 per cent growth. The increasing processed in the ACH, pointing to the need for same
day value for cheque payments (see Chart 27).
Chart 27

- 121 - Payments System Developments

 Bank of Jamaica

At the end of 2008, there were approximately 1.5

In 2008, there was a significant increase in both the million debit cards in circulation, an increase of 10.4
volume and value of electronic payments (debits and per cent over 2007. The total number of credit cards
credits) in the ACH. The total number of electronic in circulation was 190 432 or 8.3 per cent more than
payments routed through the ACH was 711 492 (300 in 2007. The use of debit cards by value increased
994 in 2007) valued at approximately $97.1 billion by 24.1 per cent to $201.0 billion whereas volume
($52.2 billion in 2007) representing a 136.4 per cent increased by 18.4 per cent to 45.0 million. The value
increase in volume and an 86.0 per cent increase of credit card transactions grew by 29.0 per cent, a
in value. These increases were primarily due to the deceleration when compared with the growth rate of
continued shift from paper to electronic payments 16.0 per cent for 2007. Volume usage increased by
by corporate entities for payment of salaries and 2.0 million, or by 29.0 per cent increase over 2007.
benefits as well as insurance premiums.

Retail Payments Systems (Excluding ACH)

The review of retail payment systems continued to
focus on access and utilization, measured in terms
of the number of debit and credit cards in circulation
and the volume and value of debit and credit card
transactions processed through ABM and POS
terminals (see Table 81). 55,56

Table 81
ELECTRONIC CARD USAGE
2007 & 2008
  2007 2008
  Debit Cards Credit Cards Debit Cards Credit Cards
No. of Cards in Circulation 1 389 860 175 876 1 534 553 190 432

Value of Transactions (J$ bn) 162 55 201 71

Volume of Transactions (mn) 38 7 45 9

55 Debit card transactions are processed by MultiLink.

56 Retail payments system development is scheduled in a later
phase of the Reform process. This is necessary for ease of system
monitoring and designation.

Payments System Development - 122 -

Annual Report 2008

Chart 28

At end-2008, there were 12 468 POS terminals and
405 ABM terminals, an overall growth of 10.1 per cent
in the number of terminals, relative to the previous
year. The total value of ABM and POS transactions
for 2008 was $300.0 billion, representing a 37.6 per
cent growth, relative to 2007. Total volume processed
grew by 21.7 per cent to 56.0 million, relative to 2007.
During the review average values of both POS and
ABM transactions increased by 19.6 per cent to $5
381.00 (see Chart 29).

Chart 29

- 123 - Payments System Developments

 Bank of Jamaica

Clearing of Selected Foreign Currency Items

The Bank continued to provide manual clearing
services for foreign currency items issued by or drawn
on local commercial banks during 2008. This clearing
and settlement arrangement continued to facilitate a
more orderly exchange and faster settlement due
to the significant reduction in the ‘hold’ period for
these items. Eligible items were denominated in
four currencies: US dollars, Canadian dollars, Great
Britain Pounds and Euros.
In 2008, the foreign currency items cleared locally
were valued at approximately US$ 4.4 billion, a 7.3
per cent increase over the US$4.1 billion exchanged
in 2007. The increase reflected growth in US dollar
items only. These items continued to dominate
foreign currency clearing, accounting for over 98.0
per cent of foreign currency items cleared locally
during the year.

Table 82
FOREIGN CURRENCY ITEMS CLEARED
(VALUE)
Currency Units 2005 2006 2007 2008
         
(USD Millions)        
USD 2 770 3 679 3 982 4 271
         
CDN 20.79 24.71 29.20 23.99
         
GBP 53.13 71.33 112.50 73.14
       
Euro 5.46 6.51 11.80 8.14

Payments System Development - 124 -

13. Financial Legislation
Pending Amendments To Financial Legislation
Payments and Settlement System Legislation
T
he Bank of Jamaica in conjunction with
the Jamaica Bankers Association (JBA) is
spearheading the introduction of legislation
to deal with the regulation of the payments and
settlement system of Jamaica. This legislation
will formally establish the legal framework for the ambit of the Minister of Finance and the Bank of
oversight of the payment and settlement systems Jamaica. Other substantive enhancements to the
and will address matters such as: -
(i) the finality of payments;
(ii) the effect of insolvency on payments which is the Ministry with portfolio responsibility for
already in the system and
(iii) upgrading of the settlement infrastructure
by, inter alia, allowing for real-time gross
settlement.
In 2007, drafting instructions were issued to the
Chief Parliamentary Counsel through the Ministry of
Finance and the Public Service (formerly the Ministry
of Finance and Planning). The draft Bill was issued
from the office of the Chief Parliamentary Counsel in
2008 and is currently being reviewed by the Bank of
Jamaica.
Passage of this Legislation will be the first step in
ensuring that Jamaica’s payment and settlement
system operates in accordance with the Bank for
International Settlements (BIS) Core Principles for
SIPS. These Core Principles are the standards for
payment systems used by international agencies such
as the World Bank and the International Monetary
Fund (IMF) to assess the safety and soundness of
- 125 -
payment systems generally.
The Cooperative Societies (Amendment) Bill
This Bill will seek to restrict the deposit-taking
activities of cooperative societies to those cooperative
societies which operate as credit unions. Secondly,
it will seek to bring credit unions under the regulatory
Cooperative Societies Act are being contemplated
by the Ministry of Industry, Investment & Commerce,
cooperative societies. The cabinet submission by
this Ministry which will inform the drafting instructions
to the Chief Parliamentary Counsel, was approved.
Omnibus Statute
During 2008, the Bank continued the process of
reviewing legislation governing the operations of
deposit-taking entities i.e. the Banking Act, Financial
Institutions Act and the Bank of Jamaica (Building
Societies Act) with a view to consolidating these
pieces of legislation into one statute. In so doing, it is
intended that any existing inconsistencies between
these statutes will be removed, thereby ensuring a
more synchronized progression of updates to the laws
governing the deposit-taking industry. This initiative
is also intended to implement enhancements that will
bring the regulation of the banking sector in line with
the issued Revised Basel Core Principles as well
as to ensure that the relative provisions in relation
to consolidated and conglomerate supervision are

appropriately robust. The Basel Core Principles II,
are the global standards for prudential regulation and
supervision of banking systems. Revisions to the
financial legislation will also focus on current issues
such as outsourcing, as well as the proposed role
of credit bureaux, provisions for electronic reporting
and enhancing powers as regards the investigation
and prosecution of illegal deposit-taking activities.
The Bank is finalizing a working paper on the matter
which will inform the subsequent submission to
Cabinet, to commence the legislative process.
Pending Financial Regulations
The Banking (Form of Application) Regulations
The Financial Institutions (Form of Application)
Regulations
These regulations will comprise the prescribed
application form under the respective Acts. The
earlier format of licence fees regulations under the
Banking Act and the Financial Institutions Act that
dealt with both licences fees and the prescribed form
of application was not retained. The Bank was of the
view that the matter of the prescribed application form
should be addressed via separate regulations so that
the periodic upgrading of this form would not disrupt
the licence fees aspect of the regulatory regime.
These regulations will also include enhancements
to the application form in order to capture certain
basic particulars from applicants that were not
captured under the old forms. The enhancements
are expected to bring the regulations in line with the
revised Core Principles.
The revised form will also require the principals These regulations will bring the operations of credit
signing on behalf of the applicant company to certify unions fully under the BOJ’s prudential supervisory
Financial Legislation - 126 -
Bank of Jamaica
that the information given in the form is accurate to
the best of their knowledge and belief. Similar reforms
to the application form under the Building Societies
Act will be subsequently effected.
The Building Societies (Licence Fees)
Regulations
These regulations will be revised to bring the fees
payable in line with the applicable fees under the 2003
Licence Fees Regulations under the Banking Act and
the Financial Institutions Act (see Supervision of
Deposit-Taking Financial Institutions).
The Banking (Qualification of Auditors)
Regulations
These regulations will create a framework for ensuring
that auditors who are proposed as the statutory
auditors of financial institutions, are independent of the
financial institutions being audited (see Supervision
of Deposit-Taking Financial Institutions).
The Banking (Credit Classification and
Provisioning) Regulations
These regulations will formally impose the measures
that banks are required to take in assessing credit-
taking security and making provisions for the
possibility of default (see Supervision of Deposit-
Taking Financial Institutions).
The Bank of Jamaica (Credit Union) Regulations
Annual Report 2008
regime. They will therefore, among other things, cover
licensing, capital, reserves, prohibited business,
remedial and intervention processes and the role
of credit union associations (see Supervision of
Deposit-Taking Financial Institutions).
Pending Non-Financial Legislative Amendments
The Bank of Jamaica has been involved in the
process of formulating certain items of non-financial
legislation.
(i) The Credit Reporting Bill
Due to the impact this Act will have on
regulated financial services, particularly as
regards the provision of credit, the Bank
of Jamaica was asked by the Ministry of
Finance and the Public Service (formerly
the Ministry of Finance and Planning) to
provide its comments on the provisions to be
included in this Act. The Bank’s comments
were provided to the Ministry and have
been incorporated in the proposed Bill.
On passage, this statute will legislatively
establish a credit reporting system which (iii) Terrorism Prevention (Reporting Entities)
is designed to improve credit assessment
processes as well as to facilitate enhanced
risk management and loan pricing strategies
throughout the financial sector. A licensing
system will be imposed on persons who intend 57 “The Egmont Group is an informal group of financial intelligence
to offer credit reporting services. Prescribed
reporting processes have been outlined
to ensure the objective and standardized
reporting of credit information under this
regime. Persons offering credit reporting
services will be subject to regulation. This
Bill was tabled in Parliament in July 2008.
(ii) The Financial Investigations Division Act
(FIDA)
This Bill was tabled in Parliament on 12
November 2008. The passage of this Act
will satisfy Jamaica’s obligation to comply
with recommendation 26 of the (FATF) 40
(revised) recommendations which states
that: -
“Countries should establish a Financial
Intelligence Unit that serves as a national
center for the receiving, analysis…and
dissemination of suspicious transaction
reports and other financial information
regarding money laundering or terrorist
financing”.
Allied to this recommendation is the FATF
advisory that the Unit, when established,
should consider applying for membership in
the Egmont Group57.
Regulations
These Regulations will be promulgated
under the Terrorism Prevention Act and will
units (FIUs) established in 1995. The group was so named for
the location of the first meeting at the Egmont-Arenberg Palace in
Brussels. The goal of this group is to provide a forum for FIUs to
improve support to their respective national anti-money laundering
programmes. This support includes expanding and systemizing
the exchange of financial intelligence information, improving
expertise and capabilities of personnel of such organizations, and
fostering better communication among FIUs through application of
technology.” Source: Information Paper on FIUs and the Egmont
Group – (See the FATF web site at WWW.fatf-gafi-org or see
www1.oecd.org/fatf/ctry-orgpages/org-egmont_.htm
- 127 - Financial Legislation
 Bank of Jamaica

outline the operational controls that must

be maintained by financial institutions,
particularly when contemplating the
commencement of a business relationship
or one-off transaction. As such, these
regulations will therefore largely mirror the
Know Your Customer (KYC) obligations
contained in the regulations under the Money
Laundering Act. Accordingly, financial
institutions will be required to establish and
maintain appropriate procedures in relation
to identification, record-keeping (minimum
of 5 years retention period) internal controls,
communication and training of employees.
These Regulations will also prescribe the
requisite Declaration Forms for transactions
which the reporting entity knows or suspects
is one that constitutes a terrorism offence;
and for the quarterly reports as to whether
or not the reporting entity is holding
property in respect of a person who is
on the United Nations list of designated
terrorists or in respect of a person who has
links with terrorists or terrorist groups or
organizations.

