ANNUAL REPORT - Bank of Jamaica | Home Development Bank of Jamaica DJIA Dow Jones Industrial Index DNFBP Designated Non-Financial Businesses & Proffessions DSGE Dynamic Stochastic

ANNUAL REPORT

2012

Report and Statement of Accounts for the

Year Ended 31 December 2012

ANNUAL REPORT

2012

Report and Statement of Accounts for the

Year Ended 31 December 2012

© 2013 Bank of JamaicaNethersole Place

KingstonJamaica

Telephone: (876) 922 0750-9Fax: (876) 967 4265

Email: [email protected]: www.boj.org.jm

ISSN 0067 3668

Printed in Jamaica

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.

BANK OF JAMAICA

PRINCIPAL OFFICERSAs at 31 December 2012

GOVERNOR & SUPERVISOR OF BANKS Mr. Brian Wynter

SENIOR DEPUTY GOVERNOR Mrs. Myrtle Halsall, OD

DEPUTY GOVERNORS Mrs. Gayon Hosin - Financial Institutions Supervisory Division

Mr. John Robinson - Research & Economic Programming Division

Mr. Livingstone Morrison - Administration & Technical Services and Finance and Technology Division

Mr. Robin Sykes - Corporate Secretary’s Office

DIVISION CHIEFS Mr. Calvin Brown - Administration & Technical Services Division

Ms. Maurene Simms - Financial Institutions Supervisory Division

Mrs. Natalie Haynes - Banking & Market Operations Division

Dr. Wayne Robinson - Research & Economic Programming Division

Mr. Herbert Hylton - Finance & Technology Division

Ms. Angela Foote - Internal Audit Division

Abbreviations

Foreword by the Governor

1. Bank of Jamaica: Our Role and Function 1

2. The Economy and Monetary Policy Review 32.1 Economic Overview 3 2.2 International Economic Developments 62.3 Balance of Payments 122.4 Foreign Exchange Market 162.5 Prices 202.6 Money and Credit 282.7 Production 372.8 The Stock Market 452.9 Public Finance 492.10 Monetary Policy and Interest Rates 582.11 Economic Outlook 63

3. Financial System Surveillance and Policy 653.1 Supervision of Deposit-taking Institutions (DTIs) 653.2 Supervision of Cambios and Remittance Companies 823.3 Financial System Stability Assessment of DTIs 863.4 Financial Legislation 95

4. Financial Market Operations 99 4.1 Open Market Operations 994.2 International Reserves 1034.3 Reserve Management 106

5. Payment System Oversight 111

6. Banking Services 115

7. Currency Operations 121

8. Administration 125

9. Governance 129

10. Community Outreach 131

11. Bank of Jamaica’s Strategic Objectives 2012-2015 133

12. Calendar of Monetary Policy Developments 137

Final Accounts for the Year Ended 31 December 2012 i Appendices xlvii

CONTENTS

ABBREVIATIONS

ABM Automated Banking MachinesACH Automated Clearing HouseACP African, Pacific and Caribbean (countries)AFI Approved Financial InstitutionAML Anti-money Laundering ARP Average Realized PriceASBA Association of Banking Supervisors of the Americas BCBS Basel Committee on Banking SupervisionBCP Basel Core Principle BIS Bank for International SettlementsBMI Benchmark Investment InstrumentsBN BillionBOE Bank of EnglandBOJ Bank of JamaicaBoJ Bank of JapanBOP Balance of Paymentsbps basis points

CAD Canadian Dollar CAPE Caribbean Advanced Proficiency ExaminationCAR Capital Adequacy RatioCARICOM Caribbean CommunityCCPS Central CounterpartiesCCMB Capital & Credit Merchant BankCD Certificate of DepositCDB Caribbean Development BankCFATF Caribbean Financial Action Task ForceCPC Chief Parliamentary CounselCFT Counter-Financing of TerrorismCGBS Caribbean Group of Banking Supervisorsc.i.f. Cost, insurance and freightCIFTS Customer Inquiry Funds Transfer SystemCOM CommunicationCPI Consumer Price IndexCPI-AF Consumer Price Index excluding Agriculture and FuelCPI-FF Consumer Price Index excluding Food and FuelCRA Credit Reporting ActCRR Cash Reserve RequirementCSD Central Securities DepositoryCTMS Central Treasury Management SystemC&WJCCUL Communications and Other Workers of Jamaica Cooperative Credit Union

Limited

DBJ Development Bank of JamaicaDJIA Dow Jones Industrial IndexDNFBP Designated Non-Financial Businesses & ProffessionsDSGE Dynamic Stochastic General EquilibriumDTI Deposit-taking InstitutionsDVBP Dollar Value of a Basis PointDvP Delivery versus PaymentDVPP Dollar Value of a Percentage Point

EBIS Enterprise Business Intelligence SystemECI Export Credit InsuranceEPA Economic Partnership AgreementEU European UnionEWS Early Warning System EXIM National Export-Import Bank of Jamaica

FATCA Foreign Accoount Tax Compliance ActFATF Financial Action Task ForceFed Federal Reserve (US)FIA Financial Institutions ActFID Financial Investigations DivisionFIDA Financial Investigations Division ActFINSTAB Financial Stability DepartmentFISD Financial Institutions Supervisory DivisionFIU Financial Intelligence UnitFNB Food and Non-alcoholic Beveragesf.o.b. Free on boardFRF Fiscal Responsibility FrameworkFSAP Financial Sector Assessment ProgrammeFSC Financial Services CommissionFSSF Financial Sector Support FundFX Foreign ExchangeFY Fiscal Year

GBP Great Britain PoundGCT General Consumption TaxGDP Gross Domestic ProductGFA Gross Foreign AssetsGKMA Greater Kingston Metropolitan AreaGOJ Government of JamaicaGSDA Government Securities Dematerialization Act

HEART Human Employment and Resource TrainingHMF Honourable Minister of FinanceHWEG Housing, Water, Electricity, Gas and Other Fuels

IDB Inter-American Development BankIBRD International Bank for Reconstruction and Development (World Bank)ICBS International Conference of Banking SupervisorsIFC International Finance CorporationIFPAS Inflation Forecast & Policy Assessment SystemIFRS International Financial Reporting StandardsIMAJ Incorporated Master Builders Associations of JamaicaIMF International Monetary FundIMF-SBA International Monetary Fund – Stand-By ArrangementIPCP Index of Primary Commodity PricesIPDF Insurance Policy Discounting FacilityIPI Import Price Index

JBA Jamaica Bankers AssociationJBDC Jamaica Business Development CentreJCCUL Jamaica Cooperative Credit Union LeagueJCSD Jamaica Central Securities DepositoryJDX Jamaica Debt ExchangeJEEP Jamaica Emergency Employment ProgrammeJGA Jamaica Guild of ArtistsJMMB Jamaica Money Market BrokersJNBS Jamaica National Building SocietyJSE Jamaica Stock ExchangeJTB Jamaica Tourist Board

KYC Know Your CustomerLAR Liquid Assets RequirementLIBOR London Inter-bank Offer RateLRS Local Registered StockLTRO Long-Term Refinancing Operations

MaFI Macro-Financial IndexMFIs Multilateral Financial InstitutionsMOF Ministry of Finance MOU Memorandum of UnderstandingMN MillionMPI Micro-prudential IndexMUG Market User Group

NCTVET National Council on Technical and Vocational Education and TrainingNDA Net Domestic AssetsNHT National Housing TrustNIM Net Interest MarginNIR Net International ReservesNOP Net Open Position NPCB National People’s Cooperative Bank of JamaicaNPL Non-Performing LoansNPS National Payment SystemNROCC National Road Operating & Construction Company

OMO Open Market OperationsOMT Outright Monetary TransactionOPBs Other Public BodiesOPEC Organization of Petroleum Exporting CountriesOUC Other Urban Centres

PAYE Pay As You Earn (income tax)PBOC People’s Bank of ChinaPBMA Public Bodies Management and Accountability PCB People’s Cooperative BankPCMB PanCaribbean Merchant Bank PD Primary DealersPDA Primary Dealers AssociationPFMIs Principles for Financial Market InfrastructuresPL Performing LoansPOCA Proceeds of Crime ActPOS Point of SalePPP Production & Productivity Programmepps Percentage pointsPSCA Payments Clearing and Settlement ActPSE Public Sector Entity

R&A Restaurants AccommodationR&C Recreation & CultureRADA The Rural Agricultural Development AgencyREER Real Effective Exchange RateROAA Return on Average AssetsRSP Remittance Service ProviderRTGS Real Time Gross SettlementRWCA Risk Weighted Capital Adequacy

SCT Special Consumption TaxSDR Special Drawing RightsSIFIs Systemically Important Financial InstitutionsSIPS Systemically Important Payments SystemSME Small and Medium Sized EnterprisesSPBS Selected Public BodiesSRC Scientific Research CouncilSSM Special Safeguard MechanismSTATIN Statistical Institute of JamaicaSWIPS System-wide Important Payment System

TCI Trade Credit InsuranceTPA Terrorism Prevention ActTRAN Transport

UK United KingdomUN United NationsUR Unemployment RateUSA United States of AmericaUSD US Dollar

VAT Value Added TaxVMBS Victoria Mutual Building SocietyVR Variable Rate

WASR Weighted Average Selling RateWATBY Weighted Average Treasury Bill YieldWTI West Texas Intermediate (crude oil)WTO World Trade Organization

YOY Year Over Year

FOREWORD by the governor

The Bank continued to operate in a challenging environment character-

ised by uncertainties in both the domestic and international economies.

Within the domestic economy, investor concerns about the nature and

timing of a funding arrangement with the International Monetary Fund

(IMF) resulted in uncertainties in the financial markets. For the global

economy, the protracted fiscal crisis in Europe continued to have a debili-

tating impact on world trade and growth.

In the context of the uncertainty in the domestic economy, there was a

reduction in net private capital inflows which contributed to increased

instability in the foreign exchange market, reflected in a faster pace of depreciation of the exchange rate

relative to 2011. In this regard, the Bank intervened in the foreign exchange market on several occasions and

in the December quarter offered three special variable rate instruments to primary dealers and commercial

banks. The Bank also maintained its policy rate throughout the year in a context where the outlook for inflation

remained within the targeted range.

Inflation for 2012 was 8.0 per cent, relative to 6.0 per cent in 2011. The higher out-turn was against the

background of adverse weather conditions, the implementation of tax measures and an acceleration in the

rate of depreciation of the domestic currency. However, persistently weak domestic demand conditions, lower

crude oil prices and a significant reduction in communication costs moderated the impact of inflationary

impulses. Against the background of weak demand and the uncertainties, the domestic economy is estimated

to have contracted by 0.3 per cent in 2012. This weak demand reflected the impact of increased unemployment,

declining real wages, reduced pace of growth in remittances and deterioration in both consumer and business

sentiments.

In spite of the uncertain environment the financial system remained stable. In particular, deposit-taking

institutions (DTIs) were largely resilient to macro-prudential stress tests due to strong capital positions and

improved loan quality. In relation to credit, interest rate and foreign exchange stress tests, the results showed

that the system was resilient to these hypothetical shocks, with the post shock capital adequacy ratios (CARs)

generally remaining above the 10.0 per cent minimum benchmark. The assessment of the Bank’s macro-

financial index, which assesses the vulnerability of the financial sector to the changes in the macroeconomy,

also reflected an improvement. Similarly, the DTIs generally recorded a better performance in the micro-

prudential index (MiPI) due to improvements in balance sheet and asset quality indicators.

While no new legislation for the financial sector was passed in 2012 , the Bank continued work on developing

and refining bills to effectively carry out its mandate of financial stability. A major focus was the development of

the ‘Omnibus Banking Bill’ for which the Bank released a Consultation Paper on “Proposals for Enhancement

of the Legislative Framework for the Deposit-taking Sector” in December 2012. The proposed legislation will

strengthen the Bank’s oversight of the deposit-taking financial sector and achieve greater conformity with

the Basel Core Principles as well as other global best practice standards. Additionally, the Omnibus Banking

Bill will consolidate the three deposit-taking statutes into a single piece of legislation to provide for easier

updating of the regulatory framework and eliminate existing inconsistencies and arbitrage opportunities.

In an effort to achieve greater financial inclusion and access to financial services, the Bank pursued amend-

ments to Jamaica’s legal and regulatory framework to allow banks to partner with non-bank third parties to

offer banking services, as agents. These amendments will allow banking customers to conduct banking trans-

actions such as cash deposits and withdrawals within certain size limits from third-party locations. Such agent

activities will also enable banking customers to perform a range of other transactions electronically, including

funds transfers between accounts and balance inquiries.

During 2012, the Bank continued to provide banking and payment services to its clients in the most efficient

and secure way. In this regard, the Bank facilitated the training of the Government’s staff and granted them

access to the JamClear Real Time Gross Settlement (RTGS) system. There were efficiency gains from this

training as the Government, the single most significant initiator of large value transactions, was able to create

its own files in the system, taking full responsibility for verifying the accuracy and timeliness of payments.

Further, the Bank lowered the Automated Clearing House value threshold to $3.0 million from $5.0 million as

part of its risk mitigation strategy of having all large value transactions settled in the RTGS. In addition, the

Bank improved the efficiency of its currency operations by using more durable substrates in the production of

four Bank notes. The $1000, $500 and $50 notes were printed on pre- and post-print varnished cotton while

the $100 note was printed on a composite material of protective polyester film layered around a cotton fibre

core known as Hybrid®.

The Bank continued the investment in its human resources in 2012 through exposure to various seminars,

conferences and workshops both locally and abroad. To this end, the training function was re-launched under

the theme “Vision 2015: Targeted Training-Creating a New Generation of Central Bankers”, aimed at creating

a cadre of central bankers equipped to function in several areas of the Bank. With regard to the physical

infrastructure, the Bank intensified its efforts in 2012 to optimize the use of its physical plant and equipment,

advance its energy management programme as well as implement environmentally friendly initiatives. The key

strategies included the development and implementation of Phase 3 of its Energy Management programme

and the completion of the Glass Fenestration System project. Of note, the Bank achieved a reduction of 12.0

per cent in energy consumption which exceeded its projected savings of 5.0 per cent to 10.0 per cent for the

year.

During the year, the Bank continued its outreach programmes, including the School Education Programme

and the Economic Seminar Series. The Bank also hosted the 2nd G. Arthur Brown Memorial Lecture which

was presented by former Prime Minister, the Most Hon P.J. Patterson on the topic “Stimulating the Flow

of Our Creative Potential”. The Bank remains committed to maintain and enhance its current outreach

programmes while being open to the possibility of new projects aimed at adding value to the employee and

visitor experience.

While economic activity was subdued, the year 2012 was special for Jamaica as it marked the country’s 50th

anniversary of independence. In observance of the anniversary, the Bank issued a series of commemorative

banknotes and coins. Additionally, the Bank’s Lunch Hour Concerts highlighted performances that were

selected to display Jamaican talent over the 50 years. As a mark of the country’s achievement at the Olympic

Games, the Bank released gold and silver commemorative coins in honour of the eight athletes who won

individual Olympic gold medals since Jamaica began participating in 1948.

During 2012, the Bank played a key role in negotiations with the IMF for a borrowing programme. The

engagement with the IMF began with the Article IV consultations which set the stage for discussion on a new

borrowing programme. As the lead member of the country’s negotiating team, I want to express my gratitude

for the outstanding service that was delivered by my staff, particularly those who went beyond the call of duty

at great personal sacrifice. At a time when remuneration has been frozen for all staff members it would be

remiss of me not to recognise in words the commitment and hard work of all members of staff. I am also very

grateful for the contributions of members of the Board of Directors of the Bank during this challenging year.

In 2012, there were changes in the composition of the Board of the Bank due to the resignation of some of

its members and appointments to fill the vacancies. Specifically, there were resignations from Dr. Wesley

Hughes, Dr. Celia Brown-Blake, Dr. Nigel Clarke, Mr. Rohan Barnett and Mr. Mark Myers. On behalf of the

Bank, I want to express my gratitude to these persons for their dedicated service and to wish them well in their

future endeavours. I am also pleased to welcome as their replacements, Mr. Devon Rowe, the new Financial

Secretary and ex officio member, Mr. Christopher Bicknell, Dr. Christine Clarke, Dr. Vincent Lawrence, Miss

Janice Holness and Mr. Dennis Morrison.

The Bank recognizes that there will be continuing challenges for the economy in 2013. Foremost among these

is the successful conclusion of an agreement with the IMF and the subsequent adherence to the performance

targets under the medium-term macroeconomic programme. The signing of this agreement is anticipated

to lead to an improvement in Jamaica’s economic environment in 2013 due to reduced uncertainties, The

Board and management of the Bank are confident that with the professionalism and high standards of the

staff, the Bank will be able to confront the challenges of 2013 and beyond. The Bank’s strategic focus in this

regard involves enhancing the monetary policy framework to achieve the inflation objective, strengthening

the Bank’s institutional framework for maintaining financial system stability and aligning the Bank’s human

resources, processes, technology and organizational structure to support the attainment of the Bank’s strategic

objectives. Brian Wynter

GovernorBank of Jamaica

- 1 -

1. Bank of Jamaica: Our Role & Function

Bank of Jamaica (BOJ), established by the

Bank of Jamaica Act (1960), is responsible for

the implementation of sound and consistent

monetary policies, while ensuring financial

system stability through robust supervisory

and regulatory policies. The achievement of

these objectives is critical to the attainment of

sustainable growth in the Jamaican economy.

The two-fold nature of the Bank’s operations is

captured in its 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 organization with

highly motivated and professional employees

working for the benefit of the people of Jamaica.

Bank of Jamaica conducts monetary policy

with the aim of achieving inflation in line with

that of our major trading partners. While not

operating an explicit inflation targeting regime,

on BOJ’s recommendation, the inflation target

range for the current fiscal year is announced

by the Minister of Finance at the beginning

of each year. In formulating monetary policy

to achieve this target, the Bank takes into

consideration all prevailing and prospective

developments in the macro economy, fiscal

operations, external sector as well as relevant

market information. A decision to change the

stance of monetary policy can be reflected in a

number of adjustments. These include changes

in the rates paid on the Bank’s certificates of

deposit and adjustments to the liquid asset and

cash reserve ratios.

In fulfilling its mandate to maintain financial

system stability, the BOJ has supervisory and

regulatory oversight of commercial banks and

other licensed deposit-taking institutions.

The BOJ routinely monitors institutions’

compliance with all the relevant legislation

and regulations to ensure the highest level of

prudence and integrity in the management

of such organizations. The Bank’s overall

responsibility for financial stability is supported

by micro- and macro-prudential assessments,

which are underpinned by the results from

early warning systems and risk models.

The Bank’s responsibilities also include:

• oversightoftheoperationofthepayments

system and the foreign exchange market;

• theissueandredemptionofcurrency;

• the provision of banking services to the

Government and commercial banks

as well as fiscal agency services to the

Government; and

•management of the external reserves of

Jamaica.

- 3 -

2. The Economy & Monetary Policy Review

2. The Financial Systemthese inflationary impulses was, however,

moderated by a reduction in crude oil prices,

lower communication cost and generally weak

demand conditions.

The Jamaican economy recorded an estimated

marginal contraction of 0.3 per cent in 2012,

following growth of 1.3 per cent in 2011. The

decline in economic activity was influenced by

weak external and domestic demand, elevated

levels of uncertainty throughout the year as well

as the effects of adverse weather conditions.

External demand from major trading partners

remained sluggish against the backdrop of

slower growth in the world economy relative

to 2011. Consumer demand was also adversely

affected by a reduction in real wages, an

increase in unemployment and a reduced

pace of growth in remittances. In addition,

uncertainty about the Government’s pending

agreement with the IMF had an adverse impact

on investor sentiment.

The decline in economic activity for the year

reflected a contraction in the tradable industries,

as value added in the non-tradable industries

remained flat. The contraction for 2012 was

primarily reflected in Mining & Quarrying,

Construction and Transport, Storage &

Communication. However, there was a partly

offsetting impact from growth in Agriculture,

Forestry & Fishing, Hotels & Restaurants and

Finance & Insurance Services.

2.1. Economic OverviewThe Bank of Jamaica (BOJ) maintained

its monetary policy stance in 2012 in the

context of continued weak domestic demand

which tempered the impact of inflationary

impulses as well as uncertainties within the

local and international economies. Within the

domestic economy, uncertainty surrounding

the timing and content of an agreement with

the International Monetary Fund (IMF) on

a new medium-term economic programme

contributed to instability in the foreign

exchange market and delays in investment

projects. Uncertainty in the global economy

was largely related to developments in the Euro

Area and its impact on international financial

and commodity markets.

Headline inflation, as measured by the point-

to-point change in the All Jamaica Consumer

Price Index (CPI), was 8.0 per cent for 2012,

relative to 6.0 per cent for 2011. The outturn

for 2012 was influenced by the implementation

of tax measures announced in the FY2012/13

budget as well as shortages in the supplies

of several agriculture items, due to the

impact of drought conditions in the first half

of the year and the passage of Hurricane

Sandy in October. Inflationary pressures also

emanated from a rise in international grains

prices and the pass-through of exchange rate

depreciation during the year. The impact of

- 4 -The Economy & Monetary Policy Review

Bank of Jamaica

money supply (M3J) decelerated to 0.6 per

cent from 10.5 per cent in 2011 and was well

below the average growth of 8.7 per cent for the

last five years. This marginal increase in 2012,

occurred in the context of the contraction of the

domestic economy, declining real incomes and

marked deceleration in remittance inflows to

Jamaica.

Jamaica’s balance of payments is estimated

to have improved in 2012, largely reflecting

a reduction in the value of imports associated

with weak global and domestic demand

conditions. The weakness in the global economy

contributed to a decline in some commodity

prices, particularly crude oil. In this regard,

the current account deficit is estimated to have

narrowed to 12.7 per cent of GDP from 14.6

per cent in 2011. This improvement reflected

a narrowing in the deficits on the Goods and

Income sub-accounts, the impact of which was

partly offset by lower surpluses on the Services

and Current Transfers sub-accounts. Net

Private and Official Investment inflows were

insufficient to finance the deficits on the capital

and current accounts. Consequently, the NIR

of the Bank fell by US$840.5 million to US$1

125.6 million at end-2012, with gross reserves

representing 13.2 weeks of projected goods and

services imports.

During the period April to December 2012,

public sector performance was affected by the

weak domestic economy which was exacerbated

by uncertainty related to an agreement with

The foreign exchange market in 2012 was

characterized by periods of heightened demand

and reduced private capital and official inflows

relative to 2011. The reduction in inflows was

associated with the uncertainties among the

public surrounding the finalisation of a new

medium-term programme and the adequacy of

the net international reserves (NIR). Against

this background, the Jamaica Dollar reflected

a point-to-point depreciation of 6.9 per cent

against the US dollar for 2012, relative to

depreciation of 0.9 per cent for 2011.

Interest rates on the Bank’s 30-day Certificate

of Deposit (CD) and overnight instrument were

maintained at 6.25 per cent and 0.25 per cent,

respectively, throughout 2012. Additionally,

the domestic cash reserve and liquid assets

requirements were maintained at 12.0 per cent

and 26.0 per cent, respectively. However, in

the context of excess Jamaica Dollar liquidity,

the Bank introduced three variable rate

instruments which were offered to Primary

Dealers and commercial banks between 31

October and 05 November 2012.

In the context of these developments, the

monetary base expanded by 6.5 per cent for

2012, relative to 7.8 per cent for 2011, and

largely reflected net currency issue. The

expansion in the monetary base was facilitated

by an increase in the net domestic assets of the

Central Bank as there was a decline in the NIR.

Concurrent with the slower expansion in the

monetary base, growth in broad Jamaica Dollar

- 5 -

Annual Report 2012

The Economy & Monetary Policy Review

the IMF. This delay resulted in the non-

receipt of some loan and grant flows from

multilateral financial institutions, which led to

postponement of project spending, particularly

by public bodies, consolidating to a build-up in

surplus balances by these entities by end-2012.

With respect to Central Government, revenues

grew by 4.7 per cent for the period, relative to

growth of 6.1 per cent for the corresponding

period in 2011. As a consequence of the

lower revenues, expenditure was curtailed

as the Central Government sought to meet

its fiscal deficit and primary surplus targets

for FY2012/13. In addition, in the context of

the investor uncertainty, the Government was

unable to extend the maturity profile of the debt

stock and increase the proportion of fixed rate

issues, consistent with the debt strategy.

Jamaica’s economic environment is anticipated

to improve in 2013 in the context of reduced

uncertainties consequent on the signing of an

IMF agreement as well as continued global

growth. The economy is expected to expand

in the range of 0.5 per cent to 1.5 per cent in

2013, in contrast to the contraction in 2012.

Most industries are expected to grow in 2013

with the major contributors being Agriculture,

Forestry & Fishing, Construction and Mining

& Quarrying. However, despite the overall

expected expansion in output, domestic

demand conditions are anticipated to remain

weak due to significant fiscal consolidation.

Notwithstanding the relatively weak demand

conditions, headline inflation for 2013 could

exceed the rate recorded in 2012 in the context

of higher import prices and further exchange

rate pass-through. In that context, the Bank will

continue to manage inflation expectations to

obtain the objectives outlined in the medium-

term macroeconomic programme.


Bank of Jamaica

2.2. International Economic

Developments

2.2.1. Overview

Global growth continued to decelerate in 2012

reflecting weak economic activity in most

advanced and emerging market economies.

In particular, the impact of austerity measures

in the Euro Area, stemming from the region’s

sovereign debt crisis, resulted in a contraction in

economic activity in that economy for the year.

As a result, some Euro Area economies were

characterized by heightened unemployment

rates and reduced consumer spending during

the year. This had spill-over effects on the

United Kingdom (UK) as well as some emerging

markets such as China. However, there was

increased domestic demand in the USA.

During 2012, a number of central banks in both

advanced and emerging market economies

implemented additional expansionary

monetary policy measures in an attempt to spur

growth. In spite of the expansionary monetary

policies, global inflation decelerated in the

context of continued weak demand and lower

commodity prices.

2.2.2. Output

The pace of economic growth in the global

economy is estimated to have moderated to 3.2

per cent in 2012, following an expansion of 3.9

per cent in 2011. This outturn reflected slower

growth rates in both advanced and developing

economies. In particular, advanced economies

recorded growth of 1.3 per cent in 2012, relative

to an expansion of 1.6 per cent in 2011 while

growth for the developing countries slowed to

5.1 per cent from 6.3 per cent in 2011 (see Table

1 & Table 2). Among the larger developing

economies, China recorded the fastest output

growth in 2012, albeit at a slower rate (see

Table 2).