Financial Legislation - 128 -

 14. Administration
I
Overview
n 2008, the Bank’s management strengthened
its administrative operations in order to ensure
greater operational effectiveness. The following
initiatives were implemented:
• a review of the Bank’s recruitment system
and development of a succession planning
framework;
• improved education of members of staff and
pensioners on health and lifestyle issues; and
• a more robust maintenance and energy
management programme.
Staffing and Industrial Relations
At the end of 2008, the Bank’s staff complement
totalled 576 employees, an increase of 4.5 per cent,
relative to 2007. The complement comprised 483
permanent, 21 contract and 72 project staff. There
were 1 638 applications for employment during the
year, a 36.4 per cent increase over 2007 applications.
The largest number of applications was for positions
within the accounting, auditing and financial institutions
supervision areas. Thirty persons were hired to the
permanent staff and 14 on a contractual basis. Of
the total number of newly employed persons, 12 had
post graduate and professional qualifications, 11
undergraduate degrees, while 7 had a combination
of other tertiary and secondary school qualifications.
The staff turnover rate for 2008 was 5.7 per cent,
reflecting a percentage point reduction, relative to
2007.
During the year, the two-year Management/Labour
Contract between the Bank’s Management and all
- 129 -
categories of staff expired. Following discussions
between all relevant parties, including the Ministry of
Finance and the Public Service, a salary and benefits
contract, in accordance with the third Memorandum
of Understanding (MOU3) between the Government
and the Public Sector, was signed and subsequently
implemented. The agreement provides for salary and
benefits adjustments of 15.0 per cent and 7.0 per cent
on 1 April 2008 and on 1 April 2009, respectively.
During the first quarter of 2009, the Bank will launch
its electronic recruitment system. The system, which
was developed jointly by the Human Resource
Administration and the Information Systems
Departments, will allow applications for employment
to be done on-line, thereby increasing the efficiency of
the Bank’s recruitment and job selection processes.
Training and Development
Under the theme “Building Organizational Capacity
through Training and Development”, the Bank’s
Training Institute provided training interventions for
438 members of staff and overseas participants in
2008. The Bank’s Training Institute provided training
for a total of 135 training programmes during the
year. Training interventions were designed primarily
to build the managerial and technical competencies
of the Bank’s staff while providing on-going education
on health and lifestyle issues. Four hundred and two
persons attended local in-house training programmes
and 95 other local programmes. Forty members of
staff also participated in 32 specialized overseas
courses, seminars and attachments sponsored or
hosted by the International Monetary Fund, the
 Bank of Jamaica

World Bank, the Centre for Latin American Monetary Pension Administration
Studies, the Federal Reserve Board and the Swiss Initiatives which commenced in 2007 to streamline
National Bank. the administration of pension functions and benefits
were consolidated in 2008. The establishment of
In the review year, the Bank partnered with the a Pension Administration Department within the
Financial Stability Institute (FSI) of the Bank for Division strengthened the Bank’s delivery of pension
International Settlements (BIS) and the Caribbean services and met legislative requirements associated
Group of Bank Supervisors (CGBS) to host an In- with amendments to the Income Tax Act passed
Country Training Programme on “Operational Risk”. by the Parliament in March 2008. These statutory
Participants for this workshop were drawn from requirements have been submitted to the Financial
regional central banks and/or monetary authorities. Services Commission (FSC) in compliance with its
In addition, the Bank, in collaboration with the registration and licensing regime.
MIS Training Institute, U.S.A., hosted a special in-
country three-day seminar on “How to Conduct an During the year, the Department conducted several
Internal Fraud Investigation”. Participants included pensioners’ outreach programmes including the
functionaries in the local financial sector. Annual Health and Lifestyle Seminar and monthly visits
to pensioners. Notably, the Department significantly
Of particular significance, during the year, the Bank increased the flow of information to members of
facilitated e-learning interventions with a number of the pension scheme, particularly, information on
organizations including the BIS, Thompson Reuters provisions of the Rules and Trust Deeds, as well as
and Foreword Financial Group. A programme of note pension benefits to active and deferred members
was “The Launch of the World Bank Commission through the publication of a quarterly Pensions
on Growth and Development Report” which was Bulletin. This was further supported by information
transmitted by video conference technology to disseminated via the Bank’s intranet.
participants from the Bank and other Public Sector
Entities. In May 2008, the Bank’s pensioners launched the
Bank of Jamaica Pensioners’ Association. The
At the end of the year, the Training Institute concluded Association comprises both active and deferred
arrangements with the Human Employment and pensioners. The aim of the Association is to promote
Resource Training Trust/National Training Agency programmes and activities towards enhancing the
(HEART Trust/NTA) for the implementation of the first wellbeing of members.
phase of a programme to upgrade and certify the skills
and competencies of the Bank’s electrical, electronic Plant and Physical Infrastructure
and mechanical technicians. The programme aimed In 2008, the Bank strengthened its programme of
at ensuring that these occupational groups within training and staff sensitization on the importance
the Bank are trained and certified at international of maintaining a healthy and safe environment.
standards. The programme of education included exhibition,

Administration - 130 -
Annual Report 2008

information bulletins and classroom training. that security officers, floor wardens and essential
staff are equipped with the knowledge and skills that
This exercise was supported by an aggressive are required in the event of a natural disaster.
maintenance schedule for the Bank’s main plant
and external properties. An important element of
the maintenance schedule was the intensification of
the Bank’s energy management and conservation
programmes during the year. Measures were
implemented to reduce energy consumption while
educating members of staff on the imperatives of
energy conservation, given emerging global trends
with respect to energy costs and the availability of fossil
fuel. In 2009, the Bank will expand the programme
to utilize renewable energy by installing photovoltaic
energy equipment at 2 external properties as their
primary source of energy.

During the year, the Bank also continued its Capital

Development Programme. This entailed the
renovation of offices to accommodate new staff,
the procurement of a standby generator to meet the
Bank’s electricity needs as well as to assist in the
Bank’s energy conservation’ programme, and finalize
arrangement for the acquisition and installation of a
fenestration system to protect vulnerable areas of
the Bank from hurricanes.

Disaster management training and preparedness

remained a priority for the Bank throughout 2008.
During the period, the Bank commenced
implementation of recommendations from a
vulnerability assessment study conducted in 2007 by
the Office of Disaster Preparedness and Emergency
Management. The programme of preparedness
was underpinned by the participation of the Bank’s
Emergency Management Team in evacuation
simulations and fire drills. This was aimed at ensuring

- 131 - Administration
 15. Compensation of Senior Executive
Management

$ $

Salary Range of Executive Management 7 669 055.00 - 14 813 609.69

Allowances of Executive management

(a) Governor 2 551 500.00

(b) Deputy Governors 604 726.11

Notes
Executive Management includes the Governor, the Senior Deputy Governor, four (4) Deputy Governors, and
a General Manager. In the case of the Governor, a maintained residence and an official car are provided,
as is customary for Governors of the Bank of Jamaica. The Deputy Governors and General Manager are
provided with fully maintained motor vehicles. Each member of the Executive Management is eligible for
benefits including a non-contributory pension plan, health insurance, life insurance and staff loans.

- 132 -
 16. Calendar of Monetary Policy Developments

09/01/08 The Bank of Jamaica implemented the following changes to interest rates payable on OMO
instruments:

Tenor 30 days 60 days 90 days 120 days 180 days

Previous Rates (%) 11.65 11.70 11.80 11.85 12.00

New Rates (%) 12.65 12.70 12.80 12.85 13.00

The realignment of rates placed the Bank in a better position to manage the Jamaica Dollar
liquidity that emanated from the maturity of both Bank of Jamaica and Government of
Jamaica instruments as well as the reflow of currency issued for the Christmas season. The
revised rate structure offered investors a range of options that more closely reflected the
then existing money market rates.

16//01/08 Bank of Jamaica offered a 365-day CD in addition to its regular suite of instruments. This
offer attracted a rate of 13.50 per cent per annum, which was consistent with the Bank’s
then existing interest rate structure. The rates on 30-day to 180-day instruments remained
unchanged.

18/01/08 Bank of Jamaica offered a special 18-month variable rate CD to banks and primary dealers.
The CD attracted a rate of 12.80 per cent for the first 3 months. Thereafter, quarterly
interest payments were made at the 90-day weighted average Treasury Bill rate applicable
at the beginning of each interest period plus a margin of 1.5 percentage points. The rates
applicable to all other BOJ instruments remained unchanged.

04/02/08 Interest rates paid on OMO instruments issued by the Bank of Jamaica were revised as
follows:

Tenor 30 days 60 days 90 days 120 days 180 days 365 days
Previous rate (%) 12.65 12.70 12.80 12.85 13.00 13.50
New rates (%) 13.50 13.70 13.90 14.00 14.20 15.00

The revisions reflected concerns about the rising trend in inflation and its impact on the
attractiveness of Jamaica Dollar investments.

- 133 -
 Bank of Jamaica

26/06/08 Interest rates paid on Bank of Jamaica OMO instruments were adjusted as follows:

Tenor 30 days 60 days 90 days 120 days 180 days 365 days
Previous rates (%) 13.50 13.70 13.90 14.00 14.20 15.00
New rates (%) 14.00 14.20 14.40 14.50 14.70 15.50

The adjustments to the rates were aimed at guiding domestic inflation towards a range of 12
– 15 per cent by March 2009, based on current projections for commodity prices.

01/09/08 Bank of Jamaica offered a special 18-month, variable rate CD to banks and primary dealers.
The CD attracted a rate of 14.58 per cent for the first 3 months. Thereafter, quarterly interest
payments at the 90-day weighted average Treasury Bill rate applicable at the beginning of
each interest period plus a margin of 1.25 percentage points applied. The rates applicable to
all other BOJ instruments remained unchanged.

15/10/08 As a direct consequence of the current global financial turmoil, and in order to preserve
overall financial stability, the Bank of Jamaica offered a temporary lending facility to domestic
financial institutions. The facility was strictly intended to provide liquidity to these institutions
for overseas margin and repo payments on GOJ global bonds during the then existing period
of dysfunctional money markets. The specific objectives of the temporary lending facility
were intended to:-
• alleviate any short-term US dollar liquidity needs of domestic financial institutions;
• ensure the stability of GOJ global bond prices; and
• minimize pressures in the domestic foreign exchange market.

17/10/08 Interest rates payable on Bank of Jamaica OMO instruments adjusted as follows:

Tenor 30 days 60 days 90 days 120 days 180 days 365 days
Previous rates (%) 14.00 14.20 14.40 14.50 14.70 15.50
New rates (%) 14.65 14.85 15.05 15.15 15.35 16.70

The adjustment brought rates offered by the Central Bank in line with yields applicable to
Government of Jamaica Treasury Bills and other short-dated market instruments.

Calendar of Monetary Policy Developments - 134 -

Annual Report 2008

18/11/08 In an effort to remove liquidity overhang arising from the maturity of both BOJ and GOJ
securities, and preserve order in financial markets, the Bank of Jamaica implemented the
following measures:

• The Bank offered a Special CD to primary dealers and commercial banks. This
CD which was on offer from 18 November to 19 November 2008, matured on 3
December 2008. Interest payable on this instrument was 20.50% per annum.

The Bank of Jamaica’s regular menu of CDs ranging from 30 days to 365 days remained
unaltered.

• Effective 3 December, 2008, on the expiration of a 15-day notice period, the cash
reserve requirement of commercial banks, merchant banks and building societies
was increased by 2 percentage points to 11 per cent of prescribed Jamaica Dollar
liabilities. As a consequence, the liquid assets requirement rose to 25 per cent
from 23 per cent. The Bank also announced that it intended to increase those
requirements by a further 3 percentage points.

These monetary policy actions were intended to support the achievement of the inflation
objective and the maintenance of macro-economic stability.

01/12/08 Interest rates payable on Bank of Jamaica OMO instruments were adjusted as follows:

Tenor 30 days 60 days 90 days 120 days 180 days 365 days
Previous rates (%) 14.65 14.85 15.05 15.15 15.35 16.70
New rates (%) 17.00 17.50 20.00 20.20 21.50 24.00

The increase in interest rates occurred in the context of instability in the foreign exchange
market, which was related to the sharp rise in the yields on Government of Jamaica (GOJ)
global bonds and US dollar bonds issued by Jamaican companies. The resulting spike in
demand for foreign exchange by securities dealers to meet margin calls from overseas
creditors, together with incremental demand for foreign exchange by a wider cross-section
of persons triggered a disorderly depreciation in the exchange rate. If this condition was
allowed to persist, it would have precipitated higher inflation and greater macroeconomic
instability.

- 135 - Calendar of Monetary Policy Developments

 Bank of Jamaica

In context of the foregoing, the Jamaica Dollar liquidity resulting from the maturity of significant
sums in BOJ securities over the following three weeks made it necessary for BOJ to take
that action. Accordingly, the rise in interest rates was expected to dampen the extraordinary
demand related to portfolio decisions and thereby restore predictability and order to local
financial markets.

Calendar of Monetary Policy Developments - 136 -

 Auditors’ Report

KPMG KPMG Peat Marwick

Chartered Accountants
P.O. Box 76 The Victoria Mutual Building Telephone +1 (876) 922-6640 
Kingston 6 Duke Street Telefax +1 (876) 922-7198 
Jamaica Kingston +1 (876) 922-4500 
Jamaica email:firmmail@kpmg.com.jm

INDEPENDENT AUDITORS’ REPORT

TO BANK OF JAMAICA

Report on the Financial Statements

Pursuant to Section 43(1) of the Bank of Jamaica Act, we have audited the accompanying financial statements of the
Bank of Jamaica (the Bank), set out on pages iii to xliv, which comprise the balance sheet as at December 31, 2008,
the statements of income, changes in capital and reserves and cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with
International Financial Reporting Standards and the Bank of Jamaica Act. This responsibility includes designing,
implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements
that are free from material misstatements, whether due to fraud or error, selecting and consistently applying appropriate
accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance as to whether or not the financial statements are free
from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the
auditors consider internal controls relevant to the Bank’s preparation and fair presentation of the financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
KPMG Peat Marwick, a Jamaican Partnership, Raphael E. Gordon Caryl A. Fenton Elizabeth A. Jones 
is a member of KPMG International, Patrick A. Chin Patricia 0. Dailey-Smith Linroy J. MarshalI
a Swiss nonoperating association. R. Tarun Handa Cynthia I. Lawrence

--
 Bank of Jamaica

TO BANK OF JAMAICA

Report on the Financial Statements (cont’d)

Opinion
In our opinion, the financial statements give a true and fair view of the financial position of Bank as at December 31,
2008, and of its financial performance, changes in capital and reserves and cash flows for the year then ended in
accordance with International Financial Reporting Standards, and comply with the provisions of the Bank of Jamaica
Act.