Table 1

2011 2012* 2011 2012* 2011 2012* 2011 2012*

Advanced Economies 1.6 1.3 7.9 8.0 2.7 2.0 n/a n/a

of which

USA 1.8 2.2 9.0 8.2 3.1 2.0 0.0 - 0.25 0.0 - 0.25

UK 0.9 -0.2 8.0 8.1 4.5 2.7 0.5 0.5

Euro Area 1.4 -0.4 10.2 11.2 2.7 2.3 1.0 0.75

Canada 2.6 2.0 7.5 7.3 2.9 1.8 1.0 1.0

Japan -0.6 2.0 4.6 4.5 -0.3 0.0 0.1 0.1

Source: IMF World Economic Outlook Update: September 2011; January 2012 , International Labour Office, statistical agencies of individual countries

*Estimates ** Annual average *** End-of-period

INDUSTRIAL ECONOMIESReal GDP, Consumer Prices and Unemployment Rates

(Annual percentage change and per cent of labour force)

Country GDPUnemployment

RateInflation Rate**

Central Bank Target

Interest Rates***

- 7 -

Annual Report 2012


Table 2

2011 2012* 2011 2012*

Emerging and Developing Economies 6.3 5.1 7.2 6.1

Latin America and the Caribbean 4.5 3.0 6.6 6.0

Argentina 8.9 2.6 9.8 9.9

Brazil 2.7 1.0 6.6 5.2

Chile 5.9 5.0 3.3 3.1

Colombia 5.9 4.3 6.4 3.2

Dominican Republic 4.5 4.0 8.5 4.1

Ecuador 5.8 4.0 4.5 5.1

Mexico 3.9 3.8 3.4 4.0

Peru 6.9 6.0 3.4 3.7

Uruguay 5.7 3.5 8.1 7.9

Venezuela 4.2 5.7 26.1 23.2

Caribbean*** 2.7 2.8 7.2 5.5

Antigua & Barbuda -5.5 1.0 3.5 3.8

Barbados 0.6 0.7 9.4 8.2

Dominica 1.0 0.4 1.4 2.3

Guyana 5.4 3.7 5.0 3.0

Jamaica**** 0.9 1.0 7.5 7.3

St. Kitts & Nevis -2.0 0.0 7.2 2.5

St. Vincent & Grenadines 0.0 1.2 2.8 3.2

Trinidad & Tobago -1.5 0.7 5.1 10.0

Developing Asia 8.0 6.6 6.5 5.0

China 9.3 7.8 5.4 3.0

India 7.9 4.5 8.9 10.2

Indonesia 6.5 6.0 5.4 4.4

Malaysia 5.1 4.4 3.2 2.0

Philippines 3.9 4.8 4.7 3.5

Thailand 0.1 5.6 3.8 3.2

Middle East and North Africa 3.5 5.2 9.7 10.4Sources: The World Economic Outlook Update, September 2011, statistical offices of individual countries,

*Estimates, **Annual average, ***GDP weighted, **** Point-to-point

SELECTED DEVELOPING COUNTRIESREAL GDP & CONSUMER PRICES

(Annual per cent Change)

CountryGDP Inflation Rate**


Bank of Jamaica

Growth among the advanced economies

was constrained by the impact of various

austerity measures implemented by European

governments in an effort to contain the region’s

sovereign debt crisis. However, the impact

of these measures was partially offset by

improvements in consumption and investment

expenditure associated with additional

monetary easing in the Euro Area, the USA and

Japan. Economic growth in Japan recovered in

2012, following the impact of the natural disaster

in the preceding year. For the developing

countries, growth in economic output continued

to decelerate due to the impact of weak global

demand which negatively influenced external

trade. Notwithstanding the overall outturn, the

Middle East and North Africa region recorded

an increase in output to 5.2 per cent in 2012

from 3.5 per cent in 2011. This reflected the

impact of export-led growth in the context of

higher oil prices in the first half of the year.

2.2.3. Monetary Policy

The central banks of selected advanced

economies maintained an expansionary

monetary policy stance in 2012 in an effort to

counter the effects of weak demand conditions

that characterized the year. In the USA, for

example, the Federal Reserve Board (Fed)

extended its “Operation Twist” programme,

involving the purchase of Treasury securities

to end-2012 from June 2012. It also launched

a third round of quantitative easing (QE3) in

September 2012, which involved the monthly

purchase of US$40 billion of mortgage-backed

securities for an unlimited period. Following

the launch of QE3 the Fed increased its

monthly purchase of Treasury securities by

US$45 billion in December 2012 in an effort to

maintain downward pressures on longer-term

interest rates. In order to reduce uncertainty

regarding its monetary policy stance, the Fed

pledged to maintain target interest rates within

the range of 0.0 per cent to 0.25 per cent until

the unemployment rate fall below 6.5 per cent

and projected inflation for one and two years

ahead, remaining below 2.5 per cent.

Similarly, the European Central Bank (ECB)

employed a second round of Longer-Term

Refinancing Operations (LTRO) in February

2012, lowered its target interest rates in

July and implemented Outright Monetary

Transactions (OMT) in September. The Bank

of England (BoE) also increased the size of its

asset purchase programme by £100.0 billion to

£375.0 billion in 2012 but halted its third round

of quantitative easing as it shifted its focus to

the Funding for Lending scheme. In an effort

to achieve an inflation target of 1.0 per cent,

the Bank of Japan (BoJ) also expanded its asset

purchase programme; by approximately ¥46.0

trillion to ¥101.0 trillion during 2012.

The central banks of some large emerging

market countries also employed monetary

easing in 2012. This was primarily effected

through the reduction in policy rates. In

particular, the People’s Bank of China (PBoC),

in May 2012 lowered the reserve requirement

- 9 -

Annual Report 2012


for deposit-taking financial institutions by 50

bps to 20.0 per cent for large banks and 18.0 per

cent for small banks. The PBoC later reduced

its benchmark lending rate by 56 bps to 6.0 per

cent in July 2012. The Reserve Bank of India

reduced its target repo rate by 50 bps to 8.0 per

cent while the Central Bank of Brazil lowered

its Selic rate by 325 bps to 7.25 per cent. These

monetary policy initiatives were implemented

in an effort to inject additional liquidity into the

financial system. Conversely, the Central Bank

of the Russian Federation tightened monetary

policy in September 2012, by increasing its

policy rate by 25 bps to 8.25 per cent in an effort

to curb inflationary pressures.

2.2.4. Global Inflation

Global inflation decelerated in 2012. For the

advanced economies, the annual average

inflation rate decelerated to 2.0 per cent in 2012

from 2.7 per cent in 2011. The same measure of

inflation among the developing countries also

fell by 1.1 percentage points to 6.1 per cent in

2012 (see Table 1 & Table 2). The deceleration

reflected a decline in overall commodity prices.

In particular, the prices of non-fuel commodities

fell during the year while there was a significant

moderation in the rate of increase in energy

costs. These price movements were mainly

associated with weak demand conditions in both

advanced and emerging market economies.

However, significantly lower fuel prices in the

second half of the year partly offset the impact

of higher prices in the first half of 2012.

2.2.5. Selected Exchange Rates

Selected international currencies such as the

Euro, Canadian dollar, Great Britain Pound and

the Japanese Yen all depreciated against the

US dollar (USD) during the year (see Table 3).

The depreciation of these currencies primarily

reflected the impact of the slowdown in global

economic activity stemming from uncertainties

in the Euro Area throughout the year. However,

there was a strengthening of the Euro in the

last quarter of 2012 due to the impact of the

implementation of debt sustainability measures

in Greece. In addition, the concerns regarding

Table 3

2011 2012 2011 2012

Canadian Dollar 1.01 1.00 4.2 -1.0

Japanese Yen/1 79.73 79.83 -9.0 0.1

Great Britain Pound 1.60 1.59 3.7 -0.6

Euro 1.39 1.29 4.9 -7.2

Source: Bloomberg

1. Expressed as local currency per unit of US dollars (in accordance with international convention)

Annual Per cent Change

Advanced Economies: Exchange Rates(Annual Average)

US Dollars per Unit of National Currency


Bank of Jamaica

the finalisation of the US 2013 fiscal budget

led to a weakening of the USD against selected

currencies in the final quarter of the year.

2.2.6. Commodity Markets

Commodity prices generally declined in 2012,

relative to the previous year, in the context of

lower demand associated with global economic

weakness, particularly during the second half

of the year. Additionally, increased supplies

of some commodities, amid record production

in key-producing regions, had a dampening

impact on prices. In this regard, the IMF’s Index

of Primary Commodity Prices (IPCP) registered

a decline of 3.1 per cent in 2012 relative to an

increase of 26.3 per cent in 2011 (see Table 4).

The decline in the IPCP reflected a contraction

in Non-fuel Commodities, the impact of which

was partly offset by a mild expansion in Energy.

Lower Non-fuel Commodities primarily

reflected reduced prices for Industrial Inputs,

including agricultural raw materials and

metals. The marginal increase in Energy

reflected higher prices during the first half of

the year, associated with geo-political tensions.

The impact was largely offset by the effects of

weak global demand on prices in the second

half of the year.

Table 4

2011 2012/1

All Primary Commodities 26.3 - 3.1

1. Non-fuel Commodities 17.8 - 9.8

1.1 Edibles 19.4 - 3.7

(a) Food 19.7 - 1.8

(b) Beverages 16.6 - 18.6

1.2 Industrial Inputs 16.4 - 15.5(a) Agricultural Raw Materials 22.7 - 12.6

(b) Metals 13.5 - 16.8

2. Energy 31.8 0.7

Petroleum/2 31.6 1.0

(a) WTI 19.6 - 1.0

(b) Brent 39.3 0.9

(c) Dubai 35.8 2.7

SUMMARY OF WORLD COMMODITY PRICESAnnual Average Per Cent Change

Source: IMF1/ Provisional2/ Simple Average of West Texas Intermediate (WTI), Brent and Dubai Crude oil prices

- 11 -

Annual Report 2012


In terms of Non-Fuel Commodities, there was a

decline of 3.7 per cent gggin the price of Edibles,

compared with a rise of 19.4 per cent in 2011. The

outturn was mainly attributed to a 18.6 per cent

contraction in Beverages in 2012, compared to

growth of 16.6 per cent in the previous year (see

Table 4). Downward price movements largely

reflected a 31.3 per cent fall in the price of Arabica

coffee due to record production in Brazil, the

world’s largest producer. The fall in the sub-index

was also exacerbated by a sharp decline of 20.2

per cent in cocoa prices, given increased supplies

from the top producer, Ivory Coast.

Food prices declined by 1.8 per cent in 2012,

compared to an increase of 19.7 per cent in 2011.

Despite the impact of extreme drought conditions

on the prices of US soybeans and corn, price

declines emanating from increased global supplies

of other commodities including sugar, pork and

fish resulted in an overall decline in this category.

In 2012, the price of Industrial Inputs fell by

15.5 per cent, in contrast to an increase in the

preceding year. The outturn reflected declines in

both agricultural raw materials and metals. With

regard to metals, a deceleration in the pace of

activity in the manufacturing sectors of the Euro

Area and China contributed to the downward

trend in prices, particularly aluminium. In this

context, aluminium prices recorded a decline of

15.7 per cent, compared to a rise of 10.2 per cent

in 2011.

With respect to Energy, crude oil prices, as

measured by the West Texas Intermediate (WTI)

benchmark, fell by 1.0 per cent to average

US$94.21 per barrel (bbl.) in 2012. The decline in

fuel prices was broadly influenced by an overall

reduction in fuel demand associated with the

weak global economy. In addition, high US crude

oil inventories tempered fuel prices throughout

the year. Price movements were affected by the

adverse developments to confidence during the

latter half of 2012. These developments included an

intensification of the sovereign debt and banking

crises in the Euro Area. Uncertainties regarding

the outcome of the US elections and the 2013

fiscal budget negotiations also played a role. The

impact of these developments on crude oil prices

was partly offset by the effects of geo-political

tensions largely associated with uncertainty

surrounding crude oil supplies, following the

implementation of sanctions by the West against

Iran. Furthermore, the implementation of stimulus

measures by the major central banks contributed

to upward adjustments in oil prices.


Bank of Jamaica

2.3. Balance of Payments

2.3.1. Overview

Provisional data indicate that Jamaica’s

balance of payments (BOP) improved in 2012,

largely reflecting a reduction in the value

of imports associated with weak global and

domestic demand conditions. The weakness

in the global economy contributed to a decline

in select commodity prices, particularly oil

(see International Economic Developments

and Production). The current account deficit

for the year is estimated to have narrowed by

US$207.0 million to US$1 902.9 million or 12.7

per cent of GDP relative to 2011 (see Chart 1 and

Table 5). This improvement reflected declines

in the deficits on the Goods and Income sub-

accounts, the impact of which was partly offset

by reductions in the surpluses on the Services

and Current Transfers sub-accounts.

Net Private and Official Investment inflows

were insufficient to finance the deficits on the

capital and current accounts. Consequently,

the NIR of the Bank fell by US$840.5 million

to US$1 125.6 million at end-2012, with gross

reserves representing 13.2 weeks of projected

goods and services imports.

2.3.2. Merchandise Trade

In 2012, the merchandise trade deficit narrowed

by US$119.0 million relative to the deficit for

2011 (see Table 5). This improvement was

mainly driven by a decline of US$116.5 million

or 2.0 per cent in the value of imports (f.o.b.)

and a marginal increase of US$2.5 million or

0.2 per cent in earnings from exports.

The estimated contraction in imports was due

primarily to a reduction of US$113.0 million

or 4.6 per cent in spending on Mineral Fuels.

There were also declines in all other categories

of imports, with the exception of Miscellaneous

Chart 1

9.9

15.9

20.4

9.3 7.0

14.612.7

0.0

5.0

10.0

15.0

20.0

25.0

2006 2007 2008 2009 2010 2011 2012

Per c

ent o

f GDP

Year

Jamaica: Current Account Deficit to GDP

- 13 -

Annual Report 2012


Manufactured Goods, Miscellaneous

Commodities, Beverages & Tobacco, Crude

Materials and Manufactured Goods. These

declines primarily reflected the impact of

weak global and domestic demand conditions

(see International Economic Developments

and Production). The weakness in the global

economy contributed to a reduction in select

commodity prices, in particular, the average

international price of crude oil declined by

1.0 per cent in the review year.

The marginal growth in General Merchandise

Exports in 2012 largely reflected an increase of US$116.0 million or 23.5 per cent in Non-

Traditional Exports, the impact of which was

Table 5

2011 1/ 2012 2/ Change % Change

1. CURRENT ACCOUNT -2 109.8 -1 902.9 207.0 - 9.8

% GDP 14.6 12.7

A. GOODS BALANCE -4 257.6 -4 138.6 119.0 - 2.8

Exports (f.o.b.) 1 664.8 1 667.3 2.5 0.2

Imports (f.o.b.) 5 922.4 5 805.9 - 116.5 - 2.0

B. SERVICES BALANCE 669.8 643.5 - 26.3 - 3.9

Transportation - 576.1 - 614.3 - 38.2 6.6

Travel 1 853.6 1 876.8 23.2 1.3

Other Services - 607.7 - 619.0 - 11.3 1.9

GOODS & SERVICES BALANCE -3 587.8 -3 495.1 92.7 - 2.6

C. INCOME - 518.4 - 403.3 115.1 - 22.2

Compensation of employees 36.5 32.3 - 4.2 - 11.5

Investment income - 554.9 - 435.7 119.3 - 21.5

D. CURRENT TRANSFERS 1 996.4 1 995.6 - 0.8 0.0

General Government 141.3 129.7 - 11.6 - 8.2

Other Sectors 1 855.1 1 865.9 10.8 0.6

2. CAPITAL & FINANCIAL A/C 2 109.8 1 902.9 - 207.0 - 9.8

A. CAPITAL ACCOUNT - 9.1 - 24.0 - 14.9 162.6

General Government 29.0 14.0 - 15.0 - 51.8

Other Sectors - 38.2 - 38.0 0.1 - 0.4

B. FINANCIAL ACCOUNT 2 119.0 1 926.9 - 192.1 - 9.1

Official Investment 497.9 247.3 - 250.6 - 50.3

Private Investment3/ 1 415.8 839.1 - 576.7 - 40.7

Reserves4/ 205.2 840.5

SUMMARY OF BALANCE OF PAYMENTS

1/ Revised 2/ Provisional 3/ Includes Errors & Omissions 4/ Minus Denotes increase

US$MN


Bank of Jamaica

partly offset by a decline in alumina exports.

With regard to Non-Traditional Exports, the

increase largely reflected higher receipts from

chemicals, primarily ethanol. Lower alumina

export earnings reflected a contraction of

11.0 per cent in export volumes as well as a

decline of 8.5 per cent in the average realised

price (ARP) of the commodity. The decline in

export volumes resulted from reduced capacity

utilisation at the JAMALCO alumina plant

which experienced production problems during

the first half of the year.

2.3.3. Services

Net earnings from Services declined by an

estimated 3.9 per cent to US$643.5 million in

2012, this reflecting increases in the deficits

on Transportation and Other Services. The

widening of the deficit on the Transportation

sub-account mainly reflected lower gross

inflows by US$59.2 million, relative to 2011,

due to declining activity at the country’s

ports. With regard to the Other Services the

worsening in the deficit was due largely to an

increase of US$10.8 million or 1.2 per cent in

payments for Insurance and Other Business

Services. The impact of the worsened deficits

in Transportation and Other Services was

partly offset by growth of 1.3 per cent in net

travel inflows relative to 2011 (see Table 5).

This improvement primarily reflected a rise of

1.8 per cent in stop-over visitor arrivals and

an expansion of 17.4 per cent in cruise visitor

arrivals.

2.3.4. Income

For 2012, the deficit on the income sub-account

narrowed by US$115.1 million or 22.2 per

cent to US$403.3 million. This improvement

principally reflected a decline of US$80.4

million or 71.9 per cent in the imputed profit

repatriated by the direct investment companies

and a fall of US$40.1 million or 8.6 per cent in

interest payments by the Central Government.

The impact of this improvement was partly

offset by a decline of US$4.2 million or 11.5 per

cent in Compensation of Employees, resulting

from higher outflows from foreigners working

in Jamaica (see Table 5).

2.3.5. Current Transfers

The surplus on the Current Transfers sub-

account fell marginally in 2012, reflecting a

decline of US$11.6 million or 8.2 per cent in

Government Grants, the impact of which was

partly offset by growth of US$10.8 million or

0.6 per cent in net Private Transfers. Of note,

Gross Private Transfer inflows increased by 0.8

per cent for 2012, relative to the expansion of

2.5 per cent in 2011. The slower pace of growth

in private inflows may have been influenced

by weakness in major developed countries as

well as institutional changes in the remittance

industry during the year.

2.3.6. Capital and Financial Account

The deficit on the Capital Account expanded by

US$14.9 million to US$24.0 million for 2012,

while the surplus on the Financial Account

narrowed by US$192.1 million to US$1 926.9

- 15 -

Annual Report 2012


million. This deterioration in the Financial

Account largely reflected respective declines

of US$576.7 million and US$250.6 million in

net Private and Official Investment inflows (see

Table 5).

The decline in Net Official Investments

stemmed from a fall of US$623.1 million in

gross official inflows (see Table 6). Lower

Official inflows were largely underpinned

by a reduction of US$445.5 million in Other

Assistance, which was related to the government

not accessing the international market in 2012.

In addition, there was a decline of US$177.6

million in Project Loans, following exceptional

disbursements in 2011. The impact of these

weaker inflows was partly offset by a decline in

Gross Official Outflows, which was related to a

lower level of amortization of government debt

as well as a reduction in trade suppliers’ credit.

Net private and official investments were insuf-

ficient to finance the deficits on the capital and

current accounts. As a result, the NIR of the

Bank fell by US$840.5 million to US$1125.6

million at end-2012. Gross Foreign Assets at

end-2012 were valued at US$1 980.80 million,

representing 13.2 weeks of projected goods and

services imports.

Table 6

20111/ 20122/ ChangeGROSS OFFICIAL INFLOWS 1 670.5 1 047.5 - 623.1

Project Loan 310.1 132.5 - 177.6

Other Assistance 1 360.4 915.0 - 445.5

GROSS OFFICIAL OUTFLOWS 1 172.6 800.2 - 372.4

Government Direct 690.1 569.4 - 120.7

Bank of Jamaica 177.0 66.0 - 110.9

OtherOfficial 305.6 164.8 - 140.8

NET OFFICIAL INVESTMENTS 497.9 247.3 - 250.61/ Revised2/ Provisional

OFFICIAL INVESTMENT FLOWS (US$MN)


Bank of Jamaica

2.4. Foreign Exchange Market During 2012, the foreign exchange market was

characterized by periods of excess demand,

reflecting the impact of reduced private capital

inflows and lower official inflows, relative to

2011. The fall-off in official inflows resulted

from the non-disbursement of foreign currency

flows from multilaterals in the context of the

delay in finalising an agreement between the

GOJ and the IMF on Jamaica’s medium-term

economic programme. In this regard, daily

purchases of foreign exchange from earners

averaged US$27.9 million during 2012, relative

to the average daily purchases of US$29.1

million in 2011 (see Table 7 & Table 8).

Against this background, the Jamaica Dollar

reflected a point-to-point depreciation against

its three major counterparts - the US Dollar,

Canadian dollar and Great Britain Pound

in 2012, relative to 2011. In particular, the

Jamaica Dollar depreciated by 6.9 per cent to

$92.98 vis-à-vis the US Dollar, following a more

moderate depreciation of 0.9 per cent for 2011.

The Jamaica Dollar also depreciated by 9.8

per cent to $93.31 and 11.9 per cent to $152.64

relative to the Canadian Dollar and Great

Britain Pound, respectively. This compares to

the appreciation of 1.4 per cent against the

Canadian dollar and depreciation of 0.5 per

cent against the Great Britain Pound in 2011.

Table 7

Quarter From Earners Inter-Dealer Total To End-Users Inter-Dealer Total

March 29.5 13.1 42.6 31.2 13.0 44.2

June 28.6 11.0 39.6 29.4 11.0 40.4

September 27.1 9.6 36.7 26.7 9.6 36.3

December 26.3 7.8 34.1 25.9 7.9 33.8

Annual 27.9 10.4 38.3 28.3 10.4 38.7

Daily Average Trading Volumes (US$ Million) - Excl. Intervention 2012

Purchases From: Sales to:

All Currencies converted to USD

Table 8

Quarter From Earners Inter-Dealer Total To End-Users Inter-Dealer Total

March 29.2 12.9 42.1 27.6 12.9 40.5

June 30.9 11.7 42.6 30.3 11.6 41.9

September 27.6 10.5 38.1 27.6 10.5 38.0

December 28.6 12.0 40.6 27.4 12.0 39.4

Annual 29.1 11.8 40.9 28.2 11.8 40.0

Daily Average Trading Volumes (US$ Million) - Excl. Intervention 2011

Purchases From: Sales to:

All Currencies converted to USD

- 17 -

Annual Report 2012


In the March 2012 quarter, foreign exchange

market conditions were stable in the context of

fairly ample US Dollar supply. In this regard,

earner inflows averaged US$29.5 million daily

compared with average daily earner inflows of

US$29.2 million for the corresponding quarter

in 2011. However, daily average sales to

end users increased to US$31.2 million from

US$27.6 million for the March 2011 quarter.

Consequently, the weighted average sale rate

(WASR) depreciated by 0.8 per cent in the

March quarter, albeit the slowest quarterly pace

of adjustment in the currency for the calendar

year.

By the middle of the June quarter, market

conditions were adversely affected by the

protracted negotiations between the GOJ

and the IMF on the country’s medium-term

economic programme. This was manifested in

a reduction in earner supply to a daily average

of US$28.6 million from US$30.9 million for

the June 2011 quarter, while average daily

sales was relatively unchanged. Against this

background, the Jamaica Dollar depreciated

by 1.6 per cent in the June 2012 quarter,

relative to a fairly moderate depreciation of

0.2 per cent for the corresponding period in

2011. For the first half of 2012, the Jamaica

Dollar therefore depreciated by 2.4 per cent,

compared with depreciation of 0.1 per cent for

the corresponding period in 2011.

Market conditions remained overwrought

during the second half of 2012, given the

uncertainty about the country’s fiscal outlook.

In particular, there were concerns about the

financing plans for the GOJ Eurobond that was

due to mature in the September quarter. In this

context, the Jamaica Dollar recorded a faster

pace of depreciation, relative to the first half

of the year. The point-to-point depreciation

was 4.6 per cent relative to the first half of the

year, reflecting depreciation of 1.4 per cent and

3.3 per cent for the September and December

quarters, respectively.

The sharp depreciation in the WASR during

the second half of the year coincided with a

trend decline in foreign currency inflows from

earners. In particular, per diem inflows from

earners fell to an average of US$26.7 million for

the second half of the year from an average of

US$29.1 million for the first half of 2012. This

tightening in US dollar supply during the year

was also manifested in the progressive decline

in inter-dealer transactions (see Table 7 & Table

8). Similarly the average per diem sales to end

users fell to US$26.3 million for the second half

of the year from US$30.3 million for the first

half.

In the context of the instability in the foreign

market during the year, the Bank intervened on

several occasions. This resulted in net foreign

currency sale of US$524.6 million, in contrast

to net foreign currency purchase of US$331.3

million for 2011 (see Chart 2). Whilst the

Bank’s frequency of intervention was moderate

during the March quarter, there was a marked


Bank of Jamaica

increase the June and September quarters.

This increase was necessitated by the market’s

adverse reaction to the continued delay in ar-

riving at agreement with the IMF. Against this

background, total purchases and sales report-

ed by authorized foreign currency traders de-

clined to US$10 181.0 million and US$10 278.8

million, respectively, during 2012 from US$10

864.4 million and US$10 844.9 million, for

2011 (see Table 9). Concurrently, the share of

inter-dealer trades as a per cent of total trades

declined to 26.8 per cent for 2012 from 29.4 per

cent for 2011.

Chart 2 Bank of Jamaica: Foreign Exchange Market Intervention (Spot Market) 2012

The distribution of market activity between the

main intermediaries i.e. authorized dealers and

cambios, shifted marginally for 2012, although

authorised dealers remained the dominant in-

termediary. In this regard, for 2012, the author-

ized dealers’ market share as a percentage of

total foreign exchange sales declined to 54.3

per cent from 62.6 per cent for 2011. In contrast,

there was an increase in cambios’ market share

to 45.7 per cent from 37.4 per cent in 2011.

- 19 -

Annual Report 2012


Table 9

Quarter 2010 2012 2011 2012

March 2 718.5 2 754.6 2 750.9 2 850.0

June 2 661.9 2 686.0 2 686.1 2 738.1

September 2 728.9 2 552.9 2 725.4 2 525.4

December 2 755.0 2 187.5 2 682.5 2 165.3

Total 10 864.4 10 181.0 10 844.9 10 278.8

Total Purchases and Sales of Foreign Exchange (US$ Million) 2011 - 2012

Purchases Sales

All Currencies converted to USD Includes BOJ Intervention


Bank of Jamaica

2.5. Prices

2.5.1. Overview

Headline inflation, as measured by the point-

to-point change in the All Jamaica Consumer

Price Index (CPI), was 8.0 per cent for 2012,

relative to 6.0 per cent for 2011 (see Chart 3).

The outturn for 2012 was influenced by the

implementation of tax measures which were

announced in the FY2012/13 budget as well

as shortages in supplies of several agricultural

items, due in part to the passage of Hurricane

Sandy. Inflationary pressures also emanated

from a rise in international grains prices in the

first half of 2012 and acceleration in the pace

of depreciation during the year. The impact

of these inflationary impulses was, however,

moderated by a reduction in crude oil prices,

lower communication cost and generally weak

demand conditions.