We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary
for the purposes of our audit. In our opinion, proper accounting records have been maintained and the financial
statements are in agreement with the accounting records.

March 25, 2009

Final Accounts for Year Ended 31 December 2008 - ii -

Annual Report 2008

BANK OF JAMAICA

Balance Sheet
December 31, 2008

Notes 2008 2007

J$'000 J$'000
ASSETS

Foreign assets
Notes and coins 10,884 9,630
Cash and cash equivalents 3 30,344,066 32,663,201
Interest in funds managed by agents 10,679,421 8,864,814
Investments 4 102,486,457 92,693,695
International Monetary Fund -
Holding of Special Drawing Rights 5,965 22,060
Bilateral accounts 78,870 -
Total foreign assets 143,605,663 134,253,400

Local assets
Notes and coins 50,931 40,887
Loans and advances 5 19,834,196 -
Investments 6 87,270,422 73,756,724
International Monetary Fund - Quota
Subscription 7 3,598,145 3,223,061
Investment property 8 94,645 88,597
Investment in financial institution 9 - 3,200
Due from Government and Government
Agencies 10 4,244,418 11,753,177
Property, plant and equipment 11 1,845,434 1,770,693
Intangible assets 12 149,394 127,200
Employee benefits 13 2,684,100 3,338,400
Other 14 3,297,891 3,043,996
Total local assets 123,069,576 97,145,935
Total assets 266,675,239 231,399,335

The accompanying notes form an integral part of the financial statements.

- iii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

BANK OF JAMAICA

Balance Sheet (cont’d)

December 31, 2008

Notes 2008 2007

J$'000 J$'000

LIABILITIES, CAPITAL AND RESERVES

Liabilities
Notes and coins in circulation 15 49,017,868 47,179,828
Deposits and other demand liabilities 16 70,354,680 56,506,439
Open market liabilities 17 127,979,788 113,930,120
International Monetary Fund -
Allocation of Special Drawing Rights 18 4,694,987 4,205,563
Foreign liabilities 19 34,877 91,020
Employee benefits obligation 13 1,357,200 967,100
Other 20 8,129,948 2,675,321
Total liabilities 261,569,348 225,555,391

Capital and reserves

Share capital 21 4,000 4,000
General reserve fund 22 20,000 20,000
Special stabilisation account 23 607,894 556,729
Other reserves 24 4,473,997 5,263,215
Total capital and reserves 5,105,891 5,843,944
Total liabilities, capital and reserves 266,675,239 231,399,335

The financial statements on pages 3 to 44 were approved for issue by the Board of Directors on March
25, 2009, and signed on its behalf by:

Governor
Derick Milton Latibeaudiere

Deputy Governor
Livingstone Morrison

Financial Controller
Herbert A. Hylton

The accompanying notes form an integral part of the financial statements.

Final Accounts for Year Ended 31 December 2008 - iv -

Annual Report 2008

BANK OF JAMAICA

Income Statement
Year ended December 31, 2008

Notes 2008 2007

J$'000 J$'000
Operating income
Interest 25 17,231,347 18,452,737
Foreign exchange gain, net 26 15,000,475 6,572,883
Other 61,337 617,922
Total operating income 32,293,159 25,643,542

Operating expenses
Interest 27 21,671,038 19,372,769
Staff costs 28 1,831,605 1,505,924
Currency expenses 943,984 904,624
Property expenses, including depreciation 579,494 467,959
Other operating expenses 552,867 360,536
Total operating expenses 29 25,578,988 22,611,812
Operating profit 6,714,171 3,031,730

Other gains/(losses)
Pension, medical and life insurance 13 ( 1,146,700) 391,900
Impairment provision, net 1,453 1,805
Gain on remeasurement of staff loans
and promissory note - ( 163)
Gain on disposal of securities designated
as available for sale 319,220 106,578
Gain on disposal of property, plant and equipment 15,478 8,483
Expenditure on behalf of Government
of Jamaica not reimbursed 10 ( 121,937) ( 161,177)
Profit for the year 5,781,685 3,379,156
Transferred from/(to) pension equalisation reserve 24(c) 694,700 ( 630,800)
Transferred to general reserve fund 6,476,385 2,748,356

The accompanying notes form an integral part of the financial statements.

-- Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

BANK OF JAMAICA

Statement of Changes in Capital and Reserves

Year ended December 31, 2008

General Special
Share reserve stabilisation Other
capital fund account reserves Total
J$'000 J$'000 J$'000 J$'000 J$'000
(Note 21) (Note 22) (Note 23) (Note 24)

Balances at December 31, 2006 4,000 20,000 481,423 4,037,501 4,542,924

Profit for the year - 2,748,356 - - 2,748,356*'

Transfer of surplus on defined

benefit pension scheme - - - 665,200 665,200*'

Change in fair value of available-

for-sale securities - - - 560,514 560,514*'

Transfer from coins in circulation - - 75,306 - 75,306

Profit due to consolidated

fund (note 10) - (2,748,356) - - (2,748,356)

Balances at December 31, 2007 4,000 20,000 556,729 5,263,215 5,843,944

Profit for the year - 6,476,385 - - 6,476,385*'

Transfer of surplus on defined

benefit pension scheme - - - ( 654,300) ( 654,300)*'

Change in fair value of available-

for-sale securities - - - ( 134,918) ( 134,918)*'

Transfer from coins in circulation - - 51,165 - 51,165

Profit due to consolidated

fund (note 10) - (6,476,385) - - (6,476,385)

Balances at December 31, 2008 4,000 20,000 607,894 4,473,997 5,105,891

*' - Total recognised gains of J$5,687,167 (2007: gains of J$3,974,070,000).

The accompanying notes form an integral part of the financial statements.

Final Accounts for Year Ended 31 December 2008 - vi -

Annual Report 2008

BANK OF JAMAICA

Statement of Cash Flows

Year ended December 31, 2008

Note 2008 2007

J$'000 J$'000
Cash flows from operating activities:
Profit for the year 5,781,685 3,379,156
Adjustments for:
Depreciation – property, plant and equipments 11 209,485 188,188
Amortisation – intangible assets 37,193 39,766
Gain on disposal of property, plant and equipment ( 15,478) ( 8,483)
Employee benefits, net 1,084,800 ( 452,400)
Unrealised exchange gain (12,796,606) ( 3,713,940)
Unrealised exchange loss on International Monetary Fund quota - -
Subscription ( 375,084) ( 223,466)
Unrealised exchange loss on International
Monetary Fund - Allocation of SDR's 489,424 291,585
Interest income 25 (17,231,347) (18,452,737)
Interest expense 27 21,671,038 19,372,769
Operating profit before changes in other assets and other
liabilities ( 1,144,890) 420,438

Interest received 20,456,424 19,081,965

Interest paid (16,133,776) (23,575,079)
Other assets ( 624,567) ( 583,742)
Other liabilities ( 82,635) ( 590,609)
Due from Government and Government Agencies ( 1,916,369) ( 735,318)
Net cash provided/(used) by operating activities 554,187 ( 5,982,345)
Cash flows from investing activities:
International Monetary Fund
- Holding of Special Drawing Rights 16,095 ( 4,186)
Interest in funds managed by agents ( 619,267) ( 581,652)
Foreign currency denominated investments 1,638,137 57,183,766
Local currency denominated investments (14,509,237) 12,364,679
Loan and advances (19,834,196) -
Addition to intangible asset ( 59,387) ( 40,817)
Additions to property, plant and equipment 11 ( 299,617) ( 159,295)
Additions to investment property ( 6,048) ( 764)
Proceeds of disposal of property, plant and equipment 30,868 25,682
Net cash (used)/provided by investing activities (33,642,652) 68,787,413
Cash flows from financing activities:
Notes and coins in circulation 1,889,205 4,973,124
Deposits and other demand liabilities 12,268,509 ( 6,444,091)
Open market liabilities 14,049,668 (36,781,371)
Foreign liabilities ( 68,739) ( 42,843)
Net cash provided/(used) by financing activities 28,138,643 (38,295,181)
Net (decrease)/increase in cash and cash equivalents ( 4,949,823) 24,509,887
Cash and cash equivalents at January 1 32,713,718 8,712,905
Effect of exchange rate fluctuation on cash held 2,641,986 ( 509,074)
Cash and cash equivalents at December 31 30,405,881 32,713,718

- vii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

BANK OF JAMAICA

Statement of Cash Flows (cont’d)

Year ended December 31, 2008

Note 2008 2007

J$'000 J$'000

Cash and cash equivalents at December 31 comprise:

Foreign notes and coins 10,884 9,630
Foreign cash and cash equivalents 3 30,344,066 32,663,201
Local notes and coins 50,931 40,887
30,405,881 32,713,718

The accompanying notes form an integral part of the financial statements.

Final Accounts for Year Ended 31 December 2008 - viii -

Annual Report 2008

BANK OF JAMAICA

Notes to the Financial Statements

December 31, 2008

1. Identification

Bank of Jamaica (hereafter “the Bank”) was established under the Bank of Jamaica Act (hereafter
“the Act”) amended on December 8, 2004. The Bank is domiciled in Jamaica and its registered
office is located at Nethersole Place, Kingston.

The principal objects of the Bank, as set out in the Act, are to issue and redeem notes and coins; to
keep and administer the external reserves of Jamaica; to influence the volume and conditions of
supply of credit so as to promote the fullest expansion in production, trade and employment,
consistent with the maintenance of monetary stability in Jamaica and the external value of the
currency; to foster the development of money and capital markets in Jamaica; and to act as banker
to the Government of Jamaica.

2. Statement of compliance, basis of preparation and significant accounting policies

(a) Statement of compliance:

The financial statements are prepared in accordance with the provisions of the Bank of
Jamaica Act and International Financial Reporting Standards (IFRS) and their interpretations,
adopted by the International Accounting Standards Board (IASB).

(b) Basis of preparation:

The financial statements are presented in Jamaica Dollars (J$) which is the Bank’s functional
currency and are prepared on the historical cost basis, except for the inclusion of available-
for-sale investments, investment property and certain classes of property, plant and
equipment at fair value.

The accounting policies set out below have been applied consistently to all periods presented
in these financial statements and comply in all material respects with IFRS.

The preparation of the financial statements in accordance with IFRS requires management to
make judgements, estimates and assumptions that affect the application of policies and
reported amounts of and disclosure relating to assets, liabilities, contingent assets and
contingent liabilities at the balance sheet date and the income and expenses for the year then
ended. Actual results may differ from these estimates.

Accounting estimates and judgements

Accounting estimates and judgements made by management in the application of IFRS that
have significant effect on the financial statements and estimates with a significant risk of
material adjustment in the next financial year are discussed below:

(a) Pension and other post-retirement benefits

The amounts recognised in the balance sheet and income statement for pension and
other post-retirement benefits are determined actuarially using several assumptions.
The primary assumptions used in determining the amounts recognised include expected
long-term return on plan assets, the discount rate used to determine the present value of
estimated future cash flows required to settle the pension and other post-retirement
obligations and the expected rate of increase in medical costs for post-retirement
medical benefits.

- ix - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

10

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(b) Basis of preparation (cont’d):

Accounting estimates and judgements (cont’d)

(a) Pension and other post-retirement benefits (cont’d)

The expected return on plan assets is assumed after considering the long-term historical
returns, asset allocation and future estimates of long-term investment returns. The
discount rate is determined based on the estimate of yield on long-term government
securities that have maturity dates approximating the terms of the company’s
obligation. In the absence of such instruments in Jamaica, it has been necessary to
estimate the rate by extrapolating from the longest-tenor security on the market. The
estimate of expected rate of increase in medical costs is determined based on
inflationary factors. Any changes in these assumptions will impact the amounts
recorded in the financial statements for these obligations.

(b) Fair value of financial instruments

In the absence of quoted market prices, the fair value of a significant proportion of the
Bank’s financial instruments was determined using a generally accepted alternative
method. Considerable judgement is required in interpreting market data to arrive at
estimates of fair values. Consequently, the estimates arrived at may be significantly
different from the actual price of the instrument in an arm’s length transaction.

It is reasonably possible, based on existing knowledge, that outcomes within the next
financial year that are different from these assumptions could require a material
adjustment to the carrying amount reflected in the financial statements.

(c) Foreign currencies:

The rate of exchange of the Jamaica Dollar for the United States dollar is determined by the
average of the weighted average rate at which the commercial banks trade in U.S. dollars and
the rate at which the Bank itself buys US dollars. The rates of exchange for other currencies
are derived from the US$ rate, thus determined, using rates published by the Federal Reserve
Bank and the Financial Times.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are
translated at the foreign exchange rates prevailing at that date. Transactions in foreign
currencies are translated at the foreign exchange rates ruling at the dates of those transactions.

Gains and losses arising on fluctuations in exchange rates are included in the income
statement.

Final Accounts for Year Ended 31 December 2008 --

Annual Report 2008

11

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(d) Financial instruments:

(i) Classification of investments:

Management determines the classification of investments at the time of purchase and

takes account of the purpose for which the investments were purchased. Investments
are classified as loans and receivables and available-for-sale securities.

Loans and receivables are non-derivative financial assets acquired by the Bank with
fixed or determinable payments and which are not quoted in an active market. An
active market is one where quoted prices are readily and regularly available from an
exchange, dealer, broker or other agency and those prices represent actual and regularly
occurring market transactions on an arm’s length basis. Loans and receivables are
recognised on the day they are acquired by the Bank.

Other financial instruments held by the Bank are classified as available-for-sale.

Available-for-sale instruments are recognised on the date the Bank commits to
purchase the instruments.

(ii) Measurement:

Financial instruments are measured initially at cost, including transaction costs.

Subsequent to initial recognition, all available-for-sale investments are measured at fair

value, except that any instrument that does not have a quoted market price in an active
market and whose fair value cannot be reliably determined, is stated at cost, including
transaction costs, less impairment losses [note 2 (k)].

All non-derivative, non-trading financial liabilities and loans and receivables are
measured at amortised cost, less impairment losses. Amortised cost is calculated on the
effective interest rate method. Premiums and discounts, including initial transaction
costs, are included in the carrying amount of the related instrument and amortised
based on the effective interest rate of the instrument.

Based on the above guidelines, the Bank’s investments are classified and measured as
follows:

[i] Loans and advances are classified as loans and receivables and are stated at cost
(amortised cost), less provision for losses and impairment as appropriate.

[ii] Local currency denominated Government of Jamaica securities which do not

have a quoted market price in an active market and whose fair values cannot be
reliably determined, and interest-bearing deposits are stated at historical or
amortised cost.

[iii] Local currency denominated Government of Jamaica securities with quoted

prices in an active market are classified as available-for-sale and measured at fair
value.

[iv] US Government bonds are classified as available-for-sale and are measured at

fair value.

- xi - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

12

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(d) Financial instruments (cont’d):

(ii) Measurement (cont’d):

[v] Investments in financial institutions:

Investments in financial institutions are stated at cost less provision for losses. A
provision for loss is made where, in the opinion of the directors, there has been a
permanent impairment in the value of an investment. Consolidated financial
statements are not prepared because the directors are of the view that, at this
time, the cost is out of proportion to the benefit to be derived having regard to,
inter alia, the nature of the activities of the investees. The amounts involved are
not material to the Bank. During the year the subsidiary was liquidated (see note
9).

(iii) Fair value measurement principles:

The fair value of financial instruments classified as available-for-sale is based on their

quoted market price at the balance sheet date without any deduction for transaction
costs. Where a quoted market price is not available, the fair value of the instrument is
estimated using discounted cash flow techniques or a generally accepted alternative
method.

Where discounted cash flow techniques are used, estimated future cash flows are based
on management’s best estimates and the discount rate is a market related rate at the
balance sheet date for an instrument with similar terms and conditions.

(iv) Gains and losses on subsequent measurement:

Gains and losses arising from a change in the fair value of available-for-sale assets are
recognised directly in equity, except for impairment losses and, in the case of monetary
items such as debt securities, foreign exchange gains and losses. When the financial
assets are sold, collected or otherwise disposed of, the cumulative gain or loss
recognised in equity is recognised in the income statement.

(v) Cash and cash equivalents:

Cash and cash equivalents are shown at cost.

(vi) Other assets:

Other assets are stated at amortised cost, less impairment losses [note 2 (k)].

Final Accounts for Year Ended 31 December 2008 - xii -

Annual Report 2008

13

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(d) Financial instruments (cont’d):

(vii) Other liabilities:

Other liabilities, including provisions, are stated at amortised cost.

(viii) Provision:

A provision is recognised in the balance sheet when the Bank has a legal or
constructive obligation as a result of a past event, it is probable that an outflow of
economic benefits will be required to settle the obligation, and a reliable estimate of the
amount can be made. If the effect is material, provisions are determined by discounting
the expected future cash flows at a rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.

(ix) Derecognition:

A financial asset is derecognised when the Bank loses control over the contractual
rights that comprise that asset. This occurs when the rights are realised, expire or are
surrendered. A financial liability is derecognised when it is extinguished.

Available-for-sale assets that are sold are derecognised and corresponding receivables
from the buyer for the payment are recognised as of the date the Bank commits to sell
the assets.

Loans and receivables are derecognised on the day they are transferred by the Bank.

(e) Property, plant and equipment:

(i) Owned assets:

Items of property, plant and equipment are stated at cost less accumulated depreciation
and impairment losses [note 2 (k)], except for freehold land and buildings which are
stated at market value.

Cost includes expenditures that are directly attributable to the acquisition of the asset.
The cost of self-constructed assets includes the cost of materials and direct labour and
any other costs directly attributable to bringing the asset to a working condition for its
intended use.

The cost of replacing part of an item of property, plant and equipment is recognised in
the carrying amount of the item if it is probable that the future economic benefits
embodied within the part will flow to the Bank and it can be measured reliably. The
costs of the day-to-day servicing of property, plant and equipment are recognised in
profit or loss as incurred.

The market value of freehold land and building is the estimated amount for which a
property could be exchanged on the date of valuation between a willing buyer and a
willing seller in an arms’ length transaction.

- xiii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

14

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(e) Property, plant and equipment (cont’d):

(ii) Depreciation:

Property, plant and equipment are depreciated on the straight-line basis at annual rates
estimated to write down the assets to their residual value over their estimated useful
lives. Leasehold property is amortised in equal instalments over the shorter of the lease
term and the property’s estimated useful life.

Land, works of art, statues and museum coins are not depreciated.

The estimated useful lives are as follows:

Buildings 10 – 20 years
Leasehold property Shorter of lease term and useful life
Furniture, plant and equipment 10 years
Computer equipment 5 years
Motor vehicles 5 years

The depreciation methods, useful lives and residual values are reassessed at the
reporting date.

(f) Notes and coins in circulation:

The nominal value of numismatic coins sold is included in notes and coins in circulation.
The net proceeds from such sales are included in the income statement.

Notes and coins in circulation is stated after a deduction of 25% of the value of coins in
circulation in accordance with the Bank of Jamaica (Value of Coins in Circulation) Order
1973, as permitted under Section 22 of the Act. The deductions are credited to the special
stabilisation account.

(g) Taxation:

Section 46 of the Act, which exempted the Bank from income tax, stamp duties and transfer
tax, was repealed on December 23, 2003. The Bank is still exempt from income tax under
Section 12(b) of the Income Tax Act. The Bank’s supplies are substantially exempt from
general consumption tax (GCT); it incurs GCT at standard rates on taxable supplies acquired.

(h) Employee benefits:

Employee benefits comprise all forms of consideration given by the Bank in exchange for
service rendered by employees. These include current or short-term benefits such as salaries,
NIS contributions, annual vacation leave, and non-monetary benefits such as medical care
and life insurance; post-employment benefits such as pension and medical care; other long-
term employee benefits such as termination benefits.

Final Accounts for Year Ended 31 December 2008 - xiv -

Annual Report 2008

15

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(h) Employee benefits (cont’d):

(i) General benefits:

Employee benefits are all forms of consideration given by the Bank in exchange for
service rendered by employees. These include current or short-term benefits such as
salaries, NIS contributions, annual leave and non-monetary benefits such as medical
care and loans and post employment benefits such as pensions.

Employee benefits that are earned as a result of past or current service are recognised in
the following manner: short-term employee benefits are recognised as a liability, net of
payments made, and charged as expense. The estimated cost of accumulated vacation
leave is recognised annually. Post-employment benefits are accounted for as described
below.

(ii) Defined-benefit scheme and post employment benefits:

Employee benefits comprising pensions, and the related post-employment assets and
obligations included in these financial statements, have been actuarially determined by
a qualified independent actuary, appointed by management. The appointed actuary’s
report outlines the scope of the valuation and the actuary’s opinion. The actuarial
valuations were conducted in accordance with IAS 19, and the financial statements
reflect the Bank’s post-employment benefit asset and obligations as computed by the
actuary. In carrying out their audit, the auditors relied on the actuary’s report.

The cost of pension benefits is the cost to the Bank of its administration of, and
contributions to, the pension scheme established to provide retirement benefits and its
payments to pensioners to supplement the basic pensions to which pensioners are
entitled under the rules of the scheme (see note 13). The contributions are a percentage
of the members’ salaries; the percentage is determined by the scheme’s actuaries using
the aggregate actuarial cost method. Administration costs are charged when incurred,
and supplemental payments are charged when paid.

The Bank’s net obligation in respect of the defined benefit pension plan is calculated by
estimating the amount of future benefits that employees have earned in return for their
service in the current and prior periods. That value is then discounted to determine the
present value, and the fair value of any plan assets is deducted. The discount rate is
determined by reference to the yield at the balance sheet date on long-term government
bonds with maturities approximating the terms of the Bank’s obligation. The
calculation is performed by a qualified actuary, using the projected unit credit method.

When the benefits of the plan are improved, the portion of the increased benefit relating
to past service by employees is recognised as an expense in the statement of income
and expenses on a straight-line basis over the average period until the benefits become
vested. To the extent that the benefits are vested immediately, the expense is recognised
immediately in the income statement.

- xv - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

16

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(h) Employee benefits (cont’d):

(ii) Defined-benefit scheme and post employment benefits: (cont’d)

To the extent that any cumulative unrecognised actuarial gain or loss exceeds ten
percent of the greater of the present value of the defined benefits obligation and the fair
value of plan assets, that portion is recognised in the statement of income and expenses
over the expected average remaining working lives of the employees participating in
the plan. Otherwise, the actuarial gain or loss is not recognised.

Where the calculation results in a benefit to the Bank, the recognised asset is limited to
the net total of any unrecognised actuarial losses and past service costs and the present
value of any future refunds from the plan or reductions in future contributions to the
plan. An economic benefit is available to the Bank if it is realisable during the life of
the plan, or on settlement of the plan liabilities.

(i) Statutory transfer of profits and losses:

Section 9 of the Act provides for each financial year’s net income to be credited, or net loss
charged, to the General Reserve Fund, and for the balance on the General Reserve Fund in
excess of five times the Bank’s authorised share capital to be transferred to the Consolidated
Fund. Likewise, any losses not covered by reserves are required by the Act to be funded by
Government out of the Consolidated Fund.

(j) Investment property:

Investment property is stated at fair value, determined by management based on an initial

valuation by an independent registered valuator. Fair value is based on market value, being
the estimated amount for which the property could be exchanged on the date of valuation
between a willing buyer and a willing seller, in an arm’s length transaction, after proper
marketing with the parties acting knowledgeably, prudently and without compulsion.

Any gain or loss arising from a change in fair value is recognised in the income statement. In
carrying out their audit, the auditors relied on the valuators’ report.

(k) Impairment:

The carrying amounts of the Bank’s assets are reviewed at each balance sheet date to
determine whether there is any indication of impairment. If any such indication exists, the
asset’s recoverable amount is estimated at each balance sheet date. An impairment loss is
recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its
recoverable amount. Impairment losses are recognised in the income statement.

When a decline in the fair value of an available-for-sale financial asset has been recognised
directly in equity and there is objective evidence that the asset is impaired, the cumulative
loss that has been recognised directly in equity is recognised in the income statement even
though the financial asset has not been derecognised. The amount of the cumulative loss that
is recognised in the statement of income and expenses is the difference between the
acquisition cost and current fair value, less any impairment loss on that financial asset
previously recognised in the income statement.