Two of the three measures of core inflation

tracked by the Bank were considerably lower in

2012 relative to 2011. The rate of change in the

CPI excluding Food and Fuel (CPI-FF) and the

CPI excluding Agriculture and Fuel (CPI-AF)

were 1.8 per cent and 5.5 per cent, respectively,

compared to 5.3 per cent and 6.9 per cent in

2011. In contrast, the Trimmed Mean (TRIM)

increased to 6.0 per cent in 2012 relative to

3.8 per cent in 2011. The generally lower core

inflation was consistent with the weak demand

conditions in the economy.

All regions recorded higher headline inflation in

2012 when compared to 2011. The rate of price

increase for Greater Kingston Metropolitan

Area (GKMA), Other Urban Centres (OUC) and

Rural Areas (RA) accelerated to 10.0 per cent,

6.9 per cent and 6.9 per cent, respectively, when

compared to respective increases of 7.0 per cent,

5.6 per cent and 5.5 per cent in 2011. The rise

in rates across all regions in 2012 was primarily

Chart 3 Headline Inflation

- 21 -

Annual Report 2012


reflected in Food & Non-Alcoholic Beverages

(FNB), Restaurants & Accommodation Services

Source: STATIN

18.8

8.6

16.6

5.0

10.6

3.8

2.4

30.4

4.3

2.0

4.9

8.0

FNB

ATB

CF

HWEG

FHERM

HLTH

TRAN

COM

R&C

ED

R&A

MIS

11.4

3.7

7.6

6.3

2.3

2.5

1.3

34.8

1.0

16.0

3.9

2.7

%Inflation (2012) GKMA Change (yoy %ppt)

12.1

6.4

10.6

4.9

9.0

2.4

2.1

40.1

6.7

5.1

6.2

6.5

FNB

ATB

CF

HWEG

FHERM

HLTH

TRAN

COM

R&C

ED

R&A

MIS

8.3

0.0

1.0

6.6

2.2

0.9

2.3

43.3

1.6

3.7

2.8

0.7

%Inflation (2012) OUC Change (yoy %ppt)

12.2

4.5

9.0

5.8

6.7

3.0

2.4

46.9

8.2

5.3

5.3

4.3

FNB

ATB

CF

HWEG

FHERM

HLTH

TRAN

COM

R&C

ED

R&A

MIS

7.4

0.3

1.4

8.0

0.1

0.1

1.0

48.9

6.2

3.8

2.2

0.7

%Inflation (2012) RA Change (yoy %ppt)

Blue bars = positive and Red bars = negative

Chart 4 Annual Inflation & YOY Change by Region

(R&A) and Recreation & Culture (R&C) (see

Chart 4 & Appendix A).


Bank of Jamaica

2.5.2. Component and Contributing Factors

to Inflation

The higher inflation in 2012 mainly reflected

increases of 14.3 per cent, 5.3 per cent and 6.6

per cent in FNB, R&A and R&C, respectively,

relative to growth of 5.4 per cent, 2.3 per cent

and 3.0 per cent in 2011 (see Chart 4a and

Appendix A). The impact of these increases

was partly offset by a significant reduction of

39.4 per cent in Communication (COM) in

contrast to an increase of 3.1 per cent in 2011.

The significant acceleration in food-related

inflation was due to shortages in agriculture

supplies associated with drought conditions

in the first three quarters and the passage of

Hurricane Sandy in October 2012. FNB also

reflected the pass-through of increases in

international grains prices. The movement in

R&A reflected higher food prices, while the

rise in R&C mainly captured price increases

for books and stationery supplies with some

administrative price adjustments.

For 2012, FNB and Housing, Water, Electricity

Gas & Other Fuels (HWEG), combined,

accounted for approximately 87.3 per cent of the

annual inflation (see Chart 4b). In particular,

FNB accounted for 77.5 per cent of inflation

and was primarily influenced by higher prices

for vegetables and starchy foods. There were

also moderate price increases for processed

foods in sub-divisions such as Meat, Fish &

Seafood, Bread & Cereals and Milk, Cheese &

Eggs, mainly associated with the movements

in international grain prices (see Appendix A).

HWEG accounted for 9.7 per cent of inflation in

2012 and was primarily due to higher costs for

Electricity, Gas, & Other Fuels (see Appendix

14.3

6.1

11.6

5.3

8.6

3.1

2.5

39.4

6.6

3.7

5.3

6.0

FNB

ATB

CF

HWEG

FHERM

HLTH

TRAN

COM

R&C

ED

R&A

MIS

8.9

1.0

2.9

7.0

1.2

0.6

1.0

42.5

3.6

4.9

3.0

0.5

% Inflation (2012) All Jamaica Change (yoy % ppt)


MIS= Miscellaneous Goods & Services, R&A=Restaurants & Accommodation, ED=Education, R&C=Recreation & Culture, COM=Communication, TRAN= Transport, HLTH=Health, FHERM=Furniture, Household Equipment & Routine Household Maintenance, HWEG=Housing, Water, Electricity, Gas & Other Fuels, C&F=Clothing & Footwear, ABT=Alcohol, Beverages & Tobacco, FNB=Food & Non-Alcoholic Beverages

Chart 4a YOY Percentage Change in Inflation

- 23 -

Annual Report 2012


14.3

6.1

11.6

5.3

8.6

3.1

2.5

39.4

6.6

3.7

5.3

6.0

FNB

ATB

CF

HWEG

FHERM

HLTH

TRAN

COM

R&C

ED

R&A

MIS

77.5

1.2

5.6

9.7

6.1

1.5

4.6

22.7

3.2

1.1

4.8

7.3

%Inflation (2012) All Jamaica %Share (2012)


MIS= Miscellaneous Goods & Services, R&A=Restaurants & Accommodation, ED=Education, R&C=Recreation & Culture, COM=Communication, TRAN= Transport, HLTH=Health, FHERM=Furniture, Household Equipment & Routine Household Maintenance, HWEG=Housing, Water, Electricity, Gas & Other Fuels, C&F=Clothing & Footwear, ABT=Alcohol, Beverages & Tobacco, FNB=Food & Non-Alcoholic Beverages

Chart 4b Inflation Contribution by Division

A). These higher costs mainly reflected the

pass-through from increased tariff and fuel

charges alongside an accelerated pace of

depreciation in the domestic currency.

2.5.3. Domestic Agriculture Supply

Domestic agriculture supply was affected by

adverse weather conditions in 2012. In the

first three quarters of the year, there were

moderate contractions in agricultural produce,

due in part to lower than average rainfall.

Additionally, the passage of Hurricane Sandy

in the December 2012 quarter significantly

disrupted supplies. Consequently, the price of

vegetables and starchy foods increased by 28.4

per cent and contributed 28.1 per cent of overall

price movement for the year (see Appendix A).

This outturn was in contrast to the fall of 8.8 per

cent in prices for vegetable and starchy foods

in 2011, reflecting recovery from the adverse

impact of Tropical Storm Nicole in late 2010.

(see Chart 5).

2.5.4. Imported Inflation

Imported inflation in 2012 was influenced by

rising international commodity prices and

an accelerated pace of depreciation in the

domestic currency. In particular, the Bank’s

grains price index increased by 11.6 per cent,

in contrast to a decline of 2.1 per cent for 2011.

The movement in grains prices in 2012 largely

reflected the impact of drought conditions in

major grain producing states in the USA, the

effect of which was partly offset by the impact

of weak global demand conditions. The higher

grain prices were reflected in increased cost of

some processed food items within FNB.


Bank of Jamaica

In contrast to the movement in grains prices,

there was a decline of 10.5 per cent in the

West Texas Intermediate crude (WTI) oil price,

relative to the increase of 10.5 per cent in 2011

(see Chart 6). Consistent with the decline in

international oil price, there were lower rates of

increase in the cost of fuel and energy related

products. These were reflected in lower rates

of movements in TRAN and HWEG relative to

2011.

The exchange rate between the Jamaica Dollar

and the US Dollar depreciated by 6.9 per cent

for 2012. This compares with depreciation of

0.9 per cent for end-2011. This depreciation

resulted in some pass-through to prices and

was mainly reflected within HWEG and FNB.

The acceleration in the pace of depreciation

during the year was influenced by uncertainties

surrounding negotiations between the GOJ

and the IMF for a new borrowing programme.

2.5.5. Administered and Other Price

Adjustments

During the June 2012 quarter, the tax base

was widened to incorporate a variety of basic

food items that were previously tax-exempt or

zero rated. In addition, there were increased

fees for motor vehicle licences, fitness and

registration. The inflationary impact from these

Chart 5 Average Supplies of Agriculture Produce (2011 - 2012)

2011

Yellow Yam

Irish Potato

Ripe Plantains

Sweet Potato

Dasheen

Carrot

Cabbage

Red Peas

Tomato (Plummie)

Escallion & Thyme

Callaloo

Pumpkin

Lettuce

Star

ches

Vege

tabl

es

Actual Avg. of previous 5-years 2012

52.0

71.8

-15.5

3.1

-4.6

-22.0

-1.7

6.8

9.6

-7.2

-22.0

6.3

-29.2

Actual (%)

Source: RADA

- 25 -

Annual Report 2012


AVG EOP AVG EOP AVG EOPWTI Prices Grain Prices Exchange Rate

2011 95.12 98.58 371.78 355.89 86.07 86.602012 94.21 88.27 380.87 397.115 88.97 92.982011 (yoy%) 19.6 10.5 25.1 -2.1 -1.6 0.92012 (yoy%) -1.0 -10.5 2.4 11.6 3.4 7.4

-10

0

10

20

30

40

50

60

70

80

-50

0

50

100

150

200

250

300

350

4002011

2012

2011 (yoy%)

2012 (yoy%)

Chart 6 Trends in WTI Crude Oil & BOJ Grains Index

Source: Bloomberg & STATIN

tax measures was mainly reflected in FNB and

TRAN. Price increases arising from these tax

measures were highest for dairy products, fish

& seafood and meats, which accounted for

30.0 per cent of the movement in CPI during

the year. Price increases arising from these

tax measures were highest for dairy products,

fish & seafood, and meats which accounted

for 30.0 per cent of the movement in the CPI

during the year. The impact of these impulses

was tempered by a reduction in the GCT rate to

16.5 per cent from 17.5 per cent.

Other price changes also contributed to inflation

pressures throughout 2012. Specifically, he

Incorporated Master Builders Association of

Jamaica (IMAJ) effected an average increase

of 5.0 per cent in wages for artisans in February

2012, which was reflected within HWEG. This

followed an average increase of 10.0 per cent

in 2011. Also, in September 2012, there was

an increase of 11.1 per cent in the National

Minimum Wage, which was reflected in

Furniture, Household Equipment & Routine

Household Maintenance.

2.5.6. Demand and Supply Conditions

Some short-term indicators of domestic

demand reflected mixed results throughout

the year. These indicators include PAYE

receipts and the values of debit & credit card

transactions, imports and non-business loans.

In real terms, PAYE receipts and imports

reflected declines of 3.5 per cent and 3.7 per

cent, respectively, relative to increases of 7.5

per cent and 4.7 per cent in 2011. In contrast,

in real terms, the values of debit and credit

card transactions and non-business loans

increased by 2.9 per cent and 14.8 per cent,

respectively, following growth of 5.2 per cent

and 3.0 per cent for 2011. The mixed outturn

for 2012 indicates overall weak demand in the

domestic economy (see Chart 7).


Bank of Jamaica

The Bank estimates that Jamaica’s output gap

widened in 2012 as business activity slowed

amid sluggish demand conditions (see Chart 8).

The resulting excess capacity among industrial

suppliers, combined with weakened domestic

demand had a moderating impact on inflation.

2.5.7. Inflation Expectations

The Bank’s survey of inflation expectations

indicated that the average expected annual

inflation among businesses for 2012 was 8.1

per cent, in line with the actual outturn of

8.0 per cent for the year (see Chart 9). This

expectation was also substantially below the

average of 11.9 per cent that was anticipated

for 2011. The result for 2012 reflected a general

downward adjustment in business expectations

as inflationary pressures subsided within the

low demand environment.

Chart 7 Average Supplies of Agriculture Produce (2010-2011)

Sources: MOF, JETS, STATIN, BOJ

A

15

20

25

30

35

40

45

50

55D

ec-0

7

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

J$ m

illio

n de

flate

d

Real PAYE

Polynomial Trend

B

80

100

120

140

160

180

200

220

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

J$m

illio

n

Real DebitCredit Tran

Polynomial Trend

C

0

1

2

3

4

5

6

7

8

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

US$Billion

Real Import Value

Polynomial Trend

D

450

500

550

600

650

700

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

J$million NonBusiness LoansPolynomial Trend

- 27 -

Annual Report 2012


Chart 8 Trends in Domestic Output Gap for 2010 & 2011

Sources: STATIN & BOJ

Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Apr-12 May-12 Jun-12 Sep-12 Oct-12 Nov-12Exp(all) 13.0 10.8 10.9 11.5 12.9 12.0 11.8 11.9 7.9 8.3 8.1 8.4 8.1 8.0 8.2

Actual(Headline) 13.3 13.2 11.3 11.7 7.8 7.2 8.1 6.0 7.3 7.2 6.9 6.7 6.7 7.2 7.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Annu

al In

flatio

n (%

)

Exp(all)

Actual (Headline)

Chart 9 Headline Inflation vs Expectations

Sources: STATIN

Mar Jun Sep Dec2011 1.7% -0.6% -2.0% 0.5%2012 0.5% -1.8% -2.3% 0.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%2011 2012


Bank of Jamaica

2.6. Money and Credit

2.6.1. Money Supply

For 2012, growth in broad Jamaica Dollar money

supply (M3J) decelerated to 0.6 per cent from

10.5 per cent in 2011 and was well below the

average growth of 8.7 per cent for the last five

calendar years (see Table 10). This marginal

increase in 2012, occurred in the context of a

contraction in the domestic economy, declining

real incomes and marked deceleration in

remittance inflows to Jamaica.

The increase in M3J during 2012 was mainly

reflected in growth of 0.1 per cent and 3.6 per

cent in local currency deposits and Currency

with the Public, respectively. 1,2 For local

currency deposits, the increase was well below

the expansion of 10.7 per cent in 2011. Within

local currency deposits, demand and time

deposits grew by 5.5 per cent and 9.9 per cent,

respectively. Savings deposits decelerated to

0.8 per cent, the lowest rate since December

2000 and could be reflecting the impact of

declining real incomes as well as a deceleration

in remittance inflows in 2012. The impact of

these expansions was partly offset by a decline

of 6.1 per cent in Other Deposits.3

1 M3J is the measure of broad money which is comprised

of currency in circulation and local currency deposits.

Local currency deposits consist of demand, savings, time

and other deposits denominated in Jamaica Dollar.

2 In real terms, there was a decline of 4.1 per cent in

currency in circulation during the year, relative to an

increase of 2.9 per cent in 2011.

3 The decline in Other Deposits in 2012 reflected the

At end-2012, the money multiplier

corresponding to M3J was 3.66 relative to 3.87

at end-2011. This decrease reflected increases

in both the currency to deposit and the reserve

to deposit ratios. The higher ratios were largely

attributable to the significant deceleration in

the growth of local currency deposits.

For the review year, the measure of money

supply that includes foreign currency

deposits, M3*, grew by 5.4 per cent, relative

to an increase of 7.6 per cent for 2011. This

expansion in M3* reflected growth of 21.6

per cent in foreign currency deposits, which

was in contrast to the decline of 1.0 per cent

for the previous year. Of note, the expansion

in the Jamaica Dollar value of these deposits

was attributable to an increase of 13.4 per cent

in the USD equivalent of the foreign currency

stock as well as the depreciation of 6.9 per cent

in the exchange rate vis-à-vis the US dollar,

compared to 0.9 per cent in 2011. The growth

in foreign currency deposits during 2012 was

largely reflected in demand and time deposits

held by business firms. This growth in foreign

currency deposits was particularly evident in

the December 2012 quarter when the stock of

demand deposits denominated in US dollars

doubled in the context of an acceleration in the

normalization, after significant growth in commercial

bank reserves and retained earnings. In 2011, growth

in local currency deposits was largely reflected in

Other Deposits. Within Other Deposits, commercial

bank reserves and retained earnings grew significantly,

associated with initiatives to contain cost and grow non-

interest income.

- 29 -

Annual Report 2012


Table 10

2011 2012 2011 2012Total Money Supply (M3)* 32 605.2 7.6 5.4

Money Supply (M3J) 33 639.0 10.5 0.6

Money Supply (M2J) 14 787.9 6.4 3.6

Money Supply (M1J) 9 505.1 9.2 4.6 Currency with the public 4 377.1 9.0 3.6

Demand Deposits 5 128.0 9.4 5.5

Quasi Money 5 282.8 4.2 2.8Savings Deposits 4 510.6 4.6 0.8Time Deposits 772.2 2.7 9.9

Other Deposits 18 851.1 20.6 - 6.1

Foreign Currency Deposits -1 033.7 - 1.0 21.6

2011 2011 2012TOTAL 32 605.2 7.6 5.4

Net Foreign Assets 4 217.3 3.9 7.3Bank of Jamaica -21 147.7 - 9.5 2.4Commercial Banks 25 364.9 - 201.3 73.6

Credit to Private Sector 20 728.2 9.5 16.7Local Currency 17 120.0 11.9 24.0Foreign Currency 3 608.2 4.9 1.7

Net Claims on Public Sector -26 605.8 - 11.5 18.5

Net Claims on Financial Institutions 7 955.4 - 22.8 - 0.1

BOJ Open Market Operations/1 30 280.3 23.4 - 51.8

Other Items (Net) -3 970.1 10.7 286.6

51 224.3

-117 482.2/1 A negative flow represents an increase in the stock.

38 739.11 316.7

37 759.6

21.2

40 055.8

22 948.8

Sources of Change in Money SupplyFlows (J$MN) % Change

201225 084.613 506.04 115.59 390.5

8 828.7

5 151.61 880.93 270.7

3 677.1 771.8

2 905.3

-6 692.8

COMPONENTS OF CHANGE IN MONEY SUPPLY

Flows (J$MN) % Change

25 084.62 135.9


Bank of Jamaica

pace of depreciation. As a result of the increase

in foreign currency deposits, the ratio of foreign

currency deposits to total deposits at end-2012

was 29.9 per cent, relative to 26.0 per cent at

end-2011 (see Chart 10).

The expansion in M3, partly reflected an

increase of 16.7 per cent in private sector credit

and growth of 18.5 per cent in Net Claims on

the Public Sector. In addition, there was net

unwinding of $51.2 billion or 51.8 per cent of

BOJ open market securities during the year,

relative to the net unwinding of $30.3 billion

or 23.4 per cent during 2011 (see Monetary

Policy Management).

2.6.2. Private Sector Credit

For 2012, the stock of commercial bank credit to

the private sector grew by 16.2 per cent and was

largely denominated in Jamaica Dollar loans

and advances (see Table 11). This expansion

exceeded the increase of 9.5 per cent for 2011

and the average growth of 13.6 per cent for the

previous five years. The acceleration in growth

primarily reflected an expansion in local

currency loans and to a lesser extent, further

investment in corporate securities.

2.6.3. Loans and Advances

Loans and advances, the largest component of

private sector credit, expanded by 15.9 per cent

relative to growth of 9.7 per cent for 2011. This

increase for 2012 reflected expansions in both

business and personal lending (see Table 12).

The stock of commercial bank loans to businesses

increased by 10.7 per cent in 2012, relative to

growth of 5.0 per cent in 2011 (see Table 13).

Growth in Business Lending was reflected in

most sectors, in particular Distribution (31.4

per cent), Manufacturing (55.2 per cent) and

Electricity, Gas & Water (54.0 per cent). The

expansion in Distribution largely represented

syndicated foreign currency loans for debt

Chart 10 Foreign Currency Deposits to Total Deposits - December 2003 to December 2012

- 31 -

Annual Report 2012


Table 11

Table 12

Table 13

Stock Stock Flows Flows % %

2011 2012 2011 2012 2011 2012

Private Sector 241 528.8 279 881.8 21 270.6 38 353.1 9.7 15.9

Business Lending 131 899.9 146 039.2 6 281.9 14 139.3 5.0 10.7

Agriculture & Fishing 5 366.1 6 138.2 846.6 772.1 18.7 14.4

Mining & Quarrying 556.3 693.0 129.9 136.7 30.5 24.6

Manufacturing 7 771.3 12 063.1 - 524.8 4 291.8 - 6.3 55.2

Construction & Land Dev. 21 079.0 21 115.4 - 883.5 36.4 - 4.0 0.2

Transport, Storage & Comm. 11 911.6 11 886.5 2 918.3 - 25.1 32.5 - 0.2

Tourism 31 392.8 26 335.4 239.3 -5 057.4 0.8 - 16.1

Distribution 30 477.3 40 054.7 2 576.2 9 577.4 9.2 31.4

Professional & Other Services 17 098.8 17 793.5 - 228.2 695.4 - 1.3 4.1

Electricity, Gas & Water 5 733.5 8 827.0 1 142.6 3 093.4 24.9 54.0

Entertainment 513.9 1 132.5 65.5 618.6 14.6 >100

Personal & Other Lending 109 628.9 133 842.6 14 988.7 24 213.7 15.8 22.1

Personal 102 192.8 127 342.8 14 311.1 25 150.0 16.3 24.6

Overseas Residents 7 436.1 6 499.9 677.6 - 936.2 10.0 - 12.6

COMMERCIAL BANK DISTRIBUTION OFTOTAL LOANS & ADVANCES TO THE PRIVATE SECTOR (J$MN)

For Year ended 31 December

2011 2012Total Private Sector Credit 20 727.5 38 747.5

% Change 9.5 16.2

Loans and Advances (excluding overseas residents) 20 593.7 37 980.3

Corporate Securities 134.5 767.2

PRIVATE SECTOR CREDITYear ended 31 December

(Flow J$MN)

Stock Stock Flows Flows % %

2011 2012 2011 2011 2011 2012

Private Sector 241 528.8 279 881.8 21 270.6 38 353.1 9.7 15.9

Business Lending 131 899.9 146 039.2 6 281.9 14 139.3 5.0 10.7

Agriculture & Fishing 5 366.1 6 138.2 846.6 772.1 18.7 14.4

Mining & Quarrying 556.3 693.0 129.9 136.7 30.5 24.6

Manufacturing 7 771.3 12 063.1 - 524.8 4 291.8 - 6.3 55.2

Construction & Land Dev. 21 079.0 21 115.4 - 883.5 36.4 - 4.0 0.2

Transport, Storage & Comm. 11 911.6 11 886.5 2 918.3 - 25.1 32.5 - 0.2

Tourism 31 392.8 26 335.4 239.3 -5 057.4 0.8 - 16.1

Distribution 30 477.3 40 054.7 2 576.2 9 577.4 9.2 31.4

Professional & Other Services 17 098.8 17 793.5 - 228.2 695.4 - 1.3 4.1

Electricity, Gas & Water 5 733.5 8 827.0 1 142.6 3 093.4 24.9 54.0

Entertainment 513.9 1 132.5 65.5 618.6 14.6 >100

Personal & Other Lending 109 628.9 133 842.6 14 988.7 24 213.7 15.8 22.1

Personal 102 192.8 127 342.8 14 311.1 25 150.0 16.3 24.6

Overseas Residents 7 436.1 6 499.9 677.6 - 936.2 10.0 - 12.6

COMMERCIAL BANK DISTRIBUTION OFTOTAL LOANS & ADVANCES TO THE PRIVATE SECTOR (J$MN)

For Year Ended 31 December


Bank of Jamaica

refinancing and the provision of working

capital. Growth in Manufacturing reflected

new local currency loans for the sugar industry,

building materials and other manufacturers.

New loans to Electricity, Gas & Water were

related primarily to power generation.

In contrast, there was net repayment in Tourism

and Transport, Storage & Communication. The

contraction in lending to Tourism occurred

during the first three quarters of the year and

was consistent with the slower rate of growth

in the sector as well as the acceleration in the

depreciation of the Jamaica Dollar during the

year.

Growth in Personal & Other lending

accelerated to 22.1 per cent in 2012, relative

to an increase of 15.8 per cent in 2011 and

represented the largest expansion since 2008.

Within personal lending, growth in instalment

credit accelerated to $14.5 billion or 40.0 per

cent for 2012 from $6.8 billion or 23.1 per cent.

This was primarily reflected in loans for debt

consolidation and motor car purchases, which

increased by $4.9 billion or 51.7 per cent and

$4.0 billion or 34.2 per cent, respectively. In

2011, there were respective increases of 10.2

per cent and 67.4 per cent in loans for debt

consolidation and motor car purchases. The

expansion in new loans for debt consolidation

for 2012 was associated with accelerated growth

of 15.2 per cent in commercial banks’ credit

card receivables from 4.8 per cent in 2011.

Consumer spending on motor car purchases

remained buoyant, following the reduction

of import duties and the relaxation of some

restrictions in 2011.

Foreign currency loans to the private sector

declined by 9.6 per cent during the year,

following a marginal expansion in 2011 (see

Table 12). This decline was mainly reflected in

Tourism, Construction & Land Development and

Professional & Other Services. Additionally,

there was a marked contraction in the stock

of foreign currency denominated loans to

Overseas Residents. The net repayments in

foreign currency loans to Overseas Residents

occurred primarily during the last quarter of the

year and may have been partially influenced by

the faster pace of depreciation in the Jamaica

Dollar vis-à-vis the US Dollar.

2.6.4. Non-performing loans

Commercial banks’ loan quality reflected an

improvement at end-2012, relative to end-

2011, notwithstanding a marginal deterioration

during the last quarter of 2012 (see Chart 11). In

this regard, the ratio of non-performing loans to

total loans declined to 6.8 per cent at end-2012

from 8.8 per cent at end-2011.4 Similarly, as

a proportion of total private sector loans, non-

performing loans declined to 7.5 per cent at end-

2012 from 9.6 per cent at end-2011. The major

sectors contributing to the improvement in the

quality of private sector loans were Construction

& Land Development, Professional & Other

Services and Entertainment. In addition, the

4 Non-performing loans refers to loans more than 3

months overdue.

- 33 -

Annual Report 2012


Chart 11 Commercial Banks’ Non-Performing Loans 2008 - 2012

quality of personal loans improved marginally

during the calendar year. Of note, there was an

increase in net loan write-offs by commercial

banks for the year. In particular, net loan write-

offs amounted to $3.2 billion in 2012, relative

to $2.3 billion in 2011 and represented 1.2 per

cent and 1.0 per cent, respectively, of average

outstanding private sector loans.

2.6.5. Interest Rates

For 2012, there was an increase in the weighted

average interest rate on commercial banks’

local currency denominated loans. In contrast,

there was a decline in the weighted average

interest rate on foreign currency denominated

loans.

2.6.5.1. Rate on Domestic Currency Loans

The overall weighted average lending rate on

local currency denominated loans increased

by 41 basis points (bps) to 18.44 per cent at

end-2012, in contrast to a decline of 240 bps

in 2011(see Table 14A). The movement in the

rate during 2012 reflected an increase of 33

bps in the weighted average lending rate to

the Private Sector, partially offset by a decline

of 4 bps in the rate to the Public Sector. In

particular, the change in the rate to the Private

Sector reflected an increase of 355 bps in the

average interest rate on personal loans and

could have been associated with increased

demand for loans. This was in contrast to the

previous year, when weighted average interest

rates for all categories of private sector loans

declined.

For the review year, the overall interest rate

spread on local currency denominated loans

increased by 76 bps to 16.34 per cent. This

increase was in contrast to a decline of 190 bps

in 2011 (see Table 14B). The increase in the

overall interest rate spread in 2012 occurred


Bank of Jamaica

Table 14A

Table 14B

- 35 -

Annual Report 2012


in the context of a reduction of 34 bps in the

weighted average deposit rate as well as an

increase in overall loan rates. There were

increases in the spread on both private and

public sector loans. However, within Private

Sector, interest rate spreads on all loan

categories declined with the exception of the

spread on personal loans, which increased by

389 bps.

2.6.5.2. Rate on Foreign Currency Loans

The weighted average interest rate on foreign

currency denominated loans declined by 38

bps to 7.55 per cent at end-2012 (see Table

15A). This decline was reflected in respective

reductions of 50 bps and 73 bps in the weighted

average interest rates on public and private

sector loans. The reduction in the weighted

average interest rate on Private Sector loans was

reflected in lower rates for instalment credit and

commercial loans as there were increased rates

for mortgage financing and personal loans.

The overall interest rate spread on foreign

currency denominated loans increased by 106

bps to 6.28 per cent at end-2012, relative to a

decline of 184 bps in 2011 (see Table 15B). This

increase occurred in the context of a decline of

Table 15A


Bank of Jamaica

143 bps in the weighted average deposit rate

to 1.28 per cent and was reflected in higher

spreads for both the public and private sectors.

For the Public Sector, the increase in spread was

primarily observed for the Central Government.

Interest spreads for the Private Sector increased

in all loan categories, except instalment credit.

Table 15B

- 37 -

Annual Report 2012


2.7. Production2.7.1. Overview

The Jamaican economy recorded a marginal

contraction of 0.3 per cent in 2012 following

growth of 1.3 per cent in 2011 (see Chart 12).

The decline in economic activity was influenced

by weak external and domestic demand,

elevated levels of uncertainty throughout the

year as well as the effects of Hurricane Sandy

in the fourth quarter. External demand from

major trading partners also remained sluggish

against the backdrop of a slower improvement

in the international economic environment

relative to 2011. The slow pace of international

recovery was reflected in the reduced pace of

growth in remittance inflows to Jamaica, which

affected domestic consumption expenditure.

In addition, domestic economy activity was

adversely affected by subdued investment

and consumer expenditure reflecting the

increased uncertainty regarding the delay in

the Government’s negotiations with the IMF.

Consumer sentiment also waned in the context

of a reduction in real wages and an increase in

unemployment.

The slowdown in economic activity for the

year reflected a contraction of 2.2 per cent in

the tradable industries as value added in the

non-tradable industries remained flat. This

compares to growth of 2.9 per cent and 1.0 per

cent in 2011 for the tradable and non-tradable

industries, respectively. Contraction for 2012

primarily emanated from Mining & Quarrying;

Construction and Transport, Storage &

Communication (see Table 16). These declines

were partially offset by growth from Agriculture,

Forestry & Fishing; Hotels & Restaurants and

Finance & Insurance Services.

2.7.2. Performance by Industry

Chart 12 Real GDP Growth Rates: 2000 - 2012

Source: STATIN


Bank of Jamaica

INDUSTRIAL CONTRIBUTION TO GDP GROWTH (%)

Industries 2011 2012

Growth (%)

Contribution Growth (%)

Contribution

1. GOODS 5.0 117.0 -1.2 111.7

Agriculture, Forestry & Fishing 9.8 41.1 3.1 -59.5

Mining & Quarrying 19.4 64.3 -9.1 138.7

Manufacture 1.8 12.6 -0.2 9.0

Construction 0.8 5.4 -3.5 105.8

2. SERVICES -0.1 -5.6 0.0 13.8

Electricity & Water 1.6 4.1 -0.3 4.4

Wholesale & Retail Trade, Repairs & Installation 0.5 7.8 0.4 -27.6

Hotels & Restaurants 2.0 7.4 1.4 -24.0

Transport, Storage & Communication -1.9 -17.3 -1.9 79.3

Financing & Insurance Services -0.5 -3.9 0.9 -35.3

Real Estates, Renting & Business Activities -0.4 -3.6 -0.3 10.0

Producers of Government Services 0.1 1.1 -0.4 19.5

Other Services -0.5 -2.6 0.2 -4.1

3. FINANCIAL INTERMEDIATION SERVICES INDIRECTLY MEASURED

-3.1 -11.4 -1.5 25.5

TOTAL VALUE ADDED 1.3 100.0 -0.3 100.0

Table 16

Real value added for Mining & Quarrying

contracted by 9.1 per cent in 2012 following

growth of 19.4 per cent in 2011. The performance

of the industry was affected by a slower pace

of growth in the global demand for aluminium

as well as a decline in capacity utilization.

Lower capacity utilization in the industry was

attributed to a disruption in production due

to electrical and mechanical difficulties and

the loss of working hours associated with the

passage of Hurricane Sandy. Consequently,

the capacity utilization rate in the bauxite and

alumina industries deteriorated to 91.2 per cent

and 38.3 per cent, respectively, from 99.3 per

cent and 42.8 per cent in 2011. In this context,

total bauxite and alumina production in 2012

declined by 8.8 per cent and 10.3 per cent,

respectively.

Electricity & Water Supply contracted by 0.3

per cent, following a 1.6 per cent expansion in

the previous year. The decline for the year partly

reflected the impact of Hurricane Sandy on the

distribution infrastructure of both the power

and water companies. In addition, a national

effort to conserve on the usage as well as low

economic output curbed electricity generation

during the year. In this regard, electricity

generation and water production contracted

- 39 -

Annual Report 2012


by 0.2 per cent and 0.9 per cent, respectively,

relative to expansions of 0.4 per cent and 6.7

per cent in 2011.

There was a contraction of 3.8 per cent in

Construction for 2012, in contrast to growth of

0.8 per cent in 2011. The decline in the industry

reflected reductions in public and private

sector projects. In particular, the Norman

Manley International Airport Expansion and

the Washington Boulevard Corridor Widening

projects were completed in 2011 while there

was reduced expenditure on the Jamaica

Development Infrastructure Programme in

2012. However, the industry benefitted from

work on the Palisadoes Shoreline and Road

Rehabilitation Works in the second half of the

year. With respect to residential activities,

data from the National Housing Trust (NHT)

indicated a decline of 30.1 per cent in housing

starts compared to an increase of 36.0 per cent

in 2011. This decline was supported by the

contraction in the total value of mortgages

disbursed by the NHT relative to 2011.

However, there was growth of 40.0 per cent

in housing completions following an increase

of 55.3 per cent in 2011. Two indicators of

construction activity, cement sales and the

importation of construction materials, declined

by 3.0 per cent and 10.0 per cent, respectively,

relative to contractions of 2.5 per cent and 2.4

per cent in 2011.

In the context of reduced domestic and

international demand for Jamaican

manufactured products, Manufacture recorded

a contraction of 0.7 per cent in 2012, compared

to an expansion of 1.8 per cent in 2011. The

performance for the year reflected declines of

1.9 per cent and 1.5 per cent in the June and

December quarters as there was marginal

growth for the other quarters. The decline in

the June quarter was attributed to a contraction

in sugar output due to adverse weather

conditions, the closure of the Petrojam Refinery

for maintenance and the absence of ethanol

production relative to the similar period in

2011.

The out-turn for the review year mainly reflected

a contraction in Other Manufacturing, the

impact of which was partially offset by marginal

growth in Food, Beverages & Tobacco. Within

Other Manufacturing there were reductions in

Refined Petroleum Products and Non-Metallic

Mineral Products. The contraction in Non-

Metallic Mineral Products mainly reflected

reduced demand for cement associated with the

downturn in building construction activities.

The decline in the Refined Petroleum Products

reflected lower levels of production for all

commodities with the exception of automotive

diesel oil. The impact of the declines within

these sub-industries were partially countered

by an expansion in Chemical Products, mainly

in ethanol production, particularly in the second

half of the year. Greater output of ethanol

stemmed from the acquisition of processing

contracts from overseas to fulfil higher demand

for dehydration capacity.


Bank of Jamaica

2.7.3. Increased production in Food, Beverages

& Tobacco primarily reflected higher

output of non-alcoholic and alcoholic

beverages as well as food excluding

sugar (see Table 17). The growth in

food excluding sugar reflected greater

production of animal feeds and edible

oils. Expansion in production of alcoholic

beverages represented recovery

following low production in 2011 due

to environmental concerns. The growth

in non-alcoholic beverages reflected

increased production of carbonated

beverages. However, the impact of

the expansion in these categories was

partially offset by a decline in sugar

output due to a reduction in the sucrose

content of the sugarcane crop.

Transport, Storage & Communication declined

by 1.6 per cent in 2012 continuing the trend

observed since 2008. The contraction in the

Source: Planning Institute of Jamaica

Table 17

SELECTED MANUFACTURING ITEMS Item 2011 2012 % Change

Production (‘000 kgs)

Poultry Meat 101 165 101 509 0.3

Sugar 143 195 136 645 -4.6

Molasses 63 664 58 870 -7.5

Edible Oil 21 266 21 102 -0.8

Non-Metallic Minerals 766 274 760 316 -0.8

Animal Feeds 402 201 408 139 1.5

Production (‘000 litres)

Non-Alcoholic Beverages 161 490 166 848 3.3

Petroleum Products 1 362 787 1 286 845 -5.6

Alcoholic Beverages 77 710 85 199 9.6

industry’s value-added reflected a decline

in Transport as there was expansion in

Communication. The fall in Transport was

influenced by the slowdown in world trade

which resulted in lower activities at the Island’s

sea ports. This was reflected in a decrease of

9.2 per cent in total domestic cargo movements,

the impact of which was partially offset by

growth of 17.4 per cent in cruise passenger

arrivals. In addition, reduced mining activity

resulted in a fall in rail services. The expansion

in Communication was attributed to growth

in telecommunications activities due to the

increase in the average revenue per user of

mobile customers associated with the reduction

in call rates.

Agriculture, Forestry & Fishing expanded by

2.6 per cent, a marked deceleration relative

to growth of 9.8 per cent in 2011. Growth in

the industry for the review period reflected

expansion in domestic agriculture in all quarters,

- 41 -

Annual Report 2012


with the exception of December, and a decline

in traditional export crops. The performance of

domestic crop production continued to reflect

the impact of various support programmes and

projects to enhance productivity and improve

the industry’s resilience to unfavourable

weather conditions. Notwithstanding these

programmes, there was a deceleration in the

rate of growth in domestic crop production to

3.0 per cent from 18.3 per cent in 2011 (see

Table 18). The slower growth in domestic crop

production was attributed to the passage of

Hurricane Sandy as well as drought conditions

during most months of the year. Given the above,

productivity as measured by output per hectare

was largely unchanged relative to 2011 (see

Chart 13). The growth in domestic agriculture

was observed in all categories of domestic crop

production, with the exception of Other Tubers.

In particular, notable expansions in production

were observed for fruits and yams.

The contraction of 3.1 per cent in Export

Agriculture predominantly reflected lower

production of citrus, sugar and coffee as there

was increased output of cocoa and pimento (see

Table 19). The reduction in coffee exports was

associated with the adverse impact of the berry

bora and leaf rust diseases as well as a fall in

demand from Japan relative to 2011. Citrus

production continued to be adversely affected

by the long-lasting impact of the greening

disease. Cocoa production exanded as a result

of the Government’s initiative to resuscitate the

industry.

An expansion of 1.8 per cent was recorded for

Hotels & Restaurants relative to the increase of

2.0 per cent in 2011. The industry’s performance

reflected growth in Hotels. The growth in Hotels

reflected the impact of the resumption of flights

from Dallas and Fort Lauderdale for the summer

months as well as new airlifts from Cincinnati,

Source: Planning Institute of Jamaica

Table 18


Bank of Jamaica

Sources: Sugar Corporation of Jamaica; and BOJ estimates

Table 19

Chart 13

Nashville and Toronto. Further, the expansion

in Hotels was aided by increased visitor arrivals

associated with the Wholesale Tour Operators

and Jamaica Product Exchange conferences.

However, the impact of these factors was

partly offset by the effect of lower airlifts due

to warmer winter conditions in the main source

markets and travel disruptions associated with

the passage of Hurricane Sandy in the March

and December quarters, respectively. The

expansion in Hotels was reflected in growth of

1.8 per cent and 1.9 per cent in total stopover

arrivals and visitor expenditure, respectively,

relative to increases of 1.6 per cent and 8.7

per cent in the prior year. In addition, cruise

passenger arrivals expanded by 17.4 per cent

in 2012, following an increase of 23.8 per cent

in 2011.

Financing & Insurance Services recorded an

expansion of 0.7 per cent in the review year,

in contrast to the average decline of 2.4 per

Crop 2011 2012 Change

Sugar 143.2 136.7 - 4.6

Citrus 8.3 6.0 - 28.1

Cocoa 0.6 0.9 50.2

Coffee 0.9 0.8 - 12.5

Pimento 0.4 0.4 12.8

Sugar cane 1 564.3 1 557.6 - 0.4

SELECTED AGRICULTURAL EXPORTS(‘000 tonnes)

Production (000’ tonnes)

12.0

12.2

12.4

12.6

12.8

13.0

13.2

13.4

13.6

13.8

14.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Perc

ent

Output per Hectares: 2000 - 2012

- 43 -

Annual Report 2012


cent for the previous two years. The rebound

in the industry was attributed to growth in

other income as net interest income continued

to decline, albeit at a slower pace. This was in

the context of lower holdings of investment

securities during the review period (see

Financial System Stability and Assessment).

2.7.4. Labour Productivity & Wages

Labour market conditions deteriorated in 2012

with the unemployment rate (UR) increasing to

13.7 per cent from 12.8 per cent in 2011. The

increase in UR reflected a contraction of 0.9

per cent in employment and growth of 0.3 per

cent in the labour force. The job seeking rate

increased by 0.6 percentage point to 8.7 per

cent in 2012. Construction & Installation and

Agriculture, Hunting, Forestry & Fishing were

the main industries that recorded contractions

in employment in 2012. However, there were

increased employment in Wholesale & Retail

Trade and Financial Intermediation (see Table

20).

Real wages contracted by 3.2 per cent in

2012, relative to a growth of 1.8 per cent

in 2011. The reduction in real wages was

observed in all industries with the exception of

Mining, Quarrying & Refining. Of note, real

wages declined by 12.4 per cent and 12.3 per

cent in Hotels & Restaurants and Financial

Intermediation, respectively.

Labour productivity, measured as output per

hour worked, declined by 2.0 per cent in 2012

when compared to growth of 3.7 per cent in

SELECTED LABOUR FORCE INDICATORS 2011 2012 % Change

Total Labour Force ('000) 1255.9 1259.7 0.3

Employed Labour Force ('000) 1096.4 1086.9 -0.9

Unemployment Rate (%) 12.7 13.7 8.0

Job Seeking Rate (%) 8.1 8.7 7.5

Employment by Industry ('000)

Agriculture, Forestry & Fishing 200.4 196.4 -2.0

Mining, Quarrying & Refining 4.0 4.8 22.2

Manufacture 75.1 75.0 -0.1

Electricity, Gas & Water 7.9 7.7 -2.2

Construction & Installation 89.4 80.4 -10.0

Wholesale & Retail, Hotels & Restaurants Services 215.5 217.9 1.1

Hotels & Restaurants Services 75.8 76.5 0.9

Transport, Storage & Communications 72.3 72.8 0.7

Financial Intermediation 24.9 25.9 4.0

Real Estate, Renting and Business Activities 57.3 57.2 -0.1

Source: Statistical Institute of Jamaica

Table 20


Bank of Jamaica

the prior year. In contrast, output per worker,

another measure of productivity, improved

by 0.5 per cent in 2012. The improvement in

output per worker was primarily concentrated

in Agriculture, Forestry & Fishing, Electricity,

Gas & Water and Construction & Installation.

Given the above, there were no inflationary

pressures emanating from the labour market

in 2012, as the movement in real wages was

below productivity gains, measured as output

per hour worked.

- 45 -

Annual Report 2012


2.8. The Stock MarketAll indices on the Jamaica Stock Exchange

(JSE) declined for 2012. In particular, the JSE

Main Index declined by 3.4 per cent for 2012,

in contrast to the gain of 11.8 per cent recorded

for the previous year (see Chart 14). Similarly,

the All Jamaica Composite and Select indices

declined by 10.8 per cent and 13.4 per cent,

respectively, in comparison to respective growth

of 26.5 per cent and 31.1 per cent in 2011.

Additionally, the JSE Junior Market Index fell

by 13.5 per cent in contrast to an increase of

97.1 per cent the prior year.

The performance of the JSE indices for 2012

occurred against the background of a weak

domestic economy and uncertainty regarding

the signing of an agreement between the

IMF and the GOJ. In addition, substantial

depreciation in the value of the domestic

currency during the review period as well as the

returns on money market securities provided

attractive investment options for investors. In

particular , the monthly average returns on

the JSE Index averaged negative 0.3 per cent

while those on money market securities and

gains on foreign currency investments were

0.5 per cent and 0.6 per cent, respectively (see

Chart 15). The poor performance of the indices

was also in spite of improved earnings of some

listed companies.5 However, there were several

announcements of favourable business plans

by listed corporate entities during the year

which led to growth in the index during the last

quarter (see Table 21). These announcements

included the planned acquisitions of Advantage

General Insurance by National Commercial

Bank Capital Markets, Lascelles deMercado

by Campari Espana S.L. and Globe Insurance

Limited by Guardian Holdings Limited.

For the review period, the weak performance

of the JSE Index was reflected in lower market

indicators relative to 2011. Of note, the

number of transactions declined by 16.3 per

cent, relative to growth of 27.0 per cent for the

previous year. In addition, the volume of stocks

traded declined by 7.7 per cent, following a

5 These improved earnings were mostly for small capitalization stocks.

48.9

66.7

-7.2 -3.7

7.2

-25.8

4.0 2.3 11.8

-3.4

-40.0-30.0-20.0-10.0

0.010.020.030.040.050.060.070.080.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Chan

ge in

Inde

x (%

)

Year

Chart 14 Annual Growth of the JSE Index: 2003-2012


Bank of Jamaica

Chart 15 Average Monthly Returns from Equities, Fixed Income Investments, & US Dollar

Positions: Comparative Indicators 2012

-2.0-1.5-1.0-0.50.00.51.01.52.02.5

Mar-12 Jun-12 Sep-12 Dec-12

Retu

rn (%

)

Equities 30-day Repo USD Position

significant fall of 41.3 per cent for the prior year

(see Table 22). However, the value of stocks

traded increased by 1.1 per cent, relative to

growth of 4.3 per cent in 2011.

The advance-to-decline ratio was 6:24, in

comparison to 28:7 for 2011, underscoring

the weak performance of the JSE Main Index

during the review period. Manufacturing

and Finance accounted for five of the top ten

declining stocks with average price declines of

18.3 per cent and 15.8 per cent, respectively. On

the other hand, Insurance accounted for two of

the top six advancing stocks and recorded an

average price appreciation of 34.5 per cent for

the year (see Table 23 ).

During 2012, the quarterly performances of

the Main JSE, All Jamaica Composite and

JSE Select indices deteriorated in comparison

Table 21

New Listing Other Developments

Mar-12 -a. Sagicor Life repurchased Breezes Runaway Bay and plans to rebrand the entity as the Jewel Runaway Bay Resort.

Jun-12a. C2W Music listed on the JSE Junior Stock Exchange.

a. NCB and NCBCAO approved the acquisition of 96.2 per cent of AGI by NCBCAP.

a. Lascelles de Mercado announced plans for sale of Globe Insurance to Guardian Holdings Limited. b. Italian firm Campari Espana S.L. announced its intentions to purchase all the shares in Lascelles de Mercado.

Dec-12

a. Kingston Live Entertainment (KLE) Group, Paramount Trading Jamaica and Consolidated Bakeries listed on the JSE Junior Stock Exchange.

a. Seprod announced a share buy-back of maximum 10 000 000 SEP shares

STOCK MARKET DEVELOPMENTS IN 2012

Sep-12

- 47 -

Annual Report 2012


Table 24

Table 22

Values J$(MN) Volumes (MN) No. of Transactions

Mar-11 3 262.5 302.7 4 915Jun-11 3 203.4 371.8 5 295Sep-11 3 731.1 397.9 6 440Dec-11 7 904.1 477.7 6 643Total 18 101.1 1 550.1 23 293Mar-12 3 393.3 272.7 5 466Jun-12 7 101.5 439.0 5 686Sep-12 4 811.5 486.9 4 278Dec-12 2 983.7 232.6 4 062Total 18 295.1 1 431.3 19 492Annual Change % 2011 2012Values 50.7 1.1 Volumes 58.9 (7.7) No. of Transactions 14.4 (16.3)

TRADING ACTIVITIES OF THE MAIN JSE: 2011-2012

Table 23

Price( $)

(e.o.p)Price

Change (%)

Insurance

Guardian Holdings Limited 277.0 67.9

Sagicor Life Jamaica 10.1 1.1

Conglomerate

Lascelles de Mercado 390.0 33.3

Finance

Scotia Investments Jamaica 30.5 5.3

Manufacturing

Trinidad Cement 18.3 0.1

Other

Palace Amusement 60.0 20.0

TOP SIX ADVANCING STOCKS IN 2012

Price( $) (e.o.p)

Price Change (%)

ManufacturingCaribbean Cement Company 1.0 - 66.7

Salada Foods 15.5 - 31.2

RetailHardware & Lumber 3.4 - 42.4

Finance

Barita Investments Limited 2.8 - 41.4

Jamaica Money Market Brokers Limited 8.2 - 33.8

Mayberry Investments Limited 2.5 - 23.3

Tourism

Ciboney Group 0.0 - 40.0

Communications

Gleaner Company 1.4 - 36.4

Conglomerate

Jamaica Producers Group 17.8 - 25.9

OtherPulse Investments 1.0 - 59.2

TOP TEN DECLINING STOCKS IN 2012


Bank of Jamaica

to the previous year. Notably, the three major

JSE indices recorded average quarterly growth

within a range of negative 6.4 per cent to 3.0

per cent, relative to a range of 1.6 per cent to 8.0

per cent for 2011 (see Chart 16). Similarly, the

JSE Junior Market Index recorded an average

quarterly decline of 3.4 per cent in 2012, in

contrast to growth of 19.4 per cent recorded

in the previous year. Notwithstanding, there

were four new listings on the Junior Market

for 2012, which resulted in a marginal uptick

in the Junior market index for the last quarter.6

6 The four newly listed companies on the Junior Exchange in 2012 were C2W Music Limited, Kingston Live Entertainment (KLE) Group, Paramount Trading

Overall, the performance of the indices was

consistent with the general uncertainty in the

economy.

Limited and Consolidated Bakeries Limited.

Chart 16 Quarterly Growth of JSE Indices

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

-15.0

-5.0

5.0

15.0

25.0

35.0

45.0

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Chan

ge o

n Ju

nior

Mar

ket

Inde

x (%

)

Chan

ge in

Indi

ces

(%)

Main JSE Index All Jamaica Composite JSE Select Junior Market

- 49 -

Annual Report 2012


2.9. Public Finance

2.9.1. Overview

During April–December 2012, public sector

performance was constrained by uncertainty

which contributed to a contraction of economic

output, volatility in the foreign exchange

market and a reversal in the declining trend in

market-determined interest rates in the second

half of the year. The uncertainty was largely

related to the delayed agreement with the

IMF on a medium-term economic programme,

resulting in the postponement of loan and grant

flows from multilateral financial institutions.

The non-receipt of these flows had a negative

impact on project spending, particularly by

public bodies, leading to a build-up in surplus

balances.

Against this background, Central Government

revenues (excluding grants) grew by 4.7 per

cent over the nine-month period, relative to

growth of 6.1 per cent for the corresponding

period in 2011. As a consequence, expenditure

was curtailed as the Central Government

sought to meet its fiscal deficit and primary

surplus targets for FY2012/13. The government

also had difficulty extending the maturity

profile of the debt stock as well as increasing

the proportion of fixed rate (FR) issues, relative

to variable rate (VR) debt, consistent with its

debt strategy.

2.9.2. Central Government Performance

For April - December 2012, Central Government

operations resulted in a fiscal deficit of $47.2

billion or 3.5 per cent of GDP, relative to the

budgeted deficit of $45.4 billion or 3.4 per cent

of GDP (see Tables 25 & Table 26). However,

the outturn compared favourably with a fiscal

deficit of $56.4 billion or 4.3 per cent of GDP for

April-December 2011. The primary surplus for

April - December 2012 was 2.9 per cent of GDP,

$6.7 billion below target but above the primary

surplus for April - December 2011. The current

deficit of $27.0 billion or 2.0 per cent of GDP for

the review period exceeded the target by $4.9

billion. For April - December 2011, the current

deficit was $32.4 billion or 2.5 per cent of GDP

Revenue & Grants for April - December

2012 was $14.5 billion below the budget but

$9.1 billion above the level for the similar

period in 2011. The lower-than-budgeted

revenue for the review period was reflected

in all categories, with the largest deviation of

$11.6 billion or 4.9 per cent reflected in Tax

Revenue. However, in real terms tax revenue

grew by 1.1 per cent. Within Tax Revenue,

major shortfalls were recorded in International

Trade, Income & Profits and Production &

Consumption, reflected primarily in lower GCT,

SCT (imports), PAYE and ‘other companies’

receipts. The impact of these shortfalls was

partly offset by higher than budgeted SCT

(local) receipts. The underperformance of Tax

Revenue partly reflected the weak domestic

economic environment and the prevailing

uncertainty, which affected the effectiveness

of revenue measures implemented during


Bank of Jamaica

Table 25

Table 26

Table 32

- 51 -

Annual Report 2012


SUMMARY OF REVENUE MEASURES J$BN Partially Widen GCT Base 4.2 Increase the threshold on electricity to 300kwh (for residential) and increase the GCT to the standard rate of 16.5 per cent 0.43 Imposition of tax on dividends payable to residents 0.30 Introduction of a minimum income tax 0.66 Change in SCT regime on overproof rum 0.75 Modify alcohol regime for tourism 0.53 Increase CET on selected (List C) goods 1.95 Modification of the GCT Regime for Tourism Sector 2.53 Increase Motor Vehicle License, Fitness, License Plates and Registration Fees 0.60 Increase tax rate on winnings - Betting Gaming, Horse Racing and Lottery 0.38 Changes to termination cost for telephone calls 5.25 Modify Asset Tax 1.95 Introduction of Specific SCT of $10.50 as per 0.7 gram of unprocessed tobacco product (bundled tobacco leaves) 0.38 Imposition of SCT on denatured ethanol 0.54 Curtail Discretionary Waivers 1.88

Revenue Gain 22.31 Reduction in Standard Rate of GCT from 17.5 % to 16.5 % -2.40

Amendment of the Corporate Income Tax (CIT) -0.45 Increase Annual General Personal Income Tax (PIT) threshold -0.10

Revenue Forgone -2.95

TOTAL NEW MEASURES 19.36

Table 27

the review period. On the other hand, the

improvement in Tax Revenue, relative to the

corresponding period of 2011, largely reflected

higher ‘other companies’ tax receipts, GCT,

customs duty and telephone call tax and was

partly associated with measures implemented

in 2012 (see Table 27). The shortfall in Grant

receipts for the review period largely reflected

the postponement in EU inflows, given the

delay in arriving at an agreement with the IMF.