Final Accounts for Year Ended 31 December 2008 - xvi -

Annual Report 2008

17

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(k) Impairment (cont’d):
(i) Calculation of recoverable amount:
The recoverable amount of the Bank’s investment in loans and receivables and other
assets is calculated as the present value of expected future cash flows, discounted at the
original effective interest rate inherent in the asset. Receivables with a short-term
duration are not discounted.
The recoverable amount of other assets is the greater of their net selling price and fair
value less cost to sell. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset.
For an asset that does not generate largely independent cash inflows, the recoverable
amount is determined for the cash-generating unit to which the asset belongs.
(ii) Reversals of impairment:
An impairment loss in respect of loans and receivables carried at amortised cost is
reversed, if the subsequent increase in recoverable amount can be related objectively to
an event occurring after the impairment loss was recognised. For all other assets, an
impairment loss is reversed, if there has been change in the estimate used to determine
the recoverable amount.
An impairment loss in respect of an investment in an equity instrument classified as
available-for-sale is not reversed through the income statement. If the fair value of a
debt instrument classified as available-for-sale increases and the increase can be
objectively related to an event occurring after the impairment loss was recognised in
the statement of income and expenses, the impairment loss shall be reversed, with the
amount of the reversal recognised in the income statement.
An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined if no impairment loss
had been recognised.
(l) Adoption of new and revised IFRS and interpretations
(i) During the year, the following revised and new IFRS became effective:

x Amendments to IAS 39 Financial Instruments: Recognition and Measurement and

IFRS 7: Financial Instruments Disclosures came into effect October 2008. The
amendments permit an entity to reclassify non-derivative financial assets (other
than those designated at fair value through profit or loss by the entity upon initial
recognition) out of the fair value through profit or loss category in particular
circumstances. The amendment also permits an entity to transfer from the available-
for-sale category to the loans and receivables category a financial asset that would
have met the definition of loans and receivables (if the financial asset had not been
designated as available-for-sale), if the entity has the intention and ability to hold
that financial asset for the foreseeable future or until maturity date.

- xvii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

18

BANK OF JAMAICA

Notes to the Financial Statements (cont’d)

December 31, 2008

2. Statement of compliance, basis of preparation and significant accounting policies (cont’d)

(l) Adoption of new and revised IFRS and interpretations (cont’d)
(i) During the year, the following revised and new IFRS became effective (cont’d):

x IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction came into effect January 1, 2008. The standard
provides guidance on assessing the limit set in IAS 19 on the amount of the surplus
that can be recognised as an asset. It also explains how the pension asset or liability
may be affected by a statutory or contractual minimum funding requirement.
The adoption of these standards did not result in any change in accounting policies and
did not have any effect on the Bank’s financial statements.
(ii) At the date of authorisation of the financial statements, there were certain standards and
interpretations which were in issue but were not yet effective. The standards and
interpretations, considered relevant to the Bank and their dates are as follows:

x IAS 1 (Revised) Presentation of Financial Statements, requires the presentation of

all non-owners’ changes in equity in one or two statements: either in a single
statement of comprehensive income, or in an income statement and in a statement
of comprehensive income. IAS 1 (revised) becomes effective for annual reporting
periods beginning on or after January 1, 2009. The Bank has not yet decided which
of the statements will be used in its financial statements.

x Amendments to IAS 32 Financial Instruments: Presentation and IAS 1,

Presentation of Financial Statements is effective for annual periods beginning on
or after January 1, 2009. The amendments allow certain instruments that would
normally be classified as liabilities to be classified as equity if certain conditions
are met. Where such instruments are reclassified, the entity is required to disclose
the amount, the timing and the reason for the reclassification. The revisions are not
expected to have any significant impact on the Bank’s financial statements.
(m) Related party balances and transactions:
A party is related to the Bank if:
(i) directly or indirectly the party:
x controls, is controlled by, or is under common control with the Bank;
x has an interest in the Bank that gives it significant influence over the Bank, or
x has joint control over the Bank;
(ii) the party is a member of the key management personnel of the Bank.
(iii) the party is a close member of the family of any individual referred to in (i) or (ii)
above;
(iv) the party is a post-employment benefit plan for the benefit of employees of the Bank, or
any entity that is a related party of the Bank.
A related party transaction is a transfer of resources, services or obligations between related
parties, regardless of whether a price is charged.

Final Accounts for Year Ended 31 December 2008 - xviii -

Annual Report 2008

19

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

3. Cash and cash equivalents

2008 2007
J$'000 J$'000

Current accounts and money at call with foreign banks 30,141,309 32,608,300
Current accounts with local banks 202,757 54,901
30,344,066 32,663,201

4. Foreign currency denominated investments

2008 2007
J$'000 J$'000
Available-for-sale securities:
US Government bonds 45,070,438 55,855,254
Barbados Government bond 48,385 38,740
45,118,823 55,893,994
Loans and receivables:
Short-term deposits with foreign banks 57,367,634 36,799,701
102,486,457 92,693,695

5. Loan and advances

The Bank granted loans and advances to certain financial institutions. These loans are collaterised
by securities issued or guaranteed by the Government of Jamaica.

2008 2007
J$'000 J$'000

Denominated in Jamaica dollars 3,057,000 -

Denominated in United States dollars 16,777,196 -
19,834,196 -

At the balance sheet date, the fair value of the securities obtained and held by the Bank was
$23,122,941,000 (2007: $Nil).

All loans and advances mature within twelve months after the balance sheet date.

- xix - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

20

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

6. Local currency denominated investments

2008 2007
J$'000 J$'000
Loans and receivables:
Jamaica Government Securities:
Local registered stock 61,614,841 55,865,698

Available-for-sale securities:
Jamaica Government Securities:
Local registered stock 9,109,101 9,363,009
Treasury bills 31 909
Investment bonds 14,896,344 7,448,012
Investment debentures 726,592 595,181
Registered bonds 923,513 483,915
25,655,581 17,891,026
87,270,422 73,756,724

7. International Monetary Fund – Quota Subscription

This represents the portion of Jamaica's fee for membership of the International Monetary Fund
(IMF), based on its quota, which was paid by the Bank (the other portion having been subscribed
by the Government of Jamaica).

Quotas are reviewed every five years, when adjustments may be considered.

2008 2007
SDR'000 J$'000 J$'000
Amount subscribed (net of reserve
tranche of J$Nil):
At beginning of year 31,125 3,223,061 2,999,595
Effect of exchange rate fluctuation - 375,084 223,466
At end of year 31,125 3,598,145 3,223,061

8. Investment property

2008 2007
J$'000 J$'000

Investment property 94,645 88,597

The carrying amount of the investment property is the fair value of the property arrived at by
management, who took account of the location of the property. The property was initially valued by
C. D. Alexander Limited, registered independent valuator having an appropriate recognised
professional qualification and recent experience in the location and category of the property being
valued, in 2003 at $87,000,000. The fair value arrived at by management was determined having
regard to recent market transactions for similar properties in the same location as the Bank’s
investment property and was not materially different from that of the independent valuator in 2003
[note 2 (j)]. Direct operating expenses during the year were $ 3,859,026 (2007: $2,538,748).

Final Accounts for Year Ended 31 December 2008 - xx -

Annual Report 2008

21

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

9. Investment in financial institution

Latest audited
Equity financial Retained
holding statements earnings
2008 2007 2008 2007
J$'000 J$'000 % % J$'000
Subsidiary company:
Jamaica Export Credit Insurance
Corporation Ltd. (liquidated) Nil 3,200 Nil 100.00 31.12.96 Nil

By virtue of Section 23(j) of the Act, the Bank is empowered to, with the approval of the Minister,
subscribe to, hold and sell shares in any corporation which, with the approval, or under the
authority, of the Government, is established for the purpose of promoting the development of a
money market or securities market in Jamaica or of improving the financial machinery for the
financing of economic development.

In 2006, the Board approved a grant to EX-IM Bank equivalent to the net liquidation proceeds
upon completion of the winding up of the subsidiary company, less the carrying value of shares
held by the Bank. Jamaica Export Credit Insurance Corporation Limited was liquidated on
December 8, 2008.

10. Due from Government and Government Agencies

2008
Movements during the year
Dec. 31, Advances/ (Settlement)/ Charged Dec. 31,
2007 losses profit to expenses 2008
J$'000 J$'000 J$'000 J$'000 J$'000
Expenditure on behalf of Government:
Payment of interest on foreign
liabilities [see (b) below] - 121,937 - (121,937) -
Other expenditure on
behalf of Government 35,227 - - ( 12) 35,215
Withholding tax refund due 8,163,053 1,916,381 - - 10,079,434
Accrued interest on
Government securities 6,303,253 3,354,510 (6,303,253) - 3,354,510
Net profit payable to Consolidated
Fund ( 2,748,356) (6,476,385) - - ( 9,224,741)
11,753,177 (1,083,557) (6,303,253) (121,949) 4,244,418

- xxi - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

22

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

10. Due from Government and Government Agencies (cont’d)

2007
Movements during the year
Dec. 31, Advances/ (Settlement)/ Charged Dec. 31,
2006 losses profit to expenses 2007
J$'000 J$'000 J$'000 J$'000 J$'000
Expenditure on behalf of Government:
Payment of interest on foreign
liabilities [see (b) below] - 161,177 - ( 161,177) -
Other expenditure on
behalf of Government 17,539 17,688 - - 35,227
Withholding tax refund due 6,395,205 1,767,848 - - 8,163,053
Accrued interest on
Government securities 6,375,538 6,303,253 (6,375,538) - 6,303,253
Net profit payable to/net loss
due from Consolidated Fund 1,050,218 (2,748,356) (1,050,218) - ( 2,748,356)
13,838,500 5,501,610 (7,425,756) ( 161,177) 11,753,177

(a) By virtue of Section 36 of the Act, the Bank is empowered to make advances to the
Government up to thirty percent of the estimated revenue of Jamaica for that financial year of
the Government, which are to be repaid within three months after the financial year. Where
advances are not duly repaid, the power of the Bank to grant further advances in any
subsequent financial year is not exercisable until the outstanding advances are repaid.
Except for temporary overdrafts, no advances were made to the Government during the
Bank's financial years ended December 31, 2008 and 2007.
(b) Interest on foreign liabilities comprises interest paid on Government of Jamaica foreign
liabilities.
(c) Government is required by the Act to pay to the Bank, out of the Consolidated Fund, the
losses incurred by the Bank. Section 9 (3) provides that if, in the opinion of the Minister, a
payment to the Bank to clear the losses cannot be made from the Consolidated Fund, then
such losses may be cleared by the issue to the Bank of securities charged to the Consolidated
Fund.

Final Accounts for Year Ended 31 December 2008 - xxii -

Annual Report 2008

23

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

11. Property, plant and equipment

Freehold Furniture,
land and Leasehold plant and Motor Work-in-
buildings property equipment vehicles progress Total
J$'000 J$'000 J$'000 J$'000 J$'000 J$'000
Cost or valuation:
December 31, 2006 1,284,692 7,202 1,117,352 180,518 5,087 2,594,851
Additions 12,782 2,106 37,782 85,455 21,170 159,295
Transfers 4,337 - - - ( 4,337) -
Transfer to investment
property - - - - ( 751) ( 751)
Disposals/write-offs ( 21) - ( 28,781) ( 45,013) - ( 73,815)
December 31, 2007 1,301,790 9,308 1,126,353 220,960 21,169 2,679,580
Additions 37,032 4,556 89,443 137,611 30,975 299,617
Transfers - - 9,822 - ( 9,822) -
Disposals/write-offs - - ( 26,417) ( 59,710) - ( 86,127)
December 31, 2008 1,338,822 13,864 1,199,201 298,861 42,322 2,893,070
At cost 119,298 13,864 1,199,201 298,861 42,322 1,673,546
At valuation 1,219,524 - - - - 1,219,524
1,338,822 13,864 1,199,201 298,861 42,322 2,893,070

Depreciation:
December 31, 2006 190,277 1,555 546,907 38,576 - 777,315
Charge for the year 65,206 817 87,392 34,773 - 188,188
Eliminated on disposals ( 21) - ( 28,780) ( 27,815) - ( 56,616)
December 31, 2007 255,462 2,372 605,519 45,534 - 908,887
Charge for the year 67,057 1,105 90,970 50,353 - 209,485
Eliminated on disposals - - ( 26,417) ( 44,319) - ( 70,736)
December 31, 2008 322,519 3,477 670,072 51,568 - 1,047,636
Net book values:
December 31, 2008 1,016,303 10,387 529,129 247,293 42,322 1,845,434
December 31, 2007 1,046,328 6,936 520,834 175,426 21,169 1,770,693
December 31, 2006 1,094,415 5,647 570,445 141,942 5,087 1,817,536

The Bank’s land and buildings were revalued in 2003 by The C. D. Alexander Company Realty
Limited, Real Estate Broker, Appraiser and Auctioneer on the open-market, existing-use basis. A
revaluation was not done during 2008 as management is of the opinion that there was no significant
change in the value of the land and buildings. The surplus arising on revaluation, inclusive of
depreciation no longer required, is included in property revaluation reserve [note 24(b)].

- xxiii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

24

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

12. Intangible asset

Computer Work-in
software progress Total
J$’000 J$’000 J$’000

Cost or valuation
December 31, 2006 172,058 86,796 258,854
Additions 40,817 - 40,817
Transfer 82,469 (82,469) -
December 31, 2007 295,344 4,327 299,671
Additions 6,319 53,068 59,387
December 31, 2008 301,663 57,395 359,058

Amortisation:
December 31, 2006 132,705 - 132,705
Charge for the year 39,766 - 39,766
December 31, 2007 172,471 - 174,471
Charge for the year 37,193 - 37,193
December 31, 2008 209,664 - 209,664

Net book values:

December 31, 2008 91,999 57,395 149,394
December 31, 2007 122,873 4,327 127,200
December 31, 2006 39,353 86,796 126,149

13. Employee benefits

The Bank operates a non-contributory defined benefit pension scheme, and medical and life
insurance schemes for all its permanent eligible employees and funds supplemental retirement
benefits, except as set out at (e) below. Benefits under the pension scheme are computed by
reference to final salary. The assets of the scheme, which are held separately from those of the
Bank, are under the control of a board of trustees, with day-to-day management by employees of
the Bank.

(a) Pension assets recognised on balance sheet:

2008 2007
J$'000 J$'000

Present value of funded obligations (2,406,300) (2,384,300)

Fair value of plan assets 7,748,000 6,846,400
Unrecognised amount due to limitation (1,129,700) -
Unrecognised actuarial gains (1,527,900) (1,123,700)
Recognised assets 2,684,100 3,338,400

Final Accounts for Year Ended 31 December 2008 - xxiv -

Annual Report 2008

25

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

13. Employee benefits (cont’d)

(a) Pension assets (cont’d):
(i) Movements in the present value of defined benefit obligations:
2008 2007
J$'000 J$'000
Balance at beginning of year 2,384,300 2,187,500
Benefits paid ( 151,200) ( 83,200)
Service and interest costs 411,100 339,300
Actuarial gain ( 237,900) ( 59,300)
Balance at end of year 2,406,300 2,384,300

(ii) Movements in plan assets:

2008 2007
J$'000 J$'000
Fair value of plan assets at January 1 6,846,400 6,051,300
Contributions paid 40,400 34,400
Expected return on plan assets 814,900 663,000
Benefits paid ( 151,200) ( 83,200)
Actuarial gain 197,500 180,900
Fair value of plan assets on December 31 7,748,000 6,846,400

Plan assets consist of the following:

Government of Jamaica securities 7,140,458 5,566,800
Certificates of deposit 160,000 470,000
Real estate 58,000 58,000
Other 389,542 751,600
7,748,000 6,846,400

(iii) Expense/(credit) recognised in the income statement:

2008 2007
J$'000 J$'000
Current service costs 98,200 73,000
Interest on obligations 312,900 266,300
Expected return on plan assets ( 814,900) (663,000)
Past service cost 300 300
Changes in disallowed assets 1,129,600 (285,900)
Net actuarial gain recognised ( 31,400) ( 21,500)
694,700 (630,800)

Actual return on pension plan assets 11.56% 12.3%

- xxv - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

26

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

13. Employee benefits (cont’d)

(a) Pension assets (cont’d):

(iv) Principal actuarial assumptions at the balance sheet date (expressed as weighted
averages):
2008 2007
% %

Discount rate 16.0 13.0

Expected return on plan assets 15.0 12.0
Future salary increases 12.0 10.0

The overall expected long-term rate of return of assets is 15% (2007:12%). The
expected long-term rate of return is based on an inflation rate of 10% (2007:8%).

(v) Historical information

Defined benefit pension plan

2008 2007 2006 2005 2004

J$'000 J$'000 J$'000 J$'000 J$'000
Present value of the defined
benefit obligation (2,406,300) (2,384,300) (2,187,500) (1,638,700) (1,449,500)
Fair value of plan assets 7,748,000 6,846,400 6,051,300 5,326,300 4,199,100
Surplus in plan 5,341,700 4,462,100 3,863,800 3,687,600 2,749,600

Experience adjustments arising

on plan liabilities ( 345,500) ( 321,100) ( 384,800) ( 278,000) 97,900
Experience adjustments arising
on plan assets 197,500 180,900 195,000 682,600 36,200

(b) Post-retirement obligations:

(i) Liability recognised in balance sheet:

2008 2007
J$'000 J$'000

Present value of obligation 1,964,800 2,363,900

Unrecognised actuarial gains/(losses) ( 596,500) (1,396,600)
Unrecognised past services costs non-vested benefits ( 11,100) ( 200)
Net liability recognised in balance sheet 1,357,200 967,100

Final Accounts for Year Ended 31 December 2008 - xxvi -

Annual Report 2008

27

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

13. Employee benefits (cont’d)

(b) Post-retirement obligations (cont’d):

Present value of obligations and recognised liability (cont’d)

(ii) Movement in present value of defined benefit obligation:

2008 2007
J$'000 J$'000

Balance at beginning of year 2,363,900 1,443,900

Interest cost 311,900 173,200
Current service cost 50,300 29,200
Past service costs ( 61,900) ( 60,400)
Benefits paid 17,300 -
Actuarial gain losses ( 716,700) 778,000
Balance at end of year 1,964,800 2,363,900

(iii) Expense recognised in the income statement:

2008 2007
J$'000 J$'000

Current service costs 50,300 29,200

Interest on obligations 311,900 173,200
Past service costs 6,400 100
Net actuarial losses recognised in the year 83,400 36,400
452,000 238,900

(iv) Principal actuarial assumptions at the balance sheet date (expressed as weighted
averages):
2008 2007
% %
Discount rate 16.0 13.0
Medical claims growth 15.0 12.0

Assumptions regarding future mortality are based on the PA (90) mortality table for
pensioners (British mortality tables), but with each age rated down by six years.

(v) Historical information

Post-employment medical benefits

2008 2007 2006 2005 2004

J$'000 J$'000 J$'000 J$'000 J$'000
Present value of obligations 1,964,800 2,361,500 1,443,900 1,069,600 761,500
Experience adjustments arising
on plan liabilities ( 59,400) ( 35,800) ( 30,100) 78,300 30,200

- xxvii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

28

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

13. Employee benefits (cont’d)

(c) Assumed trend in health care cost has a significant effect on the amounts recognised in profit
or loss. A one percentage point change in assumed healthcare cost trend rates would have the
following effects:
One One
percentage percentage
point increase point decrease
J$'000 J$'000
Effect on the aggregate service and interest cost 13,900 (10,300)
Effect on the defined benefit obligation 64,700 (49,500)

(d) The estimated pension contributions expected to be paid into the plan during the next
financial year is J$ 58,220,000 (2007: J$45,806,000).

(e) The Bank granted increases to pensioners as a supplement to the pensions paid by the
scheme. An actuarial valuation disclosed that for the scheme to take over these supplemental
payments currently being paid by the Bank, in addition to increases proposed with effect
from December 31, 2001, a special contribution of J$168,700,000 would be required from the
Bank as of the valuation date. No provision for this lump sum amount is included in the
financial statements, as the scheme is already overfunded.

In addition, the Bank granted a further supplement to pensioners: these supplemental pension
payments amounted to J$54,616,171 for the year (2007: J$54,876,722), all of which have
been included in staff costs in the income statement.

14. Other assets

2008 2007
J$'000 J$'000
Items in process of collection 1,439 13,638
Overdrafts 7,828 7,670
Staff loans 1,201,778 1,091,092
Ex-staff loans 81,612 83,005
Stock of unissued notes and coins 1,572,239 1,372,460
Accrued interest receivable other than on GOJ securities 585,944 779,768
Promissory notes 27,625 47,353
Other 366,447 75,049
3,844,912 3,470,032
Less:
Re-measurement of promissory note ( 3,680) ( 5,256)
Re-measurement of staff loans ( 531,736) ( 409,175)
Provision for loan loss for ex-staff loans ( 11,605) ( 11,605)
3,297,891 3,043,996

Final Accounts for Year Ended 31 December 2008 - xxviii -

Annual Report 2008

29

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

15. Notes and coins in circulation

2008 2007
J$'000 J$'000
Notes 47,194,187 45,509,642
Coins 1,823,681 1,670,186
49,017,868 47,179,828

Section 21 of the Act requires the Bank to hold specified assets of an amount in value sufficient to
cover the value of the total amount of notes and coins in circulation as defined in that section. The
assets held shall include, inter alia, (a) gold; (b) "hard currency" cash, bank balances or securities
issued by a foreign government or international financial institution of which Jamaica is a member;
or (c) Special Drawing Rights. Specified assets held by the Bank, as at December 31, 2008, were
2.93 (2007: 2.84) times the value of notes and coins in circulation at that date.

Coins in circulation are shown net of a reserve of 25% (note 23).

16. Deposits and other demand liabilities

2008 2007
J$'000 J$'000
Government and Government agencies 4,701,699 16,085,128
Commercial banks and specified financial institutions 58,700,048 36,034,371
International Money Fund 79,043 70,804
Others 6,873,890 4,316,136
70,354,680 56,506,439
Jamaica dollar equivalent of foreign currency deposits 33,994,248 16,044,418
Jamaica dollar deposits 36,360,432 40,462,021
70,354,680 56,506,439

Deposit liabilities of the Bank include cash reserves held in connection with the Bank's supervision
of the prudential requirements of commercial banks and specified financial institutions under the
provisions of Section 28 of the Act, Section 14 of the Banking Act, Section 14 of the Financial
Institutions Act and Section 31 of the Building Societies Regulations.

In relation to its management of liquidity in the financial system, the Bank may, under Section 28A
of the Bank of Jamaica Act, require commercial banks and specified financial institutions to make
special deposits with it in the form of cash or specified securities. Cash so deposited is also
included in deposit liabilities of the Bank; securities so deposited are, however, excluded from the
Bank's liabilities, as title is not transferred and the Bank merely holds them in safekeeping. At the
balance sheet date, the Bank was not holding any specified securities in lieu of cash deposits.

At the balance sheet date, the following obtained:

2008 2007
J$'000 J$'000
Amounts included in deposit liabilities of the
Bank, representing statutory reserves 37,768,409 31,905,318

- xxix - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

30

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

17. Open market liabilities

As part of the process of controlling liquidity in the financial system, the Bank acquires funds from
or makes funds available to financial institutions and this is effected by entering into short-term
agreements with the institutions. Receipt of funds is evidenced by the Bank issuing, to the
depositor, Certificates of Deposit.

18. International Monetary Fund - Allocation of Special Drawing Rights

This represents the Bank's obligation for Special Drawing Rights (SDRs) allocated to it. This
allocation does not change unless there are cancellations or further allocations. There have been no
further allocations or cancellations during the year (2007: Nil) and, accordingly, the changes arise
from exchange rate fluctuations.

2008 2007
SDRs'000 J$'000 J$'000
At beginning of year 40,613 4,205,563 3,913,978
Effect of exchange rate fluctuation - 489,424 291,585
At end of year 40,613 4,694,987 4,205,563

19. Foreign liabilities

2008 2007
J$'000 J$'000
Borrowings - Principal 34,241 73,607
- Accrued interest 636 1,945
Unsettled balances on bilateral accounts for CARICOM trade - 15,468
34,877 91,020

20. Other liabilities

2008 2007
J$'000 J$'000
Interest payable 7,814,324 2,277,062
Staff and staff-related expenses 283,608 242,985
Other 32,016 155,274
8,129,948 2,675,321

21. Share capital

Section 8 of the Act provides for the capital of the Bank to be J$4,000,000, which has been paid by
the Government of Jamaica.

Final Accounts for Year Ended 31 December 2008 - xxx -

Annual Report 2008

31

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

22. General Reserve Fund

Section 9 of the Act provides that the Bank shall establish and maintain a General Reserve Fund:

(a) to which, at the end of each financial year, the net income for that year shall be transferred or
the net losses charged;

(b) from which shall be paid to the Consolidated Fund the amount by which, at the end of the
financial year, the balance thereon exceeds five times the Bank's authorised share capital;

(c) into which should be paid from the Consolidated Fund at the end of the financial year, the
amount by which the Bank’s net loss exceeds the balance in the General Reserve Fund.

23. Special stabilisation account

The special stabilisation account is maintained at 25% of the coins in circulation as a reserve
against coins that are unlikely to be redeemed (note 15).

24. Other reserves

This represents the following:

2008 2007
J$'000 J$'000
Securities revaluation reserve [see (a)] 668,230 803,148
Property revaluation reserve [see (b)] 1,121,667 1,121,667
Pension equalisation reserve [see (c)] 2,684,100 3,338,400
4,473,997 5,263,215

(a) This represents the unrealised gains/losses on the revaluation of available-for-sale

investments securities.