Bank of Jamaica

The weak performance of GCT was reflected in

the C-Efficiency (GCT excluding arrears) ratio,

which was 42.4 per cent for April - December

2012 relative to the budgeted ratio of 44.0 per

cent. However, the ratio exceeded that for the

corresponding period 2011 by 2.9 percentage

points, indicating improvement in tax

administration efficiency. For April - December

2012, the C-Efficiency (GCT & SCT excluding

arrears) ratio was 60.7 per cent, 5.3 percentage

points above the corresponding period of 2011

but lower than the budgeted ratio of 63.1 per

cent (see Chart 17). 7

Expenditure for April - December 2012 was

$12.8 billion below budget but largely similar

to that of the corresponding period in 2011.

With the exception of wages & salaries, which

marginally exceeded budget, all areas of

expenditure were below budget for the review

period. The lower-than-budgeted Capital

7 The C-Efficiency ratio is the share of value-added

tax (VAT) revenue in consumption.

Expenditure primarily reflected project delays

and funding gaps, partly associated with

the postponement in grants and multilateral

funding. The variance in foreign interest

payments reflected a less than anticipated

depreciation of the Jamaica Dollar vis-à-vis

the US dollar and Euro as well as lower than

budgeted foreign loan receipts.

2.9.3. Financing

During April-December 2012, financing for

the deficit as well as debt amortization of

approximately $68.5 billion, was sourced

mainly from the domestic market. This

financing was, however, significantly below

expectations. Net amortization of external debt

for the review period included the maturity of

a €200.0 million bond in July 2012. Financing

for the review period was raised through the

issue of 17 benchmark investment instruments

(BMI) one of which was auctioned (see Table

28). Of the total instruments issued, 13 were at

variable interest rates (VR) while 4 were fixed

Chart 17

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

06/07 07/08 08/09 09/10 10/11 11/12 12/13

%

Year

C-Efficiency Ratios

C-Efficiency (GCT)

C-Efficiency(GCT/SCT)

Linear ( C-Efficiency(GCT))

Linear ( C-Efficiency(GCT/SCT))

- 53 -

Annual Report 2012


rate (FR) instruments. The VR instruments

accounted for 86.8 per cent of the value of total

take-up, relative to the budgeted issue range

of 60.0 per cent to 70.0 per cent. At end-2012,

the weighted average age of new debt was 3.4

years, compared with 8.6 years at end-2011.

The shortening in the maturity profile reflected

continued investor uncertainty regarding the

country’s economic programme.

2.9.4. Public Bodies Performance

For the period April - December 2012, the

Public Bodies recorded a net use of financing

of $2.2 billion relative to the targeted net use of

financing of $10.4 billion for the period 2012.8

The net use of financing over the review period

largely reflected use of foreign financing, the

impact of which was partly offset by a build-up

in deposits with commercial banks and other

8 Estimates

domestic institutions, given delays in project

funding. The net use of financing contrasts

with build-up balances of $3.6 billion during

April - December 2011 (see Table 29).

Selected Public Bodies (SPBs)

There was an overall build-up of $3.5 billion on

the accounts of the SPBs for April-December

2012, relative to the targeted net use of financing

of $5.6 billion. This buid-up of balances mainly

reflected amortization of foreign loans as well

as an increase in funds held with commercial

banks, the impact of which was partly offset

by net use of financing from other domestic

institutions. The performance over the review

period was in comparison to the net build-up

of $6.4 billion on the accounts of SPBs for the

comparable period of 2011. The amortization of

foreign loans for April - December 2012 largely

reflected the repayment of long-term loans and

Table 28

2010/11 2011/12 2012/13 2010/11 2011/12 2012/13 2010/11 2011/12 2012/13

Variable Rate 1 7 13 1 298.0 67 772.3 45 630.7 1.5 84.2 86.8

Fixed Rate 17 7 4 86 623.8 12 725.5 6 915.9 98.5 15.8 13.2

US$ Indexed - - - - - - - -

US$ Denominated - - - - - - - -

TOTAL 18 14 17 87 921.8 80 497.8 52 546.6 100.0 100.0 100.0

Short-term and Medium-term 7 3 12 62 497.2 20 489.5 41 614.2 71.1 25.5 79.2

Long-term 11 11 5 25 424.5 60 008.3 10 932.4 28.9 74.5 20.8

TOTAL 18 14 17 87 921.8 80 497.8 52 546.6 100 100 100

2010/11 2011/12 2012/13

6.6 8.6 3.4

12.2 8.2 7.7

Weighted Average Age of New Debt (yrs.)

Weighted Average Interest Rate on New Debt (%)

GOJ PUBLIC OFFERS OF INSTRUMENTS (EXCLUDING T-BILLS)APRIL-DECEMBER

Number of Offers Value of Offers Proportion of Total

(J$ MN) (%)


Bank of Jamaica

advances by Clarendon Alumina Partners and

Port Authority of Jamaica, the impact of which

was offset by the use of short-term financing by

Petrojam, as the entity had a greater utilization

of spot market purchases of petroleum products

than previously expected (see Table 30).

The variance in use of financing, relative to

budget, largely reflected delays in capital

projects by National Water Commission and

Port Authority, due to shortfalls in funding. In

addition, the build-up in NHT balances was in

a context where the expected allocation of funds

towards the Jamaica Emergency Employment

Programme (JEEP) did not materialize.

Other Public Bodies (OPBs)

The OPBs recorded a net use of financing of

$5.7 billion for April - December 2012, relative

to a target of $4.8 billion and $2.8 billion for

April - December 2011.9 The out-turn for the

review period reflected a net increase in foreign

financing related to the activities of PetroCaribe

9 Estimates

Table 29

Table 30

Q1 Q2 Q3 Q1 - Q3 Q1 - Q3 Variance

5 872.4 -3 338.4 -5 995.6 -3 461.6 5 612.1 -9 073.7

-0.1 - 8.6 8.2 - 0.4

-4 442.5 5 329.3 -3 783.9 -2 897.1

8 179.0 -5 455.2 663.0 3 386.9

2 136.0 -3 203.9 -2 883.0 -3 951.0

ANALYTIC PROFILE OF SELECTED PUBLIC BODIES FINANCING OUT-TURN (J$MN)

Supplementary Budget

Selected Public Bodies

Net use (+) /Net build-up ( -)

BOJ

Comm. Banks

Other Domestic

Foreign

FY 2012/13


-2 062.7 6 685.7 -2 424.6 2 198.4 10 383.4 -13 472.0

979.5 -1 288.3 600.9 292.0

-7 583.5 8 478.0 -8 829.9 -7 935.5

-1 285.5 -16 449.7 -11 270.1 -29 005.3

5 826.8 15 945.8 17 074.6 38 847.1

ANALYTIC PROFILE OF PUBLIC SECTOR FINANCING OUT-TURN (J$MN)

FY 2012/13Supplementary Budget

Public Bodies

BOJ

Comm. Banks

Other Domestic

Foreign

- 55 -

Annual Report 2012


and the Road Maintenance Fund, the impact

of which was partly offset by a build-up in

balances held with commercial banks and other

domestic institutions.10 Increased deposits in

commercial banks primarily reflected a build-

up in the fixed deposit accounts of PetroCaribe.

Additionally, PetroCaribe, Jamaica Deposit

Insurance Corporation, Jamaica Civil Aviation

Authority and the Tourism Enhancement Fund

increased their deposits with other domestic

institutions during the review period (see Table

31).

2.9.5. Total Debt Stock

At end-2012, Jamaica’s total stock of debt stood

at $1 762.8 billion or 130.4 per cent of GDP,

representing growth of 6.0 per cent relative to

end-March 2012 (see Table 32). The increase

in the debt stock over the nine-month period

represented a faster rate of growth compared

to the similar period in 2011 when total debt

grew by 3.8 per cent. The expansion in the

total debt stock primarily reflected an increase

10 The draw-down from BOJ was mainly due to PetroCaribe

in domestic debt as growth in external debt

was negligible, given postponement of related

loans from multilateral financial institutions.

Hence, at end-2012, the stock of domestic and

external debt was 73.6 per cent and 56.8 per

cent of GDP, respectively.

Domestic Debt

The stock of domestic debt grew by 9.0 per cent

and 12.7 per cent, relative to end-March 2012

and end-2011, respectively. Although the new

debt raised was predominantly from variable

rate instruments, this portion of domestic debt

fell to 44.0 per cent at end- 2012 from 44.2

per cent at end-March 2012 but increased

marginally by 0.6 percentage point, relative

to end-2011. Concurrently, the duration of the

portfolio decreased to 1.55 years at end- 2012,

relative to 1.91 years at end-March 2012 and

1.87 years at end-2011.11 The foreign currency

portion of domestic debt increased to 18.7 per

11 Target as per Medium-Term Debt Management

Strategy for the period FY2012/13 – 2014/15 tabled in

Parliament on 24 May 2012.

Table 31


-7 935.1 10 024.0 3 571.0 5 659.9 4 771.3 888.6

979.6 -1 279.9 592.6 292.3

-3 141.0 3 148.7 -5 046.1 -5 038.4

-9 464.5 -10 994.5 -11 933.1 -32 392.2

3 690.8 19 149.7 19 957.6 42 798.1

ANALYTIC PROFILE OF OTHER PUBLIC BODIES FINANCING OUT-TURN (J$MN)

FY 2012/13Supplementary Budget

Foreign

Net use (+) /Net build-up ( -)

Other Public Bodies

BOJ

Comm. Banks

Other Domestic


Bank of Jamaica

cent at end-2012 from 15.9 per cent at end-

March, reflecting the sharp depreciation in the

Jamaica Dollar (see Table 33).

External Debt

The stock of external debt at end-2012 was

$767.6 billion (US$8 255.5 million) compared

to $749.6 billion (US$8 586.8 million) at end-

March 2012 and $747.0 billion (US$8 626.1)

at end-2011. The increase in the external debt

stock in Jamaica Dollar terms was primarily

reflective of the depreciation in the exchange

rate as the stock fell in US dollar terms (see

Table 34). This decline largely reflected the

maturity of a GOJ €200 million Eurobond in

July 2012. Of note, the ratio of external debt

service to exports fell marginally to 33.8 per cent

at end-2012, relative to 33.9 per cent at end-

2011. Concurrently, the ratio of external debt

service to actual revenue (revenue less grants)

rose to 39.4 per cent at end-2012, from 37.9 per

cent at end-2011, with the latter underscoring

the relatively weak revenue performance in the

review year. Both ratios, measures of external

debt sustainability, are expected to improve by

end-FY2012/13, relative to end-2012. A further

improvement is also projected for FY2013/14.

Table 32

Table 33

J$ MN % of GDP J$ MN % of GDP FY - Dec 2011 FY - Dec 2012

Domestic Debt 883 388.6 68.1 995 230.87 73.6 9.1 9.0

External Debt

Total Debt 1 630 414.9 125.6 1 762 811.2 130.4 3.8 6.0

2.4

JAMAICA'S TOTAL PUBLIC SECTOR DEBTDecember December

Growth ( % Δ)2011 2012

747 026.3 57.6 767 580.3 56.8 -1.8

Dec-10 Dec-11 Mar-12 Dec-12

% % % %

Variable Rate Debt 40.7 43.4 44.2 43.9

Foreign Currency Debt 13.6 12.3 15.9 18.7

STRUCTURE OF DOMESTIC DEBT

Source: Ministry of Finance

- 57 -

Annual Report 2012


Table 34

10-Dec 11-Dec 12-Mar 12-Dec

Central Government 6 287.1 6 376.6 6 334.9 5 985.8

Government Guaranteed 1 302.5 1 399.5 1 402.0 1 317.0

BOJ 800.0 850.0 850.0 850.0

Total 8 389.5 8 626.1 8 586.8 8 255.5

EXTERNAL DEBT BY BORROWER CATEGORYDecember 2010 - December 2012

(US$ MN)

Source: Ministry of Finance


Bank of Jamaica

2.10. Monetary Policy & Interest Rates

2.10.1. Overview

The BOJ maintained the interest rate on its 30-

day Certificate of Deposit (CD) and overnight

instrument at 6.25 per cent and 0.25 per cent,

respectively, throughout 2012 (see Chart 18).

Additionally, the domestic cash reserve and

liquid assets requirements were maintained at

12.0 per cent and 26.0 per cent, respectively.

This policy stance occurred despite the

emergence of heightened uncertainty among

the public and excess liquidity in the domestic

financial markets, particularly towards the

end of the year. The uncertainty was mainly

in regard to the timing and content of an

agreement with the IMF. This uncertainty

resulted in an accelerated pace of depreciation

in the exchange rate, relative to the previous

year. Despite this faster pace of depreciation,

the inflation trajectory remained generally

favourable and in line with the BOJ’s projection

for the year.

The increased instability in the foreign

exchange market towards the end of the

year further prompted the Bank to focus on

removing excess Jamaica Dollar liquidity. In

this regard, the Bank introduced three special

variable rate instruments which were offered to

Primary Dealers and commercial banks from

31 October to 05 November 2012. In addition,

the Bank continued to intervene in the foreign

exchange market to smooth supply and

demand conditions. The Bank also continued

its intermediation through the Public Sector

Entities (PSE) facility.

2.10.2. Developments and Challenges

At the start of 2012, there was an optimistic

outlook for inflation. This was in the context

of a relatively stable domestic macroeconomic

environment, despite concerns emanating

from the debt crisis in the Eurozone, the

persistent volatility of oil prices and uncertainty

surrounding the content of a new agreement

between the GOJ and the IMF. However,

6.0

7.0

8.0

9.0

10.0

11.0

Per C

ent

Interest rate on BOJ 30-day Certificate of Deposit

Chart 18

- 59 -

Annual Report 2012


by June, there was expectation of an uptick

in inflation by the market, consequent on

revenue measures outlined in the fiscal budget.

The Bank’s assessment indicated that the

inflationary impact of these measures would be

temporary, given the underlying weak domestic

demand conditions. Against this background,

the Central Bank maintained its policy rate at

6.25 per cent.

During the second half of the year, there

were heightened concerns about the stability

of the macroeconomic environment and the

adequacy of the NIR, given the protracted

negotiations between the Government and the

IMF regarding an agreement on a medium-

term economic programme. These concerns

resulted in significant investor demand for

foreign currency assets which influenced an

acceleration in the pace of depreciation in

the exchange rate. The depreciation in the

exchange rate was facilitated by excess Jamaica

dollar liquidity in the system.

In this context, the Bank sold foreign currency

to reduce the volatility in the foreign exchange

market. The Bank also offered three special

variable rate CDs during the December quarter

with tenors of 49 days, 182 days and 364 days.

The 49-day CD had an offer limit of $6.0 billion,

while there were no offer limits on the other

instruments (see Calendar of Monetary Policy

Developments). Nominal subscriptions to these

instruments amounted to $8 179.0 million. The

30-day CD remained on offer at the rate which

obtained at end-December 2011.

2.10.3. Base Money Management

In the context of these developments, the

monetary base expanded by $5 938.3 million or

6.5 per cent for 2012, relative to an increase of

7.8 per cent for 2011 (see Table 35). Growth

in the monetary base for 2012 largely reflected

net currency issue of $2 037.5 million or 3.3

per cent. In addition, there were increases

of $2 986.2 million and $914.7 million in the

commercial banks’ cash reserve and current

account, respectively. The expansion in the

monetary base emanated from an increase of

$81 039.5 million in the net domestic assets

(NDA) as the NIR declined by $75 101.1 million

(US$840.5million). Within the NDA, there was

net unwinding of $51 224.3 million in BOJ

open market operation (OMO) instruments as

well as net drawdown of $30 389.0 million from

Central Government balances at the BOJ.

During the first quarter of the year, the

monetary base contracted by 8.7 per cent and

reflected the usual currency reflows which

follow the high seasonal demand for currency

in December. This contraction in the monetary

base was largely influenced by net placements

of $12 672.2 million on OMO instruments as

well as a decline of $16 885.4 million (US$189.0

million) in the NIR. The absorption of domestic

liquidity was partially offset by net drawdown

of $20 517.2 million in Central Government

deposits at the BOJ.

Base money expanded marginally by 0.8 per

cent for the June 2012 quarter in the context of


Bank of Jamaica

weak domestic demand conditions. The major

liquidity impulse emanated from net unwinding

of $33 223.3 million on OMO instruments. This

unwinding of OMO instruments facilitated the

market’s participation in the Government’s

debt-raising activities as well as financed the

purchase of foreign currency via the Bank’s

trading window. Against this background, there

was a decline of $21 150.0 million (US$236.7

million) in the NIR and net build-up of $14

161.4 million in Central Government balances

at the BOJ.

The monetary base expanded by 1.0 per cent

for the September 2012 quarter, influenced by

an increase of $26 107.7 million in the NDA.

Within the NDA, there was net drawdown in

Central Government balances at the BOJ as

Table 35

2011 2012Total Jan - Mar Apr - Jun Jul - Sep Oct - Dec Total

Net International Reserves (US$) - 205.3 - 189.0 - 236.7 - 282.6 - 132.2 - 840.5

NET INT'L RESERVES (J$) -18 343.6 -16 885.4 -21 150.0 -25 251.2 -11 814.5 75 101.1

Assets -14 184.3 -16 216.1 -22 677.0 -24 058.4 -12 069.8 75 021.3

Liabilities -4 159.2 - 669.2 1 527.0 -1 192.8 255.2 - 79.8

NET DOMESTIC ASSETS 24 960.7 8 871.9 21 790.7 26 107.7 24 269.1 81 039.5

Net Claims on Public Sector -4 833.7 22 304.4 -10 599.7 19 127.1 10 259.8 41 091.5

- Central Government Deposits -9 610.1 20 517.2 14 161.4 17 445.3 6 587.9 30 389.0

- Government Securities 4 522.0 - 297.6 - 103.7 - 753.2 776.8 - 377.6

- Other 254.4 2 084.8 3 665.3 2 435.0 2 895.0 11 080.2

Net Credit to Banks - 323.3 -1 021.0 - 655.0 - 514.4 - 55.7 -2 243.1

Open Market Operations 30 280.3 -12 672.2 33 223.3 7 587.4 23 085.7 51 224.3

Other - 162.7 260.7 - 177.9 - 92.4 -9 020.7 -9 030.3

MONETARY BASE 6 617.1 -8 013.4 640.7 856.5 12 454.6 5 938.3

- Currency Issue 5 936.0 -8 991.6 368.2 - 26.1 10 687.0 2 037.5

- Cash Reserve 1 109.3 1 024.7 333.1 683.5 944.9 2 986.2

- Current Account - 428.1 - 46.6 - 60.6 199.1 822.7 914.7

Memo:

NIR Stock (US$MN) e.o.p 1 966.1 1 777.1 1 540.4 1 257.8 1 125.6 1 125.6

Growth in Monetary Base (%) 7.8 - 8.7 0.8 1.0 14.6 6.5

Inflation (%) 6.0 1.7 1.5 2.1 2.3 8.0

SUMMARY ACCOUNTS OF THE BANK OF JAMAICAFLOWS - J$ MILLION

2012

- 61 -

Annual Report 2012


well as net unwinding of OMO instruments,

which largely financed the market’s purchase

of foreign currency via the Bank’s intervention

window. The sale of foreign currency

contributed to a decline of US$282.6 million

in the NIR, which absorbed $25 251.2 million

from the system.

Excess domestic currency liquidity remained a

challenge for the Bank in the final quarter in the

context of net maturities of OMO instruments

totalling $23 085.7 million, the main source of

liquidity during the December quarter. While

some of the proceeds of the maturing OMO

securities facilitated increased demand for

foreign currency, a significant amount was

used to meet the seasonal increase in demand

for currency over the Christmas holiday

period. Against this background, there was an

injection of $24 269.1 million from the NDA

which was partially offset by a decline of $11

814.5 million (US$132.2 million) in the NIR

for the December quarter. The decline in the

NIR mainly reflected intervention sales in the

foreign exchange market and debt payments on

behalf of the Central Government. Accordingly,

the monetary base expanded by 14.6 per cent

for the quarter.

2.10.4. Interest Rates

The Bank maintained the interest rates on

its 30-day CDs and overnight instrument

at 6.25 per cent and 0.25 per cent,

respectively, throughout 2012. In contrast,

there were mixed movements in the

weighted average yields on GOJ Treasury

Bills for the year (see Table 36 and Chart

19). In particular, there was an overall

decline of 18 basis points (bps) to 6.31

per cent in the weighted average yield on

the GOJ 30-day instrument. On the other

hand, the weighted average yields on the

90-day and 180-day instruments increased

by 146 bps and 72 bps to 7.67 per cent and

7.18 per cent, respectively.

The movements in the market-determined

Treasury Bill yields reflected the uncertainty

in the domestic economy which primarily

stemmed from the Government’s delay in

arriving at an agreement with the IMF on

Jamaica’s medium-term macroeconomic

programme. This uncertainty led to

instability in the financial markets, which

was reflected in reduced private capital

inflows, continued decline in the NIR,

sustained depreciation of the exchange

rate, a general aversion to the Government’s

longer term bonds, investors displaying a

preference for money market instruments

at the very short end of the market and

high levels of Jamaica Dollar liquidity in

the system.


Bank of Jamaica

Table 36

Chart 19

30-day WATBY 90-day WATBY 180-day WATBY

January 6.41 6.22 6.53

February 6.36 6.21 6.57

March 6.24 6.27 6.47

April 6.2 6.19 6.44

May 6.25 6.30 6.39

June 6.18 6.26 6.47

July 6.15 6.21 6.52

August 6.19 6.28 6.63

September 6.16 6.36 6.57

October 6.21 6.38 6.69

November 6.81 6.44 6.90

December 6.31 7.67 7.18

WEIGHTED AVERAGE TREASURY YIELDS(per cent) 2012

- 63 -

Annual Report 2012


2.11. Economic Outlook

2.11.1. Overview

Economic conditions in Jamaica are

anticipated to improve in 2013 in the context

of reduced uncertainties, following the signing

of an agreement with the IMF agreement and

continued global growth. In particular, the

economy is expected to record improved foreign

currency inflows which should contribute to the

gradual rebuilding of the NIR. In addition, the

economy is expected to record very moderate

growth, following an estimated contraction

in 2012. However, despite the overall

expected expansion in output, particularly

for the goods-producing sectors, domestic

demand conditions are anticipated to remain

weak, due to significant fiscal consolidation.

Notwithstanding the relatively weak demand

conditions, headline inflation for 2013 is

expected to exceed the inflation rate recorded

in 2012, in the context of higher import prices

and a relatively more depreciated domestic

currency.

2.11.2. International Economy

The global economy is projected to expand

in 2013 at a slightly moderated pace when

compared to the growth recorded in 2012.

In particular, it is expected that the USA will

continue to reflect moderate GDP growth

emanating from the implementation of policies

aimed at economic stimulation which have

already contributed to improved levels of

employment. However, growth in the USA

is expected to be tempered by efforts at fiscal

consolidation. China is expected to experience

an accelerated pace of growth during 2013,

stemming from increased foreign and domestic

investments. However, growth in the Euro Area

is projected to continue to decline as a result

of austerity measures introduced to address the

fiscal crisis. Japan is expected to experience

lower growth in 2013 as a result of reduced

trade with China, a major trading partner, as

well as a weakening in exports to the European

market. In this context, the Bank is projecting

global expansion of 2.7 per cent in 2013, relative

to the 2.8 per cent in 2012.

Crude oil prices, as measured by the West

Texas Intermediate (WTI) Index, are forecast

to increase in the range of 0.0 per cent to 1.0

per cent, relative to the decline of 1.0 per cent

in 2012. This projection reflects an expected

expansion in demand from both China and the

USA. The prices of food-related raw materials

are projected to increase within the range

of 2.5 per cent to 3.5 per cent in 2013, albeit

moderating from the 5.4 per cent and 20.1 per

cent recorded in 2012 and 2011, respectively.

This forecast incorporates expected increases of

5.0 per cent and 2.5 per cent for wheat and corn

prices, respectively, reflecting supply shortages

resulting from adverse weather conditions.

However, price declines of 12.0 per cent and

0.7 per cent are anticipated for soybean and

the benchmark Thai rice, respectively. The fall

in soybean prices should reflect normalization

from historical highs as the lagged effects of


Bank of Jamaica

severe drought conditions in the USA during

2012 gradually dissipate.

2.11.3. Domestic Economy

2.11.3.1. Growth

The Jamaican economy is expected to expand

in the range of 0.5 per cent to 1.5 per cent for

2013, in contrast to the contraction for 2012.

All industries, with the exception of Financial

& Insurance Services and Producers of

Government Services, are expected to grow

in 2013. The major contributors to output

growth are expected to be Agriculture,

Forestry & Fishing, Construction and Mining

& Quarrying. Growth in Agriculture, Forestry

& Fishing is expected to reflect the continued

impact of the GOJ Production and Productivity

Programme (PPP) as well as recovery from

the damaging effects of Hurricane Sandy

in October 2012. Construction is expected

to benefit from the commencement of major

infrastructure projects and expansions within

the tourism sector. Mining & Quarrying

should reflect recovery following the negative

effects of Hurricane Sandy as well as increased

capacity utilization following mechanical

difficulties experienced during 2012. In

addition, Manufacturing is projected to grow

in 2013, due in part to planned expansion in

ethanol production during 2013.

2.11.3.2. Inflation

For 2013, domestic inflation, as measured by

the change in the consumer price index (CPI),

could be higher than the outturn for 2012. The

inflation impulses during the year are largely

expected from the impact of the pass-through

of the depreciation in the exchange rate.

Inflationary pressures are also expected from

measures introduced by the Government to

improve fiscal sustainability. The anticipated

increase in crude oil prices is also expected to

adversely affect domestic energy and transport

costs. However, the continuation of weak

domestic demand conditions should temper

potential price increases in 2013.

2.11.3.3. Monetary Policy

Current projections suggest that output growth

and inflation in 2013 should exceed levels

attained in 2012. As the country transitions to

a more growth oriented economy there could

be uncertainties about the impact of these

changes on prices. In that context, the Bank

will continue to manage inflation expectations

to obtain its objectives outlined in the medium-


- 65 -

3. Financial System Surveillance and Policy

Jamaica’s financial markets through Rule-

Making. The drafting of detailed instructions

for the Omnibus legislation is expected to be

finalized during 2013, subsequent to feedback

from the consultative process which ends on

04 March 2013.2 (see Box –‘The Proposed

Provisions under the Omnibus Bill).

3.1.1.2 Further Strengthening of the Capital

Adequacy Framework for Licensed

Deposit-Taking Entities

The BOJ continued to ensure that licensed

deposit-taking entities maintain adequate

capital to buffer against potential losses through

stringent capital adequacy requirements. As

such, the minimum risk-based capital adequacy

(RWCA or CAR) requirement remained at 10

per cent, which is two percentage points above

the Basel minimum. Further, the inclusion

since 2004 of a 6.0 per cent leverage ratio in

Jamaica’s capital adequacy framework has

provided an added measure of resilience and is

consistent with elements of the Basel III capital

framework which the Basel Committee is

seeking to introduce by 2019. This combination

of conservatism and watchful prudential

oversight has resulted in adequately capitalized

deposit-taking licensees, which reflected

RWCA ratios between 11.1 per cent and 32.9

per cent as at 31 December 2012.

2 Subsequent to year-end, the consultation period was extended to 31 March 2013.

3.1. Supervision of Deposit-taking

Financial Institutions

3.1.1. Current Priorities in Banking

Supervision

3.1.1.1 Development of the Omnibus Banking

Bill

Development of the ‘Omnibus Banking Bill’

remained the major area of regulatory policy

focus during 2012, culminating in the release

of a Consultation Paper on “Proposals for

Enhancement of the Legislative Framework

for the Deposit-taking Sector” in December

2012. These legislative amendments will serve

to further strengthen the Bank of Jamaica’s

oversight of the deposit-taking financial sector

and achieve greater conformity with the Basel

Core Principles as well as other global best

practice standards.1 Additionally, the Omnibus

Banking Bill through consolidation of the three

deposit-taking statutes - The Banking Act,

The Financial Institutions Act and The Bank

of Jamaica (Building Societies) Regulations –

into a single legislation will eliminate existing

inconsistencies and arbitrage situations. In

addition, the Omnibus Banking Bill will provide

for easier updating of the regulatory framework,

consistent with the pace of innovation in

1 The Basel Core Principles are international best practice standards for Banking Supervision which are established by the Basel Committee on Banking Supervision.

- 66 -Financial System Surveillance and Policy

Bank of Jamaica

and financial holding companies. The Basel Core

Principles require the Supervisory Authority to have the

power to take a range of measures where a bank falls

below the minimum capital ratio, and to intervene at

an early stage to prevent capital from falling below the

minimum.

1.4 Enforceable Code of Conduct

The Omnibus statute will also introduce provisions to

address the establishment of an enforceable Bankers’

Code of Conduct which will outline the responsibilities

of the licensed deposit-taking institutions in relation to

the services and products offered to their customers.

This will therefore involve some elements of consumer

protection.

Oversight of compliance with the Code would be

incorporated into Bank of Jamaica’s regular supervisory

programme (i.e. on-site and off-site assessments) and

would require deposit-taking institutions to provide

information regarding, inter alia, customer complaint

statistics as well as fees and charges for banking

services. Licensed deposit-taking institutions will be

required to comply with the Code as a matter of law,

and Bank of Jamaica would be empowered to impose

administrative sanctions for breaches of, or non-

compliance with the Code.

Under the Omnibus Banking Bill a number of issues are to be addressed:-

1.1. Supervisory AutonomyA major issue arising from the 2005 Financial Sector

Assessment Programme (FSAP), which is being

proposed to be addressed in the Omnibus Banking Bill,

is that of supervisory independence and autonomy of

the BOJ. Jamaica was assessed as “materially non-

compliant” with Principle 1 of the Basel Core Principles,

which addresses this fundamental supervisory issue.

Supervisory independence of the BOJ in accordance

with international standards would result in the transfer

of key statutory powers from the Ministry of Finance

to the BOJ, such as, issue and revocation of licence,

determination on the fitness and propriety of proposed

principals of licensees as well as approval of branch

openings.

1.2 Consolidated Supervisory Framework

The Omnibus legislation will also enhance existing

provisions for regulation and supervision of financial

holding companies and financial conglomerates of

which licensed deposit-taking entities form a part. Such

enhanced provisions will include requirements relating

to capital adequacy and liquidity as well as limitations

on intra-group exposures.

1.3 Strengthing the Corrective & Sanctioning FrameworkThe Omnibus Banking Bill will also introduce a

comprehensive regime to ensure that the Supervisory

Authority has, at its disposal, an adequate range of

supervisory tools to bring about timely corrective

actions on the part of licensed deposit-taking entities

The Proposed Provisions under the Omnibus Banking Bill

- 67 -

Annual Report 2012

Financial System Surveillance and Policy

Notwithstanding the robustness of Jamaica’s

existing capital adequacy framework, the

Bank proposed the implementation of several

enhancements, which will be incorporated in

the Omnibus Banking Bill to further address

the requirements of Basel III. These include:

a. Further increase in the minimum

requirement for RWCA, which will be

implemented on a phased basis;

b. Introduction of an additional capital

requirement for systemically important

financial institutions (SIFIs); and

c. Introduction of an expanded RWCA

ratio (which takes into account retained

earnings) to incorporate risk buffers

that will be linked to, inter alia, general

financial stability risks.

3.1.1.3 Basel Core Principles for

EffectiveBanking Supervision – Self

Assessment

During 2012, the Bank commenced an

assessment of its supervisory framework

against the benchmark supervisory systems

and standards promulgated by the Basel

Committee on Banking Supervision (BCBS).3

This assessment was to ensure that Jamaica’s

supervisory infrastructure is in conformity

3 The Basel Committee on Banking Supervision is the international standard setting body for banking supervisors worldwide. The Committee is represented by central banks and bank regulators from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, USA and the United Kingdom.

with the Core Principles which were revised

in September 2012. The revisions took account

of post-crisis lessons for promoting sound

supervisory systems as well as significant

developments in global financial markets and

the regulatory landscape since the last revision

published in 2006.

Specifically, the Core Principles were updated

to primarily:

a. Reflect greater consistency with new

global best practice standards, such

as the Basel III capital adequacy

framework;

b. Promote enhanced risk management

and corporate governance frameworks

in banking entities;

c. Promote enhanced supervisory

approaches and techniques by

supervisory bodies/agencies;

d. Promote application of a broad financial

system perspective that considers

both the macro- and micro-prudential

elements of effective supervision; and

e. Promote effective crisis management,

recovery and resolution strategies.

In this regard, BCBS has expanded the number

of Core Principles from 25 to 29, to provide

more precise guidance in critical areas such

as the Responsibilities, Objectives & Powers

of the Supervisory Authority; Independence,

Accountability, Resourcing & Legal Protection

for Supervisors; Cooperation & Collaboration;

Disclosure & Transparency; and Financial


Bank of Jamaica

Reporting & External Audit. In addition, a

new Core Principle on Corporate Governance

was added to give greater emphasis to sound

governance practices within banking entities.

This self-assessment process will continue in

2013 and will inform the further strengthening

of the legislative and supervisory framework

for the licensed deposit-taking sector. This

strengthening will be critical as the Central

Bank prepares for an upcoming Financial

Sector Assessment Program (FSAP), which

will be conducted jointly by the International

Monetary Fund (IMF) and the World Bank.4

3.1.1.4 Development of Framework for Agent

Banking

In furtherance of efforts to achieve greater

financial inclusion and access to financial

services, during 2012 the Central Bank

pursued amendments to Jamaica’s legal and

regulatory framework to allow banks to partner

with non-bank third parties to offer banking

services, as agents. These amendments will

allow banking customers to conduct certain

banking transactions such as cash deposits

and withdrawals within certain size limits,

from third-party locations (including retail

outlets). Such agent activities will also enable

banking customers to perform a range of

other transactions electronically, including

4 Jamaica was previously assessed in 2005, based on the 1997 Core Principles. The results indicated that the country was Compliant/Largely Compliant with 21 of the 25 Core Principles and “Materially Non‐Compliant” with 3. One (1) Core Principle was assessed as “Not Applicable”

funds transfers between accounts and balance

inquiries.

Particular focus was placed on identifying

operational and reputational risks that

would emerge from the introduction of agent

activities. Specifically, the Bank assessed,

among other things, the various factors that

would advise policy determination with respect

to the types of entities that may be permitted to

serve as agents; the specific roles and functions

of, as well as the types of services that may be

performed by agents, the extent of an agent’s

liability and consumer protection measures.

At end-2012, the Central Bank was in the

process of drafting an Agent Banking Guideline

which will articulate deposit-taking institutions’

responsibilities with respect to agent activities

and the proposed programme for the regulation

and supervision of such activities by the

Supervisory Authority. Among other things,

the supervisory programme will treat with the

agent approval process, agent due diligence

(fit and proper testing), verification of customer

identity (Customer Due Diligence and record

keeping), agent exclusivity and interoperability,

internal controls and reporting requirements.

The draft Guideline is proposed to be issued to

the industry for comments in 2013.

3.1.1.5 Draft Bank of Jamaica (Credit Unions

Regulations

Draft regulations, which will prescribe the

principles for a prudential oversight regime,

- 69 -

Annual Report 2012


with respect to Credit Unions are still pending

presentation to Parliament by the Minister of

Finance.

3.1.2 Supervisory Cooperation and

Interaction

3.1.2.1 Financial Regulatory Council

The Financial Regulatory Council continued to

meet during 2012 to examine issues affecting

the financial industry as well as issues specific

to corporate groups comprising financial

entities which are supervised respectively by

the Bank of Jamaica and the Financial Services

Commission.5

3.1.2.2 The Caribbean Group of Banking

Supervisors

Bank of Jamaica continued to serve as

Administrator for the Secretariat of the

Caribbean Group of Banking Supervisors

(CGBS) throughout 2012.6 During the year, the

Secretariat coordinated three Administrative

meetings, three Supervisory Colleges and in

5 The Financial Regulatory Council comprises the following members: The Governor of the Bank of Jamaica (Chairman), the CEO, Financial Services Commission (FSC), the CEO, The Jamaica Deposit Insurance Company and The Financial Secretary.6 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 sixteen regional jurisdictions, ten of which are currently core members of CARICOM.

conjunction with the Bank of Guyana, the “XXX

Annual Conference” (see Section 3.3).7 Four

training programmes were organized for the

region with international facilitators from the

Federal Reserve System (USA) (2 programmes);

the Financial Stability Institute and the

Caribbean Regional Technical Assistance

Centre. 8,9 The Bank also participated in and

contributed to the discussions of two Technical

Working Groups on the “Development of a

Regional Crisis Management Plan” and “Basel

II/III”, respectively.

3.1.2.3 Information Sharing

During 2012, under powers of a multi-lateral

regional MOU, the Bank engaged in discussions

and exchanged relevant information with

regional jurisdictions with common banking

group presence.10 This included participation

in two joint on-site examinations, one of which

7 A regulatory or supervisory college generally refers to a working group of national banking supervisors that is formed for the collective purpose of enhancing effective consolidated supervision of a cross border banking group on an ongoing basis.8 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.9 CARTAC is one of eight IMF Regional Technical Assistance Centers (RTACs). These centres were created to help countries strengthen human and institutional capacity to design and implement sound macroeconomic policies that promote growth and reduce poverty.

10 The Bank of Jamaica is one of 14 signatory jurisdictions to a regional Information Sharing Agreement (MOU), to facilitate cross border cooperation between home and host supervisory authorities for regional banking entities.


Bank of Jamaica

was outside Jamaica. Bank of Jamaica also

participated in regional regulatory colleges

organised by the CGBS and Canada’s Office

of the Superintendent of Financial Institutions

(OSFI) to discuss matters of mutual interest

pertaining to three cross border banking

groups.

3.1.2.4 Association of Banking Supervisors of

the Americas (ASBA)

Bank of Jamaica is a member of the hemispheric

group, the Association of Banking Supervisors

of the Americas.11 During 2012, the Bank

remained an active contributor to the work of

the organisation, being a member of ASBA’s

Technical Committee. The Bank was also an

invited observer at ASBA Board meetings and

participated in a Working Group on Financial

Consumer Protection.

3.1.2.5 Caribbean Financial Action Task Force

(CFATF)

In another area of regional involvement, the

Bank participated in CFATF plenaries and

contributed to the dialogue on enhancing AML/

CFT frameworks of member countries during

2012.12

3.1.2.6 Financial Stability Board

In 2012, the Bank participated in Regional

11 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. 12 CFATF is an organization of 29 states of the Caribbean Basin which have agreed to implement common counter measures to address criminal money laundering.

Working Group meetings of the Financial

Stability Board’s Regional Consultative Group

for the Americas on Home-Host Co-operation

and Information Sharing. 13

3.1.3 The Supervised Environment

No new licences were granted under the

administered deposit-taking legislations

during 2012. The total number of licensed

deposit-taking entities operating in Jamaica

therefore remained at thirteen at end-2012

comprising seven commercial banks, four

building societies and two licensees under the

Financial Institutions Act (FIA) (see Table 37

and Table 38).

There were a significant ownership and a

separate corporate rebranding as follows:

i) During the first half of 2012, the Bank

of Jamaica completed its assessment

of Jamaica Money Market Brokers

Limited’s (JMMB) application

(submitted during the last quarter of

2011) to acquire the Capital & Credit

Financial Group, the parent company

of Capital and Credit Merchant Bank

(CCMB), a FIA licensee. In keeping

with the Bank’s recommendation, the

Minister of Finance issued formal

13 The Financial Stability Board (FSB) was established to coordinate at the international level, the work of national financial authorities and international standard setting bodies, and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. The FSB Secretariat is hosted by the Bank for International Settlements, in Basel, Switzerland.

- 71 -

Annual Report 2012


approval under Section 21 of the

Financial Institutions Act for JMMB

to proceed with the acquisition, which

was effected on 29 June 2012. JMMB

thereby assumed full control of CCMB

and its subsidiaries, Capital & Credit

Securities Limited and Capital & Credit

Fund Managers Limited.14 and

ii) PanCaribbean Bank Limited rebranded

14 Section 21 of the FIA requires that prior Ministerial approval be obtained before entering into an arrangement which would result in the control of a licensee. The Bank of Jamaica assesses such applications and makes a recommendation to the Minister.

as Sagicor Bank Jamaica Limited,

effective 17 December 2012, to more

closely align the institution with its

parent company- Sagicor Life Jamaica

Limited.

At end-2012, the licensed deposit-taking

institutions (DTIs) offered their services through

a physical branch network of 175 locations,

as against 173 at 31 December 2011, while

continuing to promote the use of electronic

banking alternatives through internet, mobile

telephone and ATMs.

Table 37

*The proposal by the Minister of Finance for assumption by the Bank of Jamaica of full supervisory responsibility for credit unions which numbered 43 at year end-2012 will result in significant expansion of the supervised deposit-taking population in the future (see also Section 3.1.10 Credit Unions).

Supervised Entities 2007 2008 2009 2010 2011 2012

Commercial Banks 6 7 7 7 7 7

FIA Licensees 4 3 3 2 2 2

Building Societies 4 4 4 4 4 4Total 14 14 14 13 13 13

MARKET COMPOSITION (Number of Licensed Deposit-taking Entities)

Table 38

Sub-sector Institution Name Related Deposit-taking InstitutionBank of Nova Scotia Jamaica Limited Scotia Jamaica Building Society

Citibank N. A.

FirstCaribbean International Bank (Jamaica) Limited FirstCaribbean International Building SocietyFirst Global Bank Limited

National Commercial Bank Jamaica Limited

PanCaribbean Bank Limited

RBC Royal Bank (Jamaica)Limited

Capital & Credit Merchant Bank Limited

MF&G Trust and Finance Limited

FirstCaribbean International Building Society FirstCaribbean International Bank (Jamaica) Limited

Jamaica National Building Society

Scotia Jamaica Building Society Bank of Nova Scotia Jamaica Limited

Victoria Mutual Building Society

LICENSED DEPOSIT-TAKING INSTITUTIONSas at 31 December 2012

Commercial Banks

FIA Licensees

Building Societies


Bank of Jamaica

3.1.4 System Performance

The combined assets base of the three licensed

deposit-taking sub-sectors recorded a higher

growth rate for 2012, as compared to 2011.15

This was largely reflective of expansion in

credit as well as the impact of re-valued

foreign currency portfolios, consequent on the

depreciation in the Jamaica Dollar vis-a-vis the

US dollar for 2012.16 For the year ended 2012,

total assets of the DTIs grew by $61.9 billion

or 7.5 per cent to $882.5 billion, compared to

growth of $37.9 billion or 4.8 per cent for 2011.

The asset base of the commercial banking sub-

sector grew by 7.5 per cent for 2012, relative

to 4.0 per cent for 2011, with the market

share unchanged at 74.8 per cent. Building

societies’ asset base expanded by 8.6 per cent

relative to growth of 10.2 per cent for 2011 and

commanded a marginally higher share of 22.8

per cent of total system assets. Total assets

15 Assets include guarantees/letters of credits and are shown net of provision for losses under International Financial Accounting Standards.16 Bank of Jamaica Weighted Average Selling Rates: December 2010: US$1 to J$85.8613; December 2011: US$1 to J$86.6008; December 2012: US$1 to J$92.9776.

of FIA licensees contracted by 0.6 per cent,

relative to the decline of 12.1 per cent for 2011

and accounted for the lowest market share of

2.4 per cent (see Table 39).

In the commercial banking sub-sector, the two

largest banks accounted for 74.7 per cent of total

assets of the sub-sector at end-2012, relative to

72.7 per cent at end-2011. Three commercial

banks reported smaller asset bases, compared

to the previous year.

Total assets of building societies grew by $15.9

billion or 8.6 per cent for 2012 compared to

growth of $17.1 billion or 10.2 per cent for the

previous year. The asset base of all building

societies, except one, expanded for 2012. The

two largest building societies accounted for

87.2 per cent of the total assets of the sub-sector

relative to 87.0 per cent for 2011. In contrast,

the asset base of FIA licensees contracted by

$134.0 million or 0.6 per cent, a slower rate

than the decline of $2.9 billion or 12.1 per cent

for 2011. The contraction for 2012 reflected

balance sheet restructuring at one licensee.

Table 39

Sub-sector J$BN % J$BN % J$BN %

Commercial Banks 589.9 75.4 613.6 74.8 659.8 74.8

Buildings Societies 168.3 21.5 185.5 22.6 201.4 22.8

FIA licensees 24.4 3.1 21.4 2.6 21.3 2.4System Total 782.6 100.0 820.5 100.0 882.5 100.0

MARKET SHARE (%) OF LICENSED DEPOSIT-TAKING INSTITUTIONS

As at 31 DecemberDec-2010 Dec-2011 Dec-2012

- 73 -

Annual Report 2012


3.1.5 Balance Sheet Profile

Loans and Advances continued to represent

the largest concentration of system assets

accounting for 45.1 per cent of total assets,

at end-2012, compared to 43.0 per cent at

end-2011. For the year, loans and advances

increased by $46.7 billion or 12.9 per cent to

total $409.0 billion, following growth of $16.4

billion or 4.8 per cent for 2011. The faster pace

of growth in the loan portfolio was influenced

by stronger demand for domestic currency

credit which increased by $47.8 billion, relative

to $21.2 billion for 2011. In contrast, the foreign

currency denominated loan portfolio contracted

by US$100.0 million for 2012.17 However, the

impact of the decline in the foreign currency

loans on the overall loan portfolio was tempered,

given the depreciation in the exchange rate.

Investments, including repurchase

transactions, remained the second largest

category of system assets in the review year,

albeit accounting for a lower 29.2 per cent of

total assets at end-2012, compared to 31.3 per

cent at end-2011. In spite of this lower share,

investments grew by $0.7 billion or 0.3 per cent,

in contrast to the contraction of $2.1 billion or

0.8 per cent for 2011. Incremental investments

during 2012 were evident in larger holdings

of GOJ and “other” foreign securities which

when combined, rose by $27.2 billion and were

funded from matured BOJ CDs and repurchase

transactions which fell by $20.5 billion and $5.9

17 Reference to US dollar values represent the USD equivalent of all foreign currencies.

billion, respectively.

Cash and Bank balances increased by $8.6

billion or 5.9 per cent, compared to growth of

$15.3 billion or 11.8 per cent for 2011. These

represented 17.4 per cent of total assets at end-

2012, relative to 17.7 per cent at end-2011. The

increase in 2012 was mainly reflected in larger

balances of $10.3 billion with BOJ, which was

partly offset by contraction of $2.6 billion in

balances held at commercial banks in Jamaica

(see Chart 20).

Deposits and borrowings were the primary

sources of funding for growth in assets for 2012,

compared to 2011, when deposits along with

shareholders’ equity were the main drivers of

expansion in system assets. For the review

year, deposits grew by $55.6 billion or 10.5

per cent to $584.1 billion, relative to growth of

$25.1 billion or 5.0 per cent for 2011. Domestic

currency and foreign currency deposits

increased by $21.7 billion and $33.9 billion,

respectively. The faster growth in foreign

currency deposits reflected the impact of the

depreciation of the domestic currency. At end-

2012, foreign currency deposits represented

38.9 per cent of total deposits, compared to 36.6

per cent at end-2011.

In 2012, borrowings including repurchase

transactions increased by $8.9 billion or 8.4 per

cent, in contrast to net repayment of borrowings

amounting to $18.9 billion or 15.1 per cent for


Bank of Jamaica

2011. Net borrowings were mainly by way of

repurchase agreements which grew by $19.8

billion, the impact of which was partially offset

by repayments of $8.8 billion and $2.0 billion

to overseas and local institutions, respectively.

The total foreign currency denominated assets

for the system grew by US$31.0 million or

0.8 per cent, following growth of US$22.0

million or 0.6 per cent for 2011. Foreign

currency denominated liabilities increased by

US$77.0 million or 2.3 per cent in contrast to a

contraction of US$101.0 million for 2011. The

larger increase in liabilities was reflected in

higher deposit inflows, resulting in a narrowing

of a net long foreign currency exposure for

the system to US$216.3 million, relative to a

net long position of US$286.8 million at end-

2011. Commercial banks and building societies

reported expansions of US$31.0 million and

US$7.0 million, respectively, in foreign currency

denominated assets. In contrast, FIA licensees

reported a decline of US$14.0 million in foreign

currency denominated assets, attributed to the

sale of a portion of the loan portfolio by one

entity to a non deposit-taking affiliate.

3.1.6 Liquidity

The system held lower levels of average

domestic currency liquid assets in relation to

average domestic currency prescribed liabilities

as at end-2012. Specifically, the ratio fell to 26.7

per cent from 30.5 per cent for December 2011

but remained above the statutory requirement

of 26.0 per cent. The system also held reduced

average balances of US dollar liquid assets to

average US dollar prescribed liabilities of 38.7

per cent for December 2012 relative to a ratio of

Chart 20 Profile of System Assets

31 Dec. 2010 31 Dec. 2011 31 Dec. 2012

Other7.1%

Other8.0%

Other8.3%

Cash & Bank16.6%

Cash & Bank17.7%

Cash & Bank17.4%

Loans43.2%

Loans43.0%

Loans45.1%

Investment (Incl. Repos)

33.1%

Investment (Incl. Repos)

31.3%

Investment(incl. Repos)

29.2%

- 75 -

Annual Report 2012


39.1 per cent for December 2011, comfortably

above the statutory minimum of 23.0 per cent.

The lower ratios at end-2012 were influenced

by an increase in reservable deposits as well as

reduced holdings of eligible foreign currency

liquid assets. DTIs switched from shorter-

dated foreign currency assets to longer-dated

GOJ foreign currency securities and corporate

bonds during the year. All licensees, including

building societies which continued to qualify for

the lower preferential liquid assets ratio, held

balances in excess of the required minimum

throughout the year.18

The system also maintained the required cash

reserve ratios of 12.0 per cent and 9.0 per cent

for the domestic currency and foreign currency

requirements, respectively. There were

however, a few instances in which the cash

reserve requirements were breached during

the year, arising from delays by some licensees

to properly fund their accounts to maintain the

required monthly cash reserve balances on the

first working day of the month as prescribed by

law. Wherever such shortfalls in cash reserve

balances occurred, applicable penalty charges

were imposed in accordance with the relevant

statutes.

18 Cash reserve and liquid assets requirements are differentially applied to building societies not satisfying a 40.0 per cent prescribed threshold of residential mortgages in relation to savings funds. Building societies that meet the prescribed threshold apply the lower requirements of 1.0 per cent and 5.0 per cent for cash reserve and liquid assets ratios, respectively. Building societies which do not satisfy the prescribed threshold are required to hold the higher requirements which apply to commercial banks and FIA licensees.

3.1.7 Asset Quality

There was significant improvement in the asset

quality of the system for the year. In particular,

the stock of non-performing loans 3 months &

over (NPLs) at end-2012 was $27.9 billion and

represented 6.8 per cent of total loans, relative

to 8.9 per cent at end-2011 and was within the

prudential benchmark of 10.0 per cent (see

Chart 21). During the year, NPLs contracted

by $4.3 billion or 13.2 per cent, in contrast to

an increase of $9.8 billion or 44.0 per cent for

2011 and was evident in commercial banks

and FIA licensees. This contraction was

influenced by customer repayments as well

as write-offs of loans, primarily to the tourism

sector, by commercial banks. The write-offs

accounted for 97.7 per cent of the reduction in

total NPLs. Improvement in the loan quality of

FIA licensees was attributable to the sale of a

portion of one entity’s stock of NPLs to a non-

deposit-taking affiliate.

In 2012, the supervised entities increased

provisions for loan losses by $1.7 billion or

7.0 per cent to $25.9 billion, relative to an

expansion of $8.6 billion or 55.1 per cent for

2011.19 The increase in provisioning coupled

with the reduction in NPLs, resulted in the

system reporting improved coverage of 92.8

per cent of NPLs at end-2012 compared to 75.2

per cent at end-2011.20 Regulatory capital and

19 Provisions for loan losses represent a combination of assessments under International Financial Reporting Standards and incremental amounts required in accordance with the Central Bank’s prudential guidelines. 20 At end-2012, coverage as per prudential guidelines


Bank of Jamaica

provisions provided a buffer of 422.8 per cent

of the value of NPLs, relative to 352.5 per cent

at end-2011.21

3.1.8 Capital

Total regulatory capital grew by $2.9 billion or

3.3 per cent for 2012 compared to $4.6 billion

or 5.4 per cent for 2011. Incremental regulatory

capital was internally generated for all DTIs

with the exception of one licensee. Despite the

strengthening of regulatory capital, there was

a reduction of $5.5 billion or 4.0 per cent in

shareholder’s equity in contrast to an increase

of $21.2 billion or 18.4 per cent for 2011. The

decline in shareholder’s equity resulted from

dividend payments as well as two instances

represented 2.3 times that which obtains using only IFRS provisions.21 Regulatory Capital for Jamaican licensed deposit-taking institutions was computed on a more conservative basis than that permitted under Basel Standards and does not include retained audited profits unless these have been specifically set aside in a non-distributable reserve.

of reported loan losses which led to increased

loan loss provisioning.