(b) The property revaluation reserve represents the surplus arising on the revaluation of certain
freehold properties (see note 11).

(c) The pension equalisation reserve represents the pension surplus arising on the actuarial
valuation, under IAS 19, of the Bank’s pension scheme. Annual changes in the value of the
scheme are shown in the statement of income and expenses, then transferred to this reserve.

25. Interest income

2008 2007
J$'000 J$'000
Loans and receivable
Cash and cash equivalents 438,620 911,291
Funds managed by agents 302,024 101,979
Investment securities 3,170,942 11,117,198
Loans and advances 175,105 -
Other 56,777 50,097
Available-for-sale
Investment securities 13,087,879 6,272,172
17,231,347 18,452,737

- xxxi - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

32

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

26. Foreign exchange gain, net

2008 2007
J$'000 J$'000
Net unrealised gain on translation of foreign currency
assets and liabilities and realised gain on settlement
of foreign assets and foreign liabilities 15,235,061 6,711,619
Exchange loss on purchases and sales of foreign currency ( 234,586) ( 138,736)
15,000,475 6,572,883

27. Interest expense

2008 2007
J$'000 J$'000
Certificates of deposit 13,510,403 13,308,909
Government and Government agencies 910,439 1,553,725
Commercial banks and specified financial institutions 7,243,775 4,502,230
Other 6,421 7,905
21,671,038 19,372,769

28. Staff numbers and costs

The number of employees at the end of the year was 483 (2007: 468) full-time and 21(2007: 82)
contract. The related costs for these employees were as follows:
2008 2007
J$'000 J$'000

Salaries and wages 1,639,458 1,311,156

Statutory payroll contributions 95,168 81,070
Uniforms 5,096 24,151
Staff welfare 67,666 69,771
Staff development 24,217 19,776
1,831,605 1,505,924

29. Operating expenses

Operating expenses include the following charges:

2008 2007
J$'000 J$'000
Depreciation (note 11) 209,485 188,188
Amortisation 37,193 39,766
Auditors' remuneration 7,390 6,426
Payments for redundancies 79,783 9,494

Final Accounts for Year Ended 31 December 2008 - xxxii -

Annual Report 2008

33

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

30. Related party balances

The Bank has a related party relationship with its Board of Directors, the members of the Executive
Council and the Bank of Jamaica pension scheme. Membership of the Executive Council is limited
to fifteen (15) persons.
The balance sheet includes balances, arising in the ordinary course of business with key
management, as follows:
2008 2007
J$'000 J$'000
Loans (included in note 14) 88,079 72,670
The interest rates applicable to the above loans range from 3% - 5%. In addition, a deemed taxable
income is computed on the interest saved by virtue of the concessionary interest rate. No non-
executive director receives emoluments or is in receipt of a loan from the Bank.
The income statement includes income earned from/expenses incurred in transactions with related
parties, in the ordinary course of business, as follows:
2008 2007
J$'000 J$'000
Interest expense – pension scheme 66,632 65,797
Interest income – Executive Council 2,310 2,561
Pension contribution – pension scheme 104,507 97,052
Executive Council compensation is as follows:
2008 2007
J$'000 J$'000
Short-term employee benefits included in staff costs (note 28) 149,420 157,390*
31. Commitments
At the balance sheet date the Bank had:
(a) Capital commitments as follows:
2008 2007
J$'000 J$'000
Authorised and contracted 122,580 50,272
Authorised but not contracted 1,025 71,673
123,605 121,945
(b) Operating lease commitments payable as follows:
2008 2007
J$'000 J$'000
Within one year 6,914 3,402
Subsequent years - 7,858
6,914 11,260

* Restated for comparative purposes

- xxxiii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

34

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

32. Contingent liabilities

At December 31, 2008, the Bank was a defendant in various relatively minor suits claiming
damages. The Bank is of the view that the claims are generally without merit and will not result in
any significant losses to the Bank. There are no lawsuits pending with the Bank as plaintiff as at
December 31, 2008.

33. Fair value of financial instruments

Fair value is the arm’s length consideration for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties, who are under no compulsion to act and is best
evidenced by a quoted market price, if one exists.

Determination of fair value:

The financial instruments held at the balance sheet date are: cash and cash equivalents, interest in
funds managed by agents, loans and advances, foreign and local currency denominated investments,
International Monetary Fund – Holding of Special Drawing Rights, due from Government and
Government Agencies, other assets, deposits and other demand liabilities, open market liabilities,
International Monetary Fund – Allocation of Special Drawing Rights, foreign liabilities and other
liabilities.

The fair value of foreign and local currency denominated investments is assumed to be equal to the
estimated market values as provided in notes 4 and 6, respectively. These values are obtained on the
basis outlined in note 2(d)(iii). The ranges of interest rates used to discount estimated cash flows,
where applicable, are based on the yield curves from the Bank and Bloomberg at the balance sheet
date and were as follows:

2008 2007
% %
Foreign currency denominated investment
US$ bonds 0.02 – 5.89 1.73 – 6.49

Local Government of Jamaica securities

Local registered stock 20.05 – 24.35 13.04 – 15.64
Treasury bills 23.24 – 23.75 12.98 – 13.10
Investment debentures 20.46 – 22.11 13.05 – 13.99
Investment bonds 23.28 – 23.63 12.93 – 13.28
Registered bond 22.40 – 26.38 15.25

The fair value of certain short-term financial instruments was determined to approximate their
carrying value.

No fair value has been estimated on the amount due from Government and Government Agencies,
as there is no practical means of estimating its fair value.

Final Accounts for Year Ended 31 December 2008 - xxxiv -

Annual Report 2008

35

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management:

(a) Introduction and overview

The Bank has exposure to the following risks from its use of financial instruments:

x credit risk
x liquidity risk
x market risks

The Board of Directors has overall responsibility for the establishment and oversight of the
Bank’s risk management framework. The Bank has established an Investment Committee
which is responsible for providing oversight on the conversion of investment strategy into
performance, portfolio construction and risk modelling. There is also a Credit Committee
which is responsible for evaluating and approving applications for staff loans. Both
committees report to the Management Council who reports on a regular basis to the Board of
Directors.

The Bank’s audit sub committee is responsible for monitoring compliance with the Bank’s
risk management policies and procedures and for reviewing the adequacy of the risk
management framework in relation to the risks faced by the Bank. The audit sub-committee is
assisted in these functions by Internal Audit Department. This department undertakes both
regular and ad hoc reviews of risk management controls and procedures, the results of which
are reported to the Board of Directors.

(b) Credit risk

Credit risk is the risk of loss arising from a counter-party to a financial contract failing to
discharge its obligations. This risk arises primarily from the Bank’s foreign and local
currency investment securities, loans and advances, cash and cash equivalent, interest in
funds managed by agents and other assets.

(i) Management of credit risk on classes of financial assets exposed to that risk:

x Foreign currency investments and interest in funds managed by agents

Credit risk in the foreign currency investment portfolio is managed by restricting the
holdings of investments substantially to US Government securities, other highly rated
sovereign securities, Jamaica Government US$ debentures and placements in highly
rated supranational institutions. The Bank uses credit rating ascribed by Moody’s
Investor Services and Standard & Poor’s Corporation as its main criterion for
assessing the creditworthiness of financial institutions and sovereigns. The Bank’s
foreign investments are restricted to money market placements with financial
institutions with minimum short-term credit ratings of A-1/P-2 and with minimum
long-term ratings of Aa1/AA+. Additionally, capital market issues must have a
minimum credit rating of Aa1/AA+. In order to reduce consolidated credit risk
exposure, the Bank has investment limits in place. The Bank’s foreign investment
portfolio consist of short-, medium- and long-term investments each of which have
stipulated percentage limits (upper and lower) of the portfolio at market value.

- xxxv - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

36

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(b) Credit risk (cont’d)

(i) Management of credit risk on classes of financial assets exposed to that risk (cont’d):

x Local investment securities

Credit risk for local securities is managed by investing only in Government of

Jamaica securities. Management does not expect this counterparty to fail to meet its
obligations.

x Loans and advances

Credit risk is managed by requiring institutions to deposit with the Bank of Jamaica
or its agents designated securities sufficient to collateralise loans and advances. The
collateral value of securities accepted is limited to a defined percentage of market
value.

x Cash and cash equivalents

Cash and cash equivalents are held in financial institutions which management
regards as strong and there is no significant concentration. The strength of these
financial institutions is constantly reviewed by the Investment Committee.

x Other assets

Other credit exposures consist mainly of staff loans for housing and motor vehicles.
There is a documented credit policy in place which guides the Bank’s credit process
for staff loans. The policy includes established procedures for the authorisation of
credit. Staff loans are limited to a percentage of the value of the assets being
purchased. Additionally, assets must be insured and repayment terms established.
Mortgages and liens are obtained for staff housing and motor vehicle loans,
respectively.

(ii) Impaired loans and securities

Impaired loans and securities are loans and securities for which the Bank determines
that it is probable that it will be unable to collect all principal and interest due
according to the contractual terms of the loan or securities agreements.

(iii) Past due but not impaired loans and securities

These are loans and securities where contractual interest or principal payments are past
due but the Bank believes that impairment is not appropriate on the basis of the level of
security available or the stage of collection of amounts owed to the Bank.

Final Accounts for Year Ended 31 December 2008 - xxxvi -

Annual Report 2008

37

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(b) Credit risk (cont’d)

(iv) Loans with renegotiated terms

Loans with renegotiated terms are loans that have been restructured due to deterioration
in the borrower’s financial position and where the Bank has made concessions that it
would not otherwise consider. Once the loan is restructured, it remains in this category
independent of satisfactory performance after restructuring. The Bank had no such
loans as at December 31, 2008 and 2007.

(v) Allowances for impairment

The Bank established an allowance for impairment losses that represents its estimate of
incurred losses in its loan portfolio. The allowance is the aggregate of the estimated
losses on individual exposures.

(vi) Write-off policy

The Bank writes off a loan or security balance (and any related allowances for
impairment losses) when the Bank determines that the loans or securities are
uncollectible. This determination is usually made after considering information such as
changes in the borrower’s financial position, or that proceeds from collateral will not be
sufficient to pay back the entire exposure.

(vii) Exposure to credit risk

Exposures to credit risk attached to financial assets are monitored through credit rating
and lending limits, which are regularly reviewed. In addition, securities issued or
guaranteed by the Government of Jamaica are required to collateralise advances to
financial institutions. Current credit exposure is the amount of loss that the Bank would
suffer if every counterparty to which the Bank was exposed were to default at once;
this is represented substantially by the carrying amount of financial assets shown on the
balance sheet.

There has been no change to the Bank’s exposure to credit risk or the manner in which
it manages and measures the risk.

The Bank’s significant concentrations of credit exposure by geographical region

(based on the region of ownership of the entity that issued the security or holds the cash
or cash equivalents) are as follows:
2008 2007
J$'000 J$'000
Caribbean 108,538,669 74,639,620
North America 105,923,170 126,816,583
Europe 41,195,507 9,974,782
Other 301,261 622,120
Total financial assets 255,958,607 212,053,105

- xxxvii - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

38

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d)

(c) Liquidity risk

Liquidity risk is the risk that the Bank will not be able to meet its financial liabilities as they
fall due. Prudent liquidity management implies maintaining sufficient cash and marketable
securities, and ensuring the availability of funding through an adequate amount of committed
standby credit facilities to meet commitments.
The Bank’s exposure to liquidity risk to meet foreign liabilities, as an institution, is limited
due to the minimal amount owed to overseas creditors/lenders. Management of liquidity risk
relates primarily to the availability of liquid foreign resources to sell to the Government of
Jamaica and its agencies to repay their suppliers and lenders. The Bank manages this risk
through a combination of:
„ Budgetary procedures to identify the timing of Government foreign payments.
„ Scheduling the maturity of foreign deposits to coincide with the demands of
Government and its Agencies.
„ Maintaining a portion of its foreign assets in cash or near cash as precautionary funds to
meet unforeseen demands.
The Bank, like all central banks, has no real liquidity risk in relation to its domestic financial
obligations.
The Bank is not subject to any imposed liquidity limit.
The following table presents the undiscounted contractual maturities of financial liabilities:
2008
Within 1 1 to 3 3 to 12 1 to 5
Month months months years Total
Deposits and other demand liabilities 70,354,680 - - - 70,354,680
Open market liabilities 27,594,390 38,279,608 58,949,983 3,155,807 127,979,788
Foreign liabilities - 34,877 - - 34,877
Other 8,129,948 - - - 8,129,948
Commitments 875 8,009 121,635 - 130,519

$106,079,893 38,322,494 59,071,618 3,155,807 206,629,812

2007
Within 1 1 to 3 3 to 12 1 to 5
Month months months years Total
Deposits and other demand liabilities 56,506,439 - - - 56,506,439
Open market liabilities 35,612,459 16,832,785 40,330,788 21,154,088 113,930,120
Foreign liabilities 15,880 9,466 7,933 57,741 91,020
Other 2,675,321 - - - 2,675,321
Commitments 283 567 124,497 7,858 133,205
$94,810,382 16,842,818 40,463,218 21,219,687 173,336,105

Final Accounts for Year Ended 31 December 2008 - xxxviii -

Annual Report 2008

39

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(d) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest
rates, will affect the Bank’s income or the value of its holdings of financial instruments. The
objective of market risk management is to manage and control market risk exposures within
acceptable parameters, while optimising the return on risk. Market risk exposures are measured
using sensitivity analysis.