The growth of 7.5 per cent in total assets vis-

à-vis capital growth of 3.3 per cent resulted

in the system recording a lower Primary Ratio

(regulatory capital: total assets) of 10.3 per

cent at end-2012, relative to 10.9 per cent at

end-2011. Concurrently, the Risk-Weighted

Capital Adequacy ratio (CAR) declined to 14.1

per cent from 16.1 per cent at end-2011.22,23

The lower CAR continued to be influenced

by the graduated increase in risk weights on

previously zero weighted GOJ foreign currency

denominated instruments. The final increase to

22 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. 23 When capital is adjusted to include retained audited profits consistent with the Basel standards, the Primary and Capital Adequacy ratios would be 12.2 per cent and 16.7 per cent, respectively.

Chart 21 System Annual Change in Loans and NPLs (3 months & over)

-4.8

16.4

46.7

5.9 9.8

-4.3

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Billi

ons

($)

YearsChange in Loans Change in NPLs

- 77 -

Annual Report 2012


100.0 per cent in risk weightings was applied

in June 2012. Notwithstanding this increase, at

year end, all licensees continued to maintain

Primary and Risk-Weighted Capital Adequacy

ratios above the minimum requirements of 6.0

per cent and 10.0 per cent, respectively.

3.1.9 Profitability

Based on unaudited prudential data submitted

by licensees to the Bank, the system recorded

pre-tax profits of $19.9 billion which translated

to a pre-tax profit margin of 20.5 per cent for

2012. This compares with pre-tax profits of

$31.3 billion and pre-tax profit margin of 30.8

per cent for 2011 which included $12.9 billion

in dividend income at one commercial bank.

Given the lower pre-tax profits and expanded

asset base, the Return on Average Assets

(ROAA) fell to 2.3 per cent for 2012 from 3.9

per cent for 2011 (see Appendix B– Annual

Prudential Indicators).24

For the review year, net interest income

increased by $2.2 billion or 4.5 per cent,

reflecting growth of $1.9 billion or 3.1 per

cent in interest income and a reduction of $0.3

billion or 2.2 per cent in interest expenses. The

Net Interest Margin (NIM) was fairly stable

at 7.4 per cent relative to 7.5 per cent in 2011.

Non-interest income declined by $6.9 billion,

largely reflecting a contraction of $8.7 billion

24 The system benefitted from a $12.9 billion in dividend income at one commercial bank in 2011. In the absence of this dividend income, the system would have recorded Net Profit Margin and ROAA of 15.9 per cent and 2.0 per cent, respectively.

or 57.2 per cent in dividend income. Other

Operating Expenses increased by $5.9 billion

or 10.2 per cent, reflecting primarily, increases

of $2.0 billion, $1.8 billion and $1.6 billion in

miscellaneous operating costs, fees and staff

costs, respectively.

3.1.10 Credit Unions

3.1.10.1 Overview of the Credit Union Sector

The Bank continued its monitoring of credit

unions during 2012, pursuant to their

designation as “specified financial institutions”

under Section 2 of the Bank of Jamaica Act, in

July 1999. This allows the Bank to undertake

information gathering, whilst authority and

oversight responsibility for these entities

continue to be vested in the Department of Co-

operatives and Friendly Societies (Registrar),

as statutory oversight agency, and the Jamaica

Co-operative Credit Union League (League)

which currently undertakes a self-regulatory

role for most credit unions.

The draft Bank of Jamaica (Credit Unions)

Regulations remained at the forefront of a

number of meetings and correspondence

between the Bank and the League during

the year. At a meeting convened by the

Honourable Minister of Finance with the Bank

and the League in September 2012, resolution

was arrived at on three of the League’s advised

remaining five issues of concern with regard

to the draft Regulations.25 Efforts directed at

25 In September 2012, agreement was reached with the Minister of Finance on the League’s request for a 24 month time period within which start-up credit unions would be


Bank of Jamaica

resolving the two remaining issues of concern

will continue to be actively pursued in 2013.26

In anticipation of the licensing regime that

will be implemented on the promulgation of

the requisite Regulations, a fourth round of on-

site examinations of the sector was completed

during 2012, while off-site surveillance

continued, based on the analysis of monthly

and quarterly prudential submissions. In the

absence of the Regulations, the Bank has no

statutory authority or power with which to

enforce any necessary corrective actions.

3.1.10.2 Credit Union Sector Developments

Consequent on the amalgamation of Churches

Co-operative Credit Union Limited and the

GSB Co-operative Credit Union Limited,

effective 01 August 2012, under provisions

contained in Section 53 (1) of the Co-operative

Societies Act, the number of credit unions

in operation contracted to 43 from 44. The

merged entity, First Heritage Co-operative

Credit Union Limited, became the second

largest credit union. At end-2012, the sector

comprised of 10 “Parish” based credit unions,

29 “Employee” based credit unions and 4

‘Other’ credit unions. 27 Of note, the 20 largest allowed to achieve the minimum capital requirement, the treatment of cash reserves and the definition of Unclaimed Funds, hence paving the way for the alignment of the treatment of these such unclaimed moneys with other deposit-taking entities.26 Permissible levels of exposure of credit unions to unsecured credits and the operation of Foreign Currency Accounts by credit unions for own account/proprietary purposes.27 The “Other’ credit unions being: COK Sodality

credit unions represented 86.0 per cent of

assets which amounted to $71.2 billion at end-

2012. Given the relative small asset base of the

remaining credit unions, further consolidation

in the sector is anticipated during 2013.

3.1.10.3 Credit Unions Performance Highlights

Based on unaudited prudential returns

submitted to the Central Bank, the net profit

for the credit union sector contracted to $0.96

billion for 2012 from $1.2 billion in 2011, which

was reflected in a decline in the net profit

margin to 3.5 per cent from 11.3 per cent.

This outturn reflected the impact of the global

financial crisis and subdued economic activity.

Credit unions advised the Bank of efforts being

made to strengthen credit and delinquency

control procedures. In addition, policies were

effected to safeguard against the threat of rising

costs and overheads.28

At end-2012 total membership was 983 501,

an increase of 2.1 per cent or 19 802 relative

to end-2011. Total assets of $71.2 billion at

end-2012 increased by 6.6 per cent or $4.4

billion, compared to growth of 9.9 per cent or

$6.0 billion for 2011. The sector accounted for

7.5 per cent of the total assets of $953.7 billion

of the combined deposit-taking industry at 31

December 2012, compared to 8.0 per cent at

end-2011(see Chart 22).

CCUL, C&WJCCUL, Church of the First Born CCUL and First Heritage CCUL 28 Mandatory write-off policies exist for Past Due Loans in excess of 365 days past due.

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Annual Report 2012


Chart 22

The expansion in assets was financed primarily

by a growth of 6.4 per cent or $3.3 billion in

membership savings to $54.9 billion, an

increase of $0.3 billion or 3.8 per cent in the

capital base to $8.1 billion and an expansion

in borrowings of 53.3 per cent or $0.4 billion

(see Table 40). For the year, loans grew by $5.5

billion or 13.0 per cent to $47.9 billion relative

to $4.5 billion or 12.5 per cent for 2011. The

major categories of loans were “Mortgages”

and “Unsecured Consumer Lending” which

accounted for 39.0 per cent and 14.0 per cent,

respectively. Most of this growth occurred in

the latter part of 2012.

3.1.11 Credit Reporting

The Bank of Jamaica continued to implement

its operational framework for the discharge

of credit reporting oversight pursuant to its

designation as “Supervising Authority” under

The Credit Reporting Act 2010 (CRA). Principal

activities were:-

3.1.11.1 Review of Licence Applications

During 2012, the Bank completed the review of

four (4) applications for licence under the CRA,

and made recommendations to the Minister of

Finance as required under the Act. Following

those recommendations, the Minister of

Finance issued two licences:

1. Creditinfo Jamaica Limited –issued 07

March 2012

2. CRIF NM Credit Assure Limited –issued

10 April 2012

Both entities were given one year from the

date of their licence to meet certain licence

conditions and commence operations. These

licence conditions included finalising IT

infrastructure and demonstrating the live credit

reporting system to the Bank’s satisfaction;

executing appropriate liability insurance

against potential claims by consumers and other

risks; and concluding contracts with eligible

credit information providers. At year-end, a


Bank of Jamaica

combined total of 25 eligible credit information

providers had signed contracts with the two

licensed credit bureaus with some having

commenced testing of data submissions.

Further, during 2012, another three applications

were received by the Minister and forwarded

to the Bank for assessment. At year-end,

one application was under review while two

were returned to the applicants due to the

insufficiency of information.

3.1.11.2 Policy Guidance

During the year, Bank of Jamaica developed

formal guidance for stakeholders on the

following aspects of the credit reporting regime:

i. Directions on the Operational

Framework for Managing the

Requirement for Consumer Written

Consent Under Section 11 (3) of The

Credit Reporting Act.

In light of feedback received from

licensed credit bureaus and certain

credit information providers, with

Table 40

Change Change

INDICATORS (%) (%)

Number of Credit Unions (Actual)

43.0 -1.0 2.3 44.0 -2.0 -4.4 46.0

Membership (Actual) 983 501 19 802 2 963 699 -12 086 -1 975 785

Total Assets ($BN) 71.2 4.4 6.6 66.8 6.1 10.0 60.7

Total Loans ($BN) 47.9 5.5 13.0 42.4 4.7 12.5 37.7

PDL (>3months) ($BN) 1.4 0.2 16.7 1.2 -0.4 -25.0 1.6

Capital ($BN) 8.1 0.3 3.8 7.8 1.3 20.0 6.5Borrowings from JCCUL ($BN)

1.1 0.4 53.3 0.7 0.4 133.3 0.3

Total Savings Fund ($BN) 54.9 3.3 6.4 51.6 3.8 7.9 47.8

Share Savings ($BN) 25.4 1.5 6.7 23.8 1.3 5.8 22.5

PDL:Total Loans 2.9 2.8 4.2

Loans:/Savings Ratio 87.2 82.2 78.9Capital: Assets Ratio 11.4 11.7 10.7

Source: Prudential Returns submitted by credit unions to the Bank of Jamaica.

COMPARATIVE KEY CREDIT UNION INDICATORS

December 2010 - December 2012Dec-2010Dec-2012 Change ChangeDec-2011

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Annual Report 2012


regard to challenges faced in

operationalizing the requirement for

credit bureaus to receive prior written

consumer consent pursuant to Section

11(3) of the CRA, the Bank issued

“Directions” under Section 22 (4) of

the Act on the matter. The Directions

outline minimum requirements relating

to, for example, the information to be

stated on the consumer consent and

required disclosures to the consumer

at the time of obtaining consent.

Importantly, the Directions also permit

for electronic means of managing this

area of operations and allow for credit

information providers to act as agents

of the credit bureau for purposes of

obtaining the consent, given their

natural interface with the consumer.

ii. Form of Notices of Intent to Disclose

Credit Information

Pursuant to Sections 8(10)(a) of the

Act, credit information providers

are required to publish in a daily

newspaper in circulation in Jamaica, a

notice stating their intention to provide

credit information to a credit bureau at

least seven days before commencing

the provision of any credit information.

In this regard, the Bank of Jamaica

developed a Form of the Notice which

was provided to each credit information

provider notified as having signed

a contract for the provision of credit

information with a credit bureau.

iii. Guide to the Assessment of Applications

for Licence

This Guide sets out the Bank’s

expectations with regard to the

information and documentation

required to meet the licence application

criteria as set out in the Credit Reporting

Regulations. The document is posted

on the Bank’s website.

3.1.11.3 Unlicensed Credit Reporting Entities

The CRA restricts the use of the words “credit

bureau” or any other words which could

reasonably be construed as indicating that

a person carries on the business of a credit

bureau [Section 4(7)]; and the disclosure of

credit information about a consumer in return

for monetary payment or other reward or as

part of any business or undertaking, whether

for profit or otherwise [Section 3(1)]. In this

regard, during 2012, the Bank undertook

investigations to identify whether there were

any entities whose existence may or may not

have pre-dated the advent of the CRA, who

were undertaking activities in violation of

the Act. From these investigations, the Bank

identified a number of entities whose business

name would seem to be in violation of the Act

or whose marketing activities or stated nature

of business as registered with the Companies

Office, would point to the undertaking of

credit reporting. While the Bank successfully

made contact with a number of entities to


Bank of Jamaica

clarify activities or request corrective actions

as relevant, there were instances of mail being

returned undelivered suggesting inactivity

of operations and were generally supported

by dated filings with the Companies Office.

Investigations were on-going at year-end.

3.1.11.4 Public Education

In an effort to sensitise the public and other

stakeholders about the implications of the new

credit reporting regime, the Bank engaged

in a number of public education initiatives

which included a mix of newspaper articles,

media appearances, pamphlet distribution,

presentation at public fora and the organisation

of a conference specifically targeted for credit

information providers. The conference, which

had over 100 participants, was presented jointly

with the International Finance Corporation and

also had regional regulatory participation.29

3.2. Supervision of Cambios and

Remittance Companies

During 2012, the Bank continued to effect

its regulatory function in respect of Cambios

and Remittance Service Providers (RSPs),

in order to ensure adherence to the Bank of

Jamaica Operating Directions (Operating

Directions) and the Anti-Money Laundering

(AML) regulations of the Proceeds of Crime Act

29 International Finance Corporation (IFC), a member of the World Bank Group, is the largest global development institution focuses exclusively on the private sector in developing countries.

(POCA). A key pillar in the supervisory process

was also to ensure that licensees implemented

the necessary strategies to mitigate risks to the

financial system. The regulatory functions were

executed through on-site inspection, supported

by in-house monitoring of the operations of

these entities. Additionally, licensees were

required to comply with reporting requirements

to facilitate the achievement of the Bank’s

objective of providing timely and accurate

information to its stakeholders.

A critical component of the supervision of

Cambios and RSPs continued to be the on-

going assessment of the probity and fitness

of operators (directors, shareholders and

managers) in line with the Bank’s ‘Fit and

Proper’ criteria.30 This assessment process

informs and guides the issuance and renewal

of licences. In this regard, 371 persons were

assessed in 2012.

3.2.1 Cambios

During 2012, six new cambio licences were

issued while four were voluntarily surrendered.

Six new companies entered the cambio market

while three ceased offering cambio services. In

this regard, the total number of cambio locations

increased to 163 at end-2012 from 161 at end-

2011. In addition, the number of companies

which offered cambio services increased to 71

from 68 at end-2011(see Table 41).

30 Shareholders are defined as persons holding 10.0 per cent or more of shares.

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Annual Report 2012


At the end of the review year, the parishes of

Kingston and St. Andrew continued to account

for the largest concentration of cambio locations

followed by St. James, St. Catherine and St.

Ann (see Chart 23).

Cambios accounted for 45.9 per cent of total

foreign exchange market sales for the review

year, this represented an increase of 8.9

percentage points, relative to 2011.

3.2.2 Remittance Service Providers (RSP)

In 2012, the Bank received one application to

operate as a RSP (Primary Agent).31 However,

processing of this new applicant was not

completed within the year. As a result, the

number of Primary Agents remained at nine,

relative to end-2011. These Primary Agents

31 Primary Agent are companies licensed in Jamaica to offer remittance services for remittance companies domiciled overseas. They are authorised to offer the service in Jamaica through sub-agents.

Chart 23 Geographic Distribution of Cambios at end-December

0

5

10

15

20

25

30

35

%

Parish

2011

2012

Table 41

2011 2012

New Locations Licensed 13 6

Locations Closed 13 4

Number of Locations 161 163

Number of Companies 68 71

STATUS OF CAMBIO LICENCES

as at 31 December


Bank of Jamaica

continued to offer inbound, outbound and intra-

island services. Inbound remittances continued

to flow mainly from four main countries: the

USA, UK, Canada and the Cayman Islands,

with the USA remaining the major source in

2012.

For 2012, fifty new licences were issued

which authorised remittance operations at

an additional 31 locations through a network

of branches and sub-agents. Concurrently,

70 licences representing 59 locations were

relinquished during the review period. As

a result, the number of licensed locations

declined to 485 from 513 at end-2011 (see Table

42).

The largest concentration of remittance

locations was in the Kingston & St. Andrew

region, which accounted for 23.7 per cent,

relative to 25.7 per cent at the end of 2011 (see

Chart 24).

Table 42

2011 2012

New Locations Licensed 44 31

Locations Cancelled 48 59

Number of Locations 513 485

New Licences Issued 148 50

Licences Relinquished 193 70

Number of Licences 645 625

Number of Primary Agents 9 9

STATUS OF REMITTANCE LICENCES

as at 31 December

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Annual Report 2012


Chart 24 Geographic Distribution of Remittance Outlets at end-December

0

5

10

15

20

25

30

%

Parish

2012

2011


Bank of Jamaica

3.3. Financial System Stability

Assessment of DTIs

3.3.1. Overview

There was minimal risk to the stability of

deposit-taking institutions (DTIs) during 2012,

despite heightened public uncertainty about

an agreement with the IMF on a medium term

macroeconomic programme. DTIs were largely

resilient to macro-prudential stress tests during

2012, due to strong capital positions as well

as improved loan quality.1,2 In particular, the

stress test results revealed that the average

post-shock 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

simulated by the Bank.

In relation to credit risk, stress test results

showed that the system was resilient to

hypothetical shocks to non-performing loans

(NPLs). The CARs of most DTIs remained

above the prudential 10.0 per cent benchmark

subsequent to a hypothetical 30.0 per cent

increase in NPLs. However, DTIs were

negatively exposed to hypothetical adverse

shocks to performing loans due to the strong

concentration in the personal loan category.

With respect to market-related shocks, the

1 DTIs include commercial banks, FIA Licensees and building societies.

2 The objective of stress testing is to determine the impact of extreme but plausible shocks to various risk factors such as credit quality, foreign exchange rates, domestic interest rates and liquidity on the capital adequacy ratios of the DTIs.

post-shock CARs for DTIs generally remained

above the 10.0 per cent minimum benchmark

throughout the review year. In particular, the

vulnerability of the banking system to foreign

exchange risk declined relative to 2011. This

occurred against the background of the lower

net open positions of these institutions. In

contrast, DTIs were generally more susceptible

to interest rate stress tests, compared to 2011. Of

note, commercial banks and building societies

showed greater susceptibility to hypothetical

increases in interest rates, relative to the FIA

licensees, due to significant net interest income

losses during the review year. The robustness

of FIA licensees to this stress test occurred in

a context where these institutions experienced

increased levels of capitalisation.

The value of the Bank’s macro-financial index

(MaFI) for DTIs, which comprises 18 key

macroeconomic indicators, improved during

2012.3 This occurred in a context where the

performance of the volatility indicators, growth

in private sector credit and fiscal measures,

improved over the review period. Similarly, the

Bank’s micro-prudential index (MiPI) for DTIs,

comprising 21 key financial ratio indicators

showed favourable results for the review

period.4 In particular, all DTI sub-sectors 3 The macroeconomic indicators are categorized as follows: 12-Month Measures - 12-month growth in CPI, 12-month growth in GDP, 12-month growth in stock market index,12-month growth in private sector credit; Fiscal Measures - central government deficit/GDP, credit to public sector/ GDP, National debt/GDP, external debt /GDP, volatility in inflation; Other Economic Prices - volatility in interest rates, volatility in exchange rates, real lending rate minus real deposit rate, U.S./Jamaica interest rate differential, real T-bill rate, real effective interest rate and BOJ Variables - BOJ credit to banking sector/GDP, M2/net international reserves, money multiplier.

4 The financial ratios are categorized as follows: Balance Sheet

- 87 -

Annual Report 2012


recorded better performance in the MiPI due

primarily to improvements in balance sheet

and asset quality indicators.

3.3.2. Credit Risk Stress Tests

Despite weak economic conditions there was

an improvement in the loan quality of DTIs. The

ratio of NPLs to total loans for DTIs decreased to

6.8 per cent at end-2012, relative to 8.9 per cent

at the close of the prior year. Overall, the DTIs

were generally resilient to the contemplated

shocks to NPLs. However, there was a sharper

decline in the CARs for commercial banks and

building societies in response to hypothetical

reductions in performing loans (PLs) relative to

2011.

Structure - Capital/assets, loans/capital, deposits/loans, deposits/total assets, liquid assets/total assets, deposits & repos/assets, public sector loan/assets, financial inst. Loans/loans, investments/assets; Asset Quality - non-performing loans/assets, non-performing loans/total loans, reserve for loan losses/total assets, loan & sec. loss prov./assets; Profitability - implicit deposit rates, employee salaries/assets, non-interest income/assets, interest income/assets, net income/assets and Other Indicators - FX liabilities/FX assets, FX deposits/FX assets, 12-month growth in deposits.

The commercial banks were most vulnerable

to the contemplated 100.0 per cent increase in

NPLs during 2012 (see Chart 25). As a result

of this shock, the CAR for FIA licensees would

fall by 1.1 percentage points to 11.8 per cent

at end-2012. Building societies remained the

most resilient to the same level of shock. Of

note, for the commercial banks, a 10.0 per cent

increase in NPLs would result in the first bank

breaching the 10.0 per cent CAR benchmark,

while an increase of 180.0 per cent was required

for the first building society and the FIA

licensee to breach this prudential minimum.

Commercial banks and building societies were

most vulnerable to a hypothetical 30.0 per cent

deterioration in performing loans. Subsequent

to this shock, the post-shock CARs for the

commercial bank and building societies sectors

would breach the prudential minimum.

Improvement in the DTIs’ loan quality for 2012

was primarily reflected in tourism, construction,

Chart 25 Banking Sector: Impact on CAR of an Increase in NPLs and Reduction in PLs


Bank of Jamaica

manufacturing and personal loan categories

which together accounted for approximately

65.9 per cent of total loans. The CARs of building

societies and commercial banks, at end-2012,

were adversely affected by the hypothetical

shock to personal loans to domestic residents.

In response to this shock, the CARs of the

building societies and commercial banks fell

below the prudential minimum benchmark.

3.3.3. Foreign Exchange Risk Stress Test

Results

The vulnerability of the banking system to

foreign exchange risk declined marginally,

despite continued depreciation in the Jamaica

Dollar vis-à-vis the US Dollar, relative to 2011.

In particular, DTIs average quarterly ratio of

foreign currency net open position to capital

declined to 20.4 per cent at end-2012, relative

to the 22.0 per cent at end-2011 (see Chart

26). In response to contemplated depreciations

or appreciations in the exchange rate, the

banking system’s CAR remained robust.

Specifically, subsequent to a hypothetical 50.0

per cent depreciation or appreciation in the

Jamaica Dollar vis-à-vis the US dollar, the

banking system’s CAR was unchanged at 14.1

per cent, primarily as a result of strong levels of

capitalization.5

3.3.4. Interest Rate Risk Stress Tests

There was increased susceptibility to interest

rate changes in the banking system as indicated

by declines in the CARs for commercial

banks and building societies under various

hypothetical scenarios. Hypothetical increases

of 1400 bps/400 bps & 350 bps/70 bps in interest

rates on domestic and foreign rate sensitive

5 Shocks applied firstly to the exchange rate between the Jamaica Dollar and the US dollar. The corresponding exchange rates of the Jamaica Dollar vis-à-vis the Euro, the Canadian dollar, and the Great Britain Pound were then incorporated based on historical correlations with the selling rate for the US dollar between January and May 2003 - a period of exchange rate volatility.

Chart 26 Banking Sector Quarterly Foreign Exchange Risk Stress Test Results

- 89 -

Annual Report 2012


assets and liabilities, resulted in declines of

2.4 percentage points and 1.6 percentage

points in the CARs for commercial banks and

building societies, respectively, during the

year.6 The increased susceptibility of both

commercial banks and building societies to

hypothetical interest rate increases was largely

due to significant net interest income losses.7

In contrast, the FIA licensees were more robust

to hypothetical increases in interest rates, due

primarily to a higher level of capitalization.

The dollar value of a percentage point to capital

base ratio (DVPP to capital) deteriorated to 11.7

per cent at end-2012, relative to 4.7 per cent

6 Interest rate shocks of increases ranging from 1 100 bps to 1 400 bps are applied to domestic and 100 bps to 350 bps are applied to foreign investment holdings for fair value assessment. Similar interest rate increases are applied to domestic and foreign investments for the net interest income impact. Increases of 100 bps to 400 bps are applied to domestic and 15 bps to 70 bps are applied to foreign non-investment component of the net interest income impact.

7 Re-pricing net gap positions are computed for each re-pricing/maturity bucket as the assets minus liabilities. The change in the market value of net re-pricing assets is evaluated by applying the interest rate shock and duration factor to each re-pricing gap position. The impact on capital adequacy is then evaluated.

at end-2011. This adjustment in the DVPP to

capital ratio reflected increased exposure to

interest rate volatility and a worsening in the

system’s ability to absorb interest rate shocks

(see Chart 27).8 Despite this, stress test results

indicated that the banking system’s buffer

capital was sufficient to absorb the impact of

hypothetical shocks.

3.3.5. Liquidity (Funding) Risk Stress Tests

At end-2012, the banking system remained

resilient to a hypothetical sudden withdrawal

of deposits, relative to end-2011, due to strong

liquidity positions. Following a contemplated

40.0 per cent reduction in deposits, the post-

shock CAR for the banking system was

unchanged at 14.1 per cent.9 This result was

similar to end-2011, where the post-shock CAR

8 DVPP 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.

9 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.

Chart 27 Banking System Quarterly Interest Rate Risk Stress Test Results 9


Bank of Jamaica

for the banking system was unchanged at 15.9

per cent (see Chart 28). The system remained

resilient in spite of lower liquid assets to total

assets ratio of 22.5 per cent at end-2012,

relative to a ratio of 23.1 per cent at end-2011.

For the review period, the commercial banks,

building societies and FIA licensees maintained

quarterly average liquid asset to deposit ratio of

37.2 per cent, 19.6 per cent and 27.9 per cent,

respectively.

3.3.6. Aggregate Stress Test Results

The aggregate stress tests assessed the

simultaneous impact of increases in interest

rates, currency depreciation, credit quality

deterioration and deposit outflow as well as the

impact of increasing risk weights on foreign

currency-denominated securities on the CAR

for the banking sector. The aggregate stress

test assumptions were:

• Increases in interest rates of 1100 bps

and 100 bps on domestic investment

assets & liabilities and other assets &

liabilities, respectively;

• Increases in interest rates of 100 bps and

10 bps on foreign currency investment

assets & liabilities and other assets &

liabilities, respectively;

• 10.0 per cent depreciation in the JMD/

USD exchange rate;

• 100.0 per cent of past due performing

loans (1 month to under 3 months)

becoming non-performing; and

• 10.0 per cent reduction in deposits.

Over the review period, in response to the

shocks, excluding the risk weights adjustments

on foreign currency GOJ securities, the CARs

of the DTIs declined by an average of 3.6

percentage points per quarter, relative to the

Chart 28 Banking System Quarterly Funding Risk Stress Test Results

- 91 -

Annual Report 2012


average decline of 4.2 percentage points for

2011 (see Chart 29).10 The decline in the CARs

of DTIs as a result of these hypothetical shocks

trended downwards throughout the year,

ending the year below the prudential minimum

benchmark (see Table 43).

3.3.7. Early Warning System (EWS) Results11

The macro-financial index (MaFI) improved

by 4 points to 9.0 points at end-2012 and

was well below the 1996-1998 financial crisis

threshold value of 44.0 points (see Chart 30).