There has been no change to the Bank’s exposure to market risks or the manner in which it
manages and measures the risk.

(i) Currency risk

Currency risk is the risk that the market value of, or the cash flows from financial
instruments will vary because of exchange rate fluctuations. The bank is exposed to
foreign currency risk due to fluctuations in exchange rates on transactions and balances
that are denominated in currencies other than the Jamaica dollar. At the balance sheet
date, the Bank’s net exposure to foreign exchange rate fluctuations was as follows,
based on currencies in which balance sheet amounts are denominated:

2008
US Euro Pound Other Total
$'000 $'000 $'000 $'000 $'000
Foreign currency assets:
Notes and coins 7,248 2,137 2,074 6,972 18,431
Cash and cash equivalents 23,823,308 244,025 4,156,188 2,120,545 30,344,066
Interest in funds managed
by agents 10,679,421 - - - 10,679,421
Interest receivable on BHAs 492,672 - 2,869 - 495,542
Items in the process of collection 1,400 - - - 1,400
Investment securities 102,486,457 - - - 102,486,457
Loans and advances 16,834,969 - - - 16,834,969
IMF - Holding of special
drawing rights - - - 5,965 5,965
IMF - Quota subscription - - - 3,598,145 3,598,145
Bilateral - - - 78,870 78,870
J$154,325,476 246,162 4,161,131 5,810,497 164,543,266

Foreign currency liabilities:

Deposits current account 27,160,288 117,168 6,441,003 275,789 33,994,248
Deposits - IMF 79,043 - - - 79,043
IMF - Allocation of special
drawing rights - - - 4,694,987 4,694,987
Foreign liabilities - - - 34,877 34,877
27,239,331 117,168 6,441,003 5,005,653 38,803,155
Net foreign currency assets/
(liabilities) J$127,086,145 128,994 (2,279,872) 804,844 125,740,111

- xxxix - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

40

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(d) Market risk (cont’d)

(i) Currency risk (cont’d)

2007
US Euro Pound Other Total
$'000 $'000 $'000 $'000 $'000

Foreign currency assets:

Notes and coins 4,698 1,541 3,441 6,354 16,034
Cash and cash equivalents 30,562,242 491,653 643,374 965,932 32,663,201
Interest in funds managed
by agents 8,864,814 - - - 8,864,814
Interest receivable on BHAs 776,035 - - - 776,035
Items in the process of collection 1,656 - - - 1,656
Investment 92,693,695 - - - 92,693,695
IMF - Holding of special
drawing rights - - - 22,060 22,060
IMF - Quota subscription - - - 3,223,061 3,223,061
J$132,903,140 493,194 646,815 4,217,407 138,260,556

Foreign currency liabilities:

Deposits current account 13,644,561 207,433 1,912,981 279,442 16,044,417
Deposits - IMF 70,804 - - - 70,804
IMF - Allocation of special
drawing rights - - - 4,205,563 4,205,563
Foreign liabilities 15,688 192 - 75,140 91,020
13,731,053 207,625 1,912,981 4,560,145 20,411,804
Net foreign currency assets/
(liabilities) J$119,172,087 285,569 (1,266,166) ( 342,738) 117,848,752

Exchange rates at December 31:

2008 2007
US$1 to J$ 79.94 70.44
UK£1 to J$ 116.87 139.78
CDN$1 to J$ 65.31 71.29
ȯ to J$ 111.27 102.87

At March 25, 2009, the exchange rates were US$1 to J$86.97, UK£1 to J$121.17,
CDN$1 to J$68.68 and ȯ 1 to J$112.37.

Sensitivity analysis

An eight percent (2007:one percent) devaluation of the Jamaica Dollar against

currencies which expose the Bank to risk at December 31 would have increased profit
by $10,059,208 (2007: $1,178,488). However, a two percent (2007: one percent)
revaluation of the Jamaica Dollar against currencies which expose the Bank to currency
risk at December 31 would decrease profit by $2,514,803 (2007:$1,178,488). The
analysis assumes that all other variables, in particular, interest rates, remain constant.
The analysis is performed on the same basis for 2007.

Final Accounts for Year Ended 31 December 2008 - xl -

Annual Report 2008

41

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(d) Market risk (cont’d)

(ii) Interest rate risk:

Interest rate risk is the risk of loss from fluctuations in the future cash flows or fair
values of financial instruments because of a change in market interest rates. It arises
when there is a mismatch between interest-earning assets and interest-bearing liabilities
which are subject to interest rate adjustments within a specified period. It can be
reflected as a loss of future net interest income and/or a loss of current market values.
The Bank manages this risk by monitoring interest rates daily and ensuring that, even
though there is no formally predetermined gap limits, to the extent practicable, the
maturity profile of its financial assets is, at least, matched by that of its financial
liabilities.

The following table summarises the carrying amounts of balance sheet assets, liabilities
and equity to arrive at the Bank’s interest rate gap based on the earlier of contractual
repricing and maturity dates.

2008
Weighted
Within Three to Over Payable Non-rate average
3 months 12 months 12 months after notice sensitive Total interest
J$'000 J$'000 J$'000 J$'000 J$'000 J$'000 %
Assets
Notes and coins - - - - 61,815 61,815 -
Cash and cash equivalents - - - - 30,344,066 30,344,066 -
Interest in funds managed by agents - - - 10,679,421 - 10,679,421 3.11
Foreign currency denominated
investments 57,367,634 - 45,118,823 - - 102,486,457 3.06
International Monetary Fund -
Holding of Special Drawing Rights - - - - 5,965 5,965 15.53
Local currency denominated
investments 508 5,758,841 81,511,073 - - 87,270,422 -
International Monetary Fund –
Quota Subscription - - - - 3,598,145 3,598,145 -
Investment property - - - - 94,645 94,645 -
Loans and advances 19,834,196 - - - - 19,834,196-
Due from Government and
Government agencies - - - - 4,244,418 4,244,418 -
Property, plant and equipment - - - - 1,845,434 1,845,434 -
Intangible assets - - - - 149,394 149,394 -
Employee benefits - - - - 78,870 78,870 -
Bilateral - - - - 2,684,100 2,684,100 -
Other assets - - - - 3,297,891 3,297,891 -
Total assets 77,202,338 5,758,841 126,629,896 10,679,421 46,404,743 266,675,239 7.23

- xli - Final Accounts for Year Ended 31 December 2008

 Bank of Jamaica

42

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(d) Market risk (cont’d)

(ii) Interest rate risk (cont’d):

2008
Weighted
Within Three to Over Payable Non-rate average
3 months 12 months 12 months after notice sensitive Total interest
J$'000 J$'000 J$'000 J$'000 J$'000 J$'000 %

Liabilities
Notes and coins in circulation - - - - 49,017,868 49,017,868 -
Deposits and other demand liabilities:
Jamaica dollar equivalent of
foreign currency deposits 16,005,003 3,321,374 - 14,667,871 - 33,994,248 -
Jamaica dollar deposits 13,154,493 - - 23,205,939 - 36,360,432 -
Open market liabilities 65,873,999 58,949,983 3,155,806 - - 127,979,788 14.13
International Monetary Fund –
Allocation of Special Drawing
Rights - - - - 4,694,987 4,694,987 -
Foreign liabilities - - - - 34,877 34,877 8.02
Employee benefits obligation - - - - 1,357,200 1,357,200 -
Other liabilities - - - - 8,129,948 8,129,948 -
Capital and reserves - - - - 5,105,891 5,105,891 -
Total liabilities 95,033,495 62,271,357 3,155,806 37,873,810 68,340,771 266,675,239 6.96
Total interest rate sensitivity
gap (17,831,157) (56,512,516) 123,474,090 (27,194,389) (21,936,028) -
Cumulative gap (17,831,157) (74,343,673) 49,130,417 21,936,028 - -

2007
Weighted
Within Three to Over Payable Non-rate average
3 months 12 months 12 months after notice sensitive Total interest
J$'000 J$'000 J$'000 J$'000 J$'000 J$'000 %

Assets
Notes and coins - - - - 50,517 50,517 -
Cash and cash equivalents - - - - 32,663,201 32,663,201 -
Interest in funds managed by agents - - - 8,864,814 - 8,864,814 4.35
Foreign currency denominated
investments 36,799,701 - 55,893,994 - - 92,693,695 5.90
International Monetary Fund -
Holding of Special Drawing Rights - - - - 22,060 22,060 -
Local currency denominated
Investments 331,055 473,311 72,952,358 - - 73,756,724 14.28
International Monetary Fund –
Quota Subscription - - - - 3,223,061 3,223,061 -
Investment property - - - - 88,597 88,597 -
Investments in financial institutions - - - - 3,200 3,200 -
Due from Government and
Government agencies - - - - 11,753,177 11,753,177 -
Property, plant and equipment - - - - 1,770,693 1,770,693 -
Intangible assets - - - - 127,200 127,200 -
Employee benefits - - - - 3,338,400 3,338,400 -
Other assets - - - - 3,043,996 3,043,996 -
Total assets 37,130,756 473,311 128,846,352 8,864,814 56,084,102 231,399,335 7.08

Final Accounts for Year Ended 31 December 2008 - xlii -

Annual Report 2008

43

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(d) Market risk (cont’d)

(ii) Interest rate risk (cont’d):

2007
Weighted
Within Three to Over Payable Non-rate average
3 months 12 months 12 months after notice sensitive Total interest
J$'000 J$'000 J$'000 J$'000 J$'000 J$'000 %

Liabilities
Notes and coins in circulation - - - - 47,179,828 47,179,828 -
Deposits and other demand liabilities:
Jamaica dollar equivalent of
foreign currency deposits 2,338,920 - - 13,705,498 - 16,044,418 -
Jamaica dollar deposits 22,094,107 - - 18,367,914 - 40,462,021 -
Open market liabilities 53,583,336 - - 60,346,784 - 113,930,120 12.05
International Monetary Fund –
Allocation of Special Drawing
Rights - - - - 4,205,563 4,205,563 -
Foreign liabilities - - 73,607 - 17,413 91,020 8.20
Employee benefits obligation - - - - 967,100 967,100 -
Other liabilities - - - - 2,675,321 2,675,321 -
Capital and reserves - - - - 5,843,944 5,843,944 -
Total liabilities 78,016,363 - 73,607 92,420,196 60,889,169 231,399,335 5.94
Total interest rate sensitivity
gap (40,885,607) 473,311 128,772,745 (83,555,382) ( 4,805,067) -
Cumulative gap (40,885,607) (40,412,296) 88,360,449 4,805,067 - -

Sensitivity Analysis

A change of 200 (2007:100) basis points in interest rates for Jamaica dollar financial
instruments and a change of 25 (2007: 100) basis points for United States dollar
financial instruments would have increased or decreased profit and equity by the
amounts shown. The analysis assumes that all other variables, in particular, foreign
currency rates, remain constant. The analysis is performed on the same basis for 2007.
Increase Decrease
Effect on Effect on Effect on Effect on
profit/loss equity profit/loss equity
December 31, 2008
Fixed rate financial instruments - ( 144,179) - 147,395
Variable rate financial instruments 1,647,644 ( 78,138) (1,647,644) 78,963
1,647,644 ( 222,317) (1,647,644) 226,358

December 31, 2007

Fixed rate financial instruments - (2,629,737) - 2,811,826
Variable rate financial instruments 689,553 ( 25,984) ( 689,553) 26,152
689,553 (2,655,721) ( 689,553) 2,837,978

- xliii -
 Bank of Jamaica

44

BANK OF JAMAICA

Notes to the Financial Statements (cont'd)

December 31, 2008

34. Financial risk management (cont’d):

(e) Capital management

The Bank’s capital consists of ordinary share capital, general reserve fund, stabilisation
reserve fund, securities revaluation reserve, property revaluation reserve and pension
equalisation reserve. The share capital of the Bank may be increased by resolution of the
Board of Directors. This resolution has to be approved by the House of Representatives. The
Bank’s net profit is transferred to the capital reserve fund. Whenever the credit in the reserve
fund exceeds five times the authorised share capital such excess profit is paid to the
Consolidated Fund. The Bank has been complying with this requirement. There were no
changes in the Bank’s approach to capital management during the year.

- xliv -