10 The original target date of end-March 2012 for the 100.0 per cent risk weights on foreign currency-denominated GOJ securities was revised to end-June 2012. This occurred as a result of a temporary pause at end-June 2011 due to implementation challenges mainly for one of the non-bank financial sectors which resulted in unadjusted risk weights of 50.0 per cent relative to end-March 2011. The phased implementation of risk weights on foreign currency-denominated GOJ securities resumed at end-September 2011.

11 The BOJ Early Warning System (EWS) for financial stability 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 tranquil period refers to an eight quarter period of relative stability that precedes the beginning of a signalling window. 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 (signalling window).

This favourable performance was reflected in

improvements in volatility indicators, growth

in private sector credit and fiscal measures,

the impact of which was partially offset by

deterioration in the performance of the M2

to net international reserves indicator which

increased to 5 points relative to 3 points at end-

2011.12

Consistent with the improvement in the MaFI,

the micro-prudential indices (MiPIs) for the

commercial banks, FIA licensees and building

societies declined to 29.0 points, 32.0 points and

44.0 points, respectively, from 30.0 points, 44.0

points and 59.0 points recorded at end-2011.

The decrease in the indices for the three sectors

was broadly due to improvements in balance

sheet structure and asset quality indicators.

The outturn of the MiPI for commercial banks

during 2012 primarily reflected improvements

12 The fiscal measures relate specifically to the national debt to GDP and external debt to GDP indicators.

Chart 29 Banking Sector: Impact on CAR after the Aggregate Stress Test Scenarios and Risk Weights on Foreign GOJ Securities


Bank of Jamaica

in weighted ratios of loans to capital, non-

performing loans to assets, non-performing

loans to total loans and provision for loan

losses to total assets (see Chart 31).13 However,

the impact of these improvements on the MiPI

was partially offset by deterioration in some

profitability indicators, partly reflective of the

continued weakness in the domestic economy.

Specifically, signals from the net income to total

assets and the interest income to asset indicators

13 Indicators included in the micro-prudential indices are weighted by asset size.

continued to deteriorate as interest income on

both loans and investments remained weak.

With respect to the building societies, the

MiPI mainly reflected improvement in the

performance of asset quality indicators

(see Chart 32). In particular, there were

improvements in the weighted ratios of non-

performing loans to total loans and provision

for loan losses to total assets. However, there

was deterioration in balance sheet indicators:

deposits as a share of assets, deposits and repos

Table 43

Chart 30: Macro-Financial Index & Sub-Components: 2011 - 2012

DTIs Quarterly Aggregate Stress Test Results

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Original CAR (%) 17.7 17.9 16.3 15.9 15.4 14.7 14.5 14.1

Post-shock CAR (%) 11.9 12.2 14.0 12.8 12.8 11.2 10.5 9.6

Post-shock CAR + risk weights on foreign currency GOJs 11.3 11.6 12.9 12.4 12.6 - - -

Change in CAR (pp.) -5.7 -5.7 -2.4 -3.1 -2.6 -3.5 -4.0 -4.5

- 93 -

Annual Report 2012


to total assets, investments to assets and liquid

assets to total assets for the review period. The

improvement in the MiPI for FIA licensees

mainly reflected lower signals for asset quality

and balance sheet indicators (see Chart 33).

Chart 31: Micro-Prudential Index & Sub-Components for Commercial Banks: 2011 - 2012

Chart 32: Micro-Prudential Index & Sub-Components for Building Societies: 2011 - 2012


Bank of Jamaica

Chart 33: Micro-Prudential Index & Sub-Components for FIA Licensees: 2011 - 2012

- 95 -

Annual Report 2012


3.4. Financial Legislation

3.4.1. Financial Legislation Passed in 2012

No new legislation was passed in 2012

3.4.2. Pending Amendments to Financial

Legislation

3.4.2.1. The Bank of Jamaica Act

The first draft Bill to amend the Bank of

Jamaica Act to give the BOJ the institutional

responsibility for stability of Jamaica’s financial

system was circulated to stakeholders for

feedback in 2012. The amendments to the Act

will:

1. Outline the mandate of the Bank

of Jamaica in relation to its role of

maintaining financial system stability;

2. Mandate the establishment of a

Financial System Stability Committee

to coordinate the activities pursuant

to the objective of financial system

stability;

3. Expand the regulatory oversight of the

Bank of Jamaica to financial institutions

whose operations are deemed to be of

systemic importance;

4. Grant the necessary powers to the Bank

of Jamaica to obtain information from

these financial institutions that will

allow for the assessment of risks to the

financial system (including the powers

of inspection; powers to demand

information);

5. Give the Bank of Jamaica the necessary

powers to direct and impose measures

to mitigate and control these risks

(including the extension of liquidity;

and powers to issue Prescriptive Rules,

Standards and Codes pertinent to the

oversight of the stability of the financial

system);

6. Mandate the establishment of a Central

Financial System database; and

7. Mandate the publication of a financial

stability report within three (3) months

after the end of each financial year.

3.4.2.2. The Cooperative Societies

(Amendment) Bill

The Cooperative Societies Amendment Bill is

expected to be presented to Parliament jointly

with the Bank of Jamaica (Credit Union) draft

Regulations. This amendment will, among other

things, bring credit union cooperative societies

under the regulatory ambit of the Minister of

Finance and the Bank of Jamaica. Accordingly,

this Bill includes provisions that will restrict

the deposit-taking activities of cooperative

societies to those cooperative societies, which

operate as credit unions.

3.4.3. Omnibus Banking Bill

During 2012, the Bank of Jamaica continued

the process of reviewing legislation governing

the operations of licensed deposit-taking


Bank of Jamaica

entities (specifically, the Banking Act, Financial

Institutions Act and the BOJ (Building Societies)

Regulations, with a view to combining these

pieces of legislation into one consolidated

statute (the Omnibus Statute). The licensing

and deposit-taking provisions of the Building

Societies Act will also be transferred from the

Building Societies Act to the Omnibus statute.

This followed the approval by Cabinet of the

recommendations, in August 2010, regarding

the development of Omnibus legislation which

will govern the licensed deposit-taking sector.

The consolidation of legislative obligations

into one statute should remove any existing

inconsistencies in the regulatory regime

contained in the various statutes and ensure a

more synchronized progression of updates to

the laws governing the deposit-taking sector.

This initiative is also intended to implement

enhancements regarding consolidated and

conglomerate supervision that will bring the

regulation of the banking business in line with

the earlier international requirements such

as Basel II as well as with the more recently

issued Revised Basel Core Principle, i.e

Basel III.1 The Bank published the Industry

Consultation Paper on the proposed Omnibus

Bill on its website on 31 December 2012 and

formally invited relevant stakeholders to review

the paper and provide feedback to the Bank

by 04 March, 2013. This paper will inform the

subsequent submission to Cabinet in order to

commence the legislative process.

1 The Basel Core Principles are the global standards for prudential regulation and supervision of banking systems.

3.4.4. Pending Financial Regulations

Clarifying Note: With the exception of

the BOJ (Credit Union) Regulations, if the

proposed Omnibus Banking Bill is finalized

before the pending financial regulations

which are discussed below, then the process of

promulgating these regulations will be replaced

by the promulgation of these regulations under

the Omnibus Statute. The BOJ (Credit Unions)

Regulations, however, remains an independent

legislative initiative that will be finalized

separately from the Omnibus Banking Bill.

3.4.4.1. The Banking (Form of Application

Regulations and The Financial

Institutions (Form of Application)

Regulations

There were no updates regarding The Banking

(Form of Application) Regulations and The

Financial Institutions (Form of Application)

Regulations during 2012. The details regarding

these Regulations were outlined in the 2010

Annual Report (Please refer to the Clarifying

Note above).

3.4.4.2. The Bulding Societies (Licence Fees)

Regulations

These regulations will be revised to bring the

fees payable in line with the applicable fees as

per the 2003 Licence Fees Regulations under

the Banking Act and the Financial Institutions

Act.(Please refer to the Clarifying Note above).

3.4.4.3. The Banking (Qualification of

Auditors) Regulations

- 97 -

Annual Report 2012


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. (Please refer to the Clarifying Note

above.)

3.4.4.4. 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 (Please

refer to the Clarifying Note above).

3.4.4.5. The Bank of Jamaica Credit Union

Regulations

These regulations will bring the operations of

credit unions fully under the Bank of Jamaica’s

prudential supervisory regime. These

regulations will therefore, among other things,

cover licensing, capital, reserves, prohibited

business, remedial and intervention processes

and the role of specially authorized credit union

(Please refer to the Clarifying Note above).

3.4.5. Non-Financial Legislation Passed in

2012

In relation to the AML/CFT framework and

the financial system, there were no legislative

amendments in 2012 which impacted the

corresponding obligations of the deposit-taking

industry.

3.4.6. Pending Non-Financial Legislation

3.4.6.1. The Proceeds of Crime Act (POCA)

During 2012, amendments to address

deficiencies identified in relation to the

suspicious transactions reporting obligations

were ongoing. In addition, the POCA was

also being amended to ensure consistency

in definitions of terms with those used in the

Financial Investigations Division Act (i.e. FIU

Act). Amendments were also being made to

outline the powers that competent authorities

designated under the POCA will have in

relation to their role of monitoring compliance

of financial institutions and designated non-

financial businesses and professions (DNFBPs)

with the applicable AML/CFT requirements

under the POCA.

The (Money Laundering Prevention)

Regulations under the POCA were also being

amended to address deficiencies identified

and emerging issues in Jamaica’s anti-money

laundering framework, including the following

matters:-

a) Customer due diligence requirements;

b) Emerging technology and non-face-to-

face business;

c) Customers conducting business through

third parties and introducers; and

d) Record-keeping obligations.

The relevant Cabinet Submission is being

prepared.


Bank of Jamaica

3.4.6.2. The Terrorism Prevention

(Amendment) Bill

Cabinet approved the request for drafting

instructions to be issued to effect further

amendments to the Terrorism Prevention Act

(FATF) as well as strengthen the confiscation

mechanisms under this Act in order to bring them

more in line with the FATF Recommendations.

The Bill also includes amendments to allow for:

a) Jamaica’s ratification of The

International Convention for the

Suppression of Acts of Nuclear Terrorism

of 04 September 2005;

b) Jamaica’s accession to the 2005

amendment to the Convention on the

Physical Protection of Nuclear Material;

c) The 14 October 2005 amendment to

the Protocol to the Convention for the

Suppression of Unlawful Acts Against

the Safety of Maritime Navigation; and

d) And 14 October 2005 Protocol to the

Convention for the Suppression of

Unlawful Acts Against the Safety of

Fixed Platforms.

The Bill also seeks to effect amendments to

the related Terrorism (Reporting Entities)

Regulations under the TPA to address

deficiencies identified and emerging issues

in Jamaica’s counter terrorism financing

framework, including the following matters:-

a) Customer due diligence requirements;

b) Emerging technology and non-face-to-

face business;

c) Customers conducting business through

third parties and introducers;

d) Record-keeping obligations.

In 2012, the draft Bill was circulated to

stakeholders for comment.

3.4.6.3. The Financial Investigations

Ammendment (FIDA) Bill

In December 2012, the Cabinet approved

the Submission to amend the Financial

Investigations Act (FIDA) to, among other

things, incorporate provisions that expressly

establish the FID’s ability to function with

operational independence and autonomy

and the FID’s ability to cooperate with its

international counterparts.2 These amendments

are critical to the successful completion of the

Financial Investigations Division’s membership

application to Egmont.3

2 Under the new FATF 40 Recommendations – the interpretative note to r 29 (formerly r26) reflects that the FIU must among other things have operational independence, operate free from undue influence or interference and should apply for membership in the Egmont Group.

3 “The Egmont Group is an informal group of financial intelligence 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)

- 99 -

4. Financial Market Operations

4.1. Open-Market Operations4.1.1. Bank of Jamaica Liquidity Management

Operations

During 2012, the Bank continued to administer

liquidity management operations primarily

through the issuance of 30-day Certificates of

Deposit (CDs). However, during the December

quarter the Bank temporarily added three

special variable rate (VR) instruments to absorb

excess liquidity. The liquidity management

operations in 2012 were conducted in an

environment characterized by uncertainty

surrounding the timing and content of an

agreement with the IMF on Jamaica’s medium-


Liquidity management operations focused on

the daily offering of open market securities,

at interest rates (30-day and overnight) which

were in effect since the September 2011

quarter. Furthermore, with heightened market

uncertainties, particularly during the second

half of the year, liquidity management was also

effected through net foreign currency sales.

Nonetheless, there was overall net liquidity

injection from net maturity on CDs, which was

partially offset by absorption via net foreign

currency sales. This occurred in spite of the

Bank’s offer of three variable rate CDs, which

were temporarily added to the existing menu of

open market instruments during the December

2012 quarter. Consequently, for 2012, there was

a net liquidity injection of $27 437.8 million

into the financial system from the Bank’s

operations. This liquidity injection reflected $41

241.2 million through open-market operations

(OMOs), partly offset by the withdrawal of $11

683.5 million and $2 119.9 million from net

foreign currency sales and payments for cash

reserve requirements, respectively (see Table

44).

In general, for 2012, the liquidity emanating

from the Bank’s operations facilitated

investments on new GOJ debt issues. Of note,

there were less frequent coupon payments

on GOJ debt instruments, consequent on

the implementation of the Jamaica Debt

Exchange (JDX) in 2010. In addition, there

were continuous transfers of GOJ balances

from commercial banks to accounts at the

Central Bank as the government implemented

its Central Treasury Management System to

consolidate and centralize its accounts.

The March 2012 quarter was characterized by

generally stable financial market conditions. In

this regard, liquidity management resulted in

the net issue of $24 100.4 million in CDs, which

was financed by the seasonal net reflows of cur-

rency as well as net payments on GOJ debt in-

struments. Additional financing emanated from

the injection of $3 971.3 million from net for-

eign currency purchases by the Bank. In the

- 100 -Financial Market Operations

Bank of Jamaica

context of these activities, for the March 2012

quarter, the re-investment rate on 30-day CDs

amounted to 108.2 per cent relative to 100.5

per cent for the March 2011 quarter and 88.5

per cent for the December 2011 quarter (see

Table 45). Consequent on these operations, the

net absorption from the financial system for the

quarter amounted to $21 157.2 million.

Liquidity management during the June,

September and December quarters was

conducted in a more uncertain macroeconomic

environment, relative to the March quarter.

This uncertainty related to the negotiations

with the IMF on Jamaica’s medium-term

macroeconomic programme. Consequently,

concerns among investors increased as the year

progressed. These concerns were manifested in

Table 44

Table 45

March June September December Total

- Net issues (+)/net mat. (-) on Certificates of Deposit 24 100.4 -33 913.5 -7 760.8 -22 729.1 -40 303.1

- Net Repurchase Issue(-) / net Repurchase Maturity (+)

0.2 1.6 60.1 -1 000.0 - 938.1

Net OMO Absorption (+) / Net OMO Injection (-)

24 100.6 -33 911.9 -7 700.7 -23 729.1 -41 241.2

Net Sale(+) / net Purchase(-) of Foreign Exchange

-3 971.3 2 735.4 14 590.7 -1 671.3 11 683.5

Net increase (+)/net Decrease (-) in Domestic Cash Reserve 1 027.9 332.8 - 170.4 929.6 2 119.9

Overall Absorption (+) / Injection (-)

21 157.2 -30 843.7 6 719.6 -24 470.9 -27 437.8

BANK OF JAMAICA LIQUIDITY MANAGEMENT OPERATIONS - 2012

Data for CDs include principal and net interest payments made during the year.

Year QuarterTake-up (J$Mn)

Take-up Ratio (%)

Maturity (J$mn)

Maturity Ratio (%)

Net Issue(+)/net Maturity(-)

(J$mn)Reinvestment

Rate (%)

March 357 000.7 26.4 355 331.8 25.4 1 668.9 100.5June 375 510.6 27.8 368 813.2 26.4 6 697.4 101.8

September 348 030.8 25.8 367 422.9 26.3 -19 392.1 94.7December 270 431.4 20.0 305 616.5 21.9 -35 185.1 88.5

Total 1350 973.6 1397 184.4 -46 210.9 96.7

March 285 992.0 34.7 264 260.3 30.5 21 731.8 108.2June 223 523.0 27.1 251 812.4 29.1 -28 289.3 88.8

September 183 053.4 22.2 199 247.8 23.0 -16 194.4 91.9December 131 883.4 16.0 150 504.6 17.4 -18 621.2 87.6

Total 824 451.9 865 825.1 -41 373.2 95.2

INVESTMENT PROFILE OF BOJ'S 30-DAY CD (2011-2012)

2012

2011

- 101 -

Annual Report 2012

Financial Market Operations

net unwinding on the 30-day CDs for the June,

September and December quarters, concurrent

with an increase in the average turnover on

the overnight Special Deposit placements. In

this regard, the average turnover on Special

Deposits increased to $12 371.21 million for the

December quarter from $7 138.8 million for the

March 2012 quarter (see Chart 34).

In the context of these developments, there was

an overall net injection of $48 595.0 million for

the last three quarters into the financial system,

largely emanating from net injection of $65

341.7 million through OMOs (see Table 44).

This net injection through OMOs reflected a

reduction in the average re-investment rate on

30-day CDs to approximately 89.4 per cent for

each quarter relative to the March quarter. The

injection through OMOs occurred despite the

offer of three special variable rate CDs which

were aimed at elongating OMO maturities

beyond the 30-day horizon. The VR instruments

comprised of a 49-day CD with a limited offer

of $6 000.0 million and unlimited offers on

the 184-day and 364-day CDs (see Table 46).

These instruments received total nominal

subscriptions of $8 179.0 million during the

offer period. Against this background, there was

a reduction in the outstanding stock of CDs, to

$48 674.5 million from $98 899.8 million as at

end-2011.

The net liquidity injected from OMOs in the

last three quarters was partially offset by the

absorption of $15 654.8 million from the net

sale of foreign currency, in contrast to the

net purchase in the March quarter. This net

sale reflected increased demand for foreign

currency in the context of the heightened

uncertainty. Additional absorption emanated

from the build-up of deposits on GOJ accounts

within the Bank.

4.1.2. Primary Dealer Performance &

Administration

During 2012, the Bank continued to issue

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

Mar/11 Jun/11 Sep/11 Dec/11 Mar/12 Jun/12 Sep/12 Dec/12

J$ M

illion

s

Q uarter-ended

Chart 34 Average Daily Turn-over of Overnight Certificate of Deposit


Bank of Jamaica

CDs through the JamClear Central Securities

Depository (JamClear®-CSD) to Primary

Dealers (PDs) and commercial banks. PDs

continued to dominate the subscriptions to

CDs in 2012, accounting for 62.6 per cent of

the issues, relative to 56.8 per cent for 2011.

Consequently, the PDs share of the outstanding

stock of CDs increased to 85.4 per cent from

57.6 per cent at end-2011.

While the Primary Dealers’ share of the

outstanding stock of CDs increased for 2012,

there was a net redemption of CDs by these

entities for each of the final three quarters (see

Charts 35 & Chart 36). This net redemption

reflected the preference among investors for

the overnight instrument. Concurrently, there

was a reduction in the PDs’ participation in

GOJ debt offers to 76.3 per cent at end-2012

from 91.3 per cent at end-2011.

The number of designated PDs was unchanged

at 11 for 2012. This reflected the voluntary

withdrawal of one designee owing to the merger

of its operations with those of another entity

and the granting of the PD designation to a new

applicant. These developments occurred in the

September 2012 quarter. A total of 9 persons

were assessed under the Bank’s ‘Enhanced Fit

& Proper’ Criteria. These assessments were

Instrument Name: BOJ 49-Day VR CD BOJ 182-DAY VR CD BOJ 364-Day VR CDSubscription Date: 31 Oct. 2012 31 Oct. 12 - 05 Nov. 12 31 Oct. 12 - 05 Nov. 12Initial Coupon (%) 6.81 7.18 7.38Reset Margin (%) 0.60 0.80 1.00Tenor (Days) 49 182 364Offer Amount (MN) 6 000.0 Unlimited UnlimitedCoupon Frequency: Monthly Quarterly QuarterlyMaturity Date: 19 Dec. 2012 1 May. 2013 30 Oct. 2013

TERM SHEETS:BOJ VARIABLE RATE SPECIAL INSTRUMENTSTable 46

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2012 2011

March Qtr. June Qtr. September Qtr December Qtr.

Chart 35 Primary Dealer Share of CDs as at end-Quarter

- 103 -

Annual Report 2012


conducted in accordance with the policy for

designating new entities as well as in relation

to the requirements for the annual renewal of

the PD designation.

4.2. International ReservesThe gross foreign assets (GFA) of the Bank

declined by US$839.6 million, to US$1

980.8 million at 31 December 2012, largely

due to Government debt payments and the

Central Bank’s foreign exchange intervention

operations (see Table 47). The decline in the

GFA was reflected in all quarters, with the most

significant reductions occurring in the June

and September quarters (see Table 48).

The net international reserves (NIR) of the BOJ

mirrored the decline in the GFA, recording a

reduction of US$840.5 million to US$1 125.6

million at 31 December 2012 (see Table 48). The

Bank’s foreign liabilities increased to US$855.2

million at 31 December 2012 from US$854.3

million at 31 December 2011. The expansion

reflected an increase in the US dollar value

of the SDR holdings of the Bank to US$832.7

million as at 31 December 2012 from US$831.8

million as at 31 December 2011.

2012 2011March Qtr. $12,911.16 $5,697.31June Qtr. -$12,603.49 $176.17September Qtr -$6,471.47 -$15,870.93December Qtr. -$8,105.60 -$14,482.12

$(20,000.00) $(15,000.00) $(10,000.00)

$(5,000.00) $-

$5,000.00 $10,000.00 $15,000.00

Chart 36 Primary Dealers Net Performance in CDs

Opening Gross Foreign Assets (GFA) 2 820.4

Inflows 2 025.0

Outflows -2 837.1

Adjustment to GFA /1 -27.6

Closing Gross Foreign Assets 1 980.8

/1 - Unrealized gains/losses on foreign currencies and other investments.

BANK OF JAMAICA GROSS FOREIGN ASSETSAs at 31 December 2012

US$MN

Table 47


Bank of Jamaica

4.2.1. Foreign Exchange Inflows and

Outflows

4.2.1.1. Inflows

During 2012, foreign exchange inflows totalled

US$2 025.0 million, reflecting a decline of

US$565.3 million when compared to 2011.

The primary sources of inflows were market

purchases and Government loan receipts which

when combined, accounted for approximately

92.0 per cent of total inflows (see Table 49).

Total market purchases for 2012 amounted

to US$1 419.8 million, a decline of US$289.5

million, relative to 2011. These flows accounted

for approximately 70.0 per cent of total inflows

and reflected US$1 203.0 million and US$216.7

million purchased under the Surrender

Arrangements and through the trading room,

respectively. 1

1 Under the surrender arrangement, Authorised Dealers and Cambios agree to sell to the BOJ a maximum of 15.0 per cent and 25.0 per cent, respectively, of their client purchases. Purchases under the Surrender Arrangement include acquisitions under the Centralised Facility for Foreign Exchange for Public Sector Entities.

GOJ foreign currency loan receipts amounted

to US$442.7 million for the year, declining by

US$325.5 million relative to 2011. The reduction

in GOJ loan receipts reflected the non-receipt

of inflows from multilateral agencies as well

as the inability to access financing from the

international capital market. The receipt of

these flows was conditioned on there being

a programme with the IMF. Consequently,

the primary source of GOJ foreign currency

receipts was the issuance of domestic US dollar

bonds, which raised a total of US$354.0 million.

Foreign currency inflows from the bauxite

sector declined to US$19.5 million from

US$22.8 million in 2011. This decline reflected

lower production levy and tax payments to the

Government, largely due to a decline in bauxite

shipments.

During 2012, the Central Bank accepted

foreign currency deposits from local financial

institutions, resulting in inflows of US$95.0

million. No foreign currency deposits were

placed with the Bank in 2011.

2011 2012

Dec. Mar. Jun. Sep. Dec.

NIR 1 966.1 1 777.1 1 540.4 1 257.8 1 125.6 -840.5

Gross Foreign Assets 2 820.4 2 638.9 2 385.1 2 115.9 1 980.8 -839.6

Foreign Liabilities 854.3 861.8 844.7 858.1 855.2 0.9

BANK OF JAMAICANET INTERNATIONAL RESERVES

(End of Period)

Annual Change (US$)

US$MN

Table 48

- 105 -

Annual Report 2012


Change

2011 2012 ($)

Bauxite Receipts* 22.8 19.5 - 3.4

Market Purchases 1 709.2 1 419.8 - 289.5

Surrenders to BOJ 1 340.9 1 203.0 - 137.9

Authorised Dealers 978.0 774.1 - 203.9

Cambios 362.9 429.0 66.0

Other Purchases** 368.4 216.7 - 151.6

GOJ Receipts 768.2 768.2 - 0.1

Eurobond 405.7 0.0 - 405.7

Domestic USD Bond 0.0 354.0 354.0

GOJ Multilateral Agency Flows 183.1 0.0 - 183.1

IDB 50.0 0.0 - 50.0

CDB 33.3 0.0 - 33.3

IBRD 99.8 0.0 - 99.8

Other GOJ 179.4 88.7 - 90.7

IMF 49.4 0.0 - 49.4

Loan Disbursement 49.4 0.0 - 49.4

Investment Income 21.5 15.7 - 5.9

Financial Institutions - Deposits 0.0 95.0 95.0

Other Receipts** 19.1 32.4 13.3

Total Cash Inflows 2 590.3 2 025.0 - 565.3

US$MN

* Bauxite receipts have been revised to comprise Royalty, Levy and Taxes. Local Cost have been excluded.

INFLOWS OF FOREIGN EXCHANGE

**Partly reflects market intervention and other trading-room purchases.

Table 49

4.2.1.2. Outflows

Foreign currency outflows totalled US$2 837.1

million for 2012, US$88.8 million higher than

2011 (see Table 50). The higher outflows

primarily reflected an increase of US$206.6

million in market sales to US$1 556.2 million.

These flows largely reflected an increase of

US169.0 million in sale of foreign currency

under the Centralised Facility for Foreign

Exchange for Public Sector Entities, which was

established in 2009.2 In addition, intervention

sales increased by US$37.6 million to US$654.8

million in the context of intermittent bouts of

excess demand during the review year.

2 The Centralized Facility for Foreign Exchange for Public Sector entities (PSE Facility) is a special arrangement whereby Public Sector Entities purchase foreign currency from the Bank of Jamaica which settles foreign currency payables on behalf of these entities.


Bank of Jamaica

Foreign currency payments on behalf of the

Government declined to US$1 242.4 million

from US$1 365.5 million during 2011. The

reduction in payments largely reflected lower

amortization payments during 2012 (see Table

49).

4.3. Reserve ManagementAs at 31 December 2012, the gross international

reserves held by the Bank of Jamaica was

US$1 980.8 million compared to US$2 820.4

million as at 31 December 2011. Throughout

the year, the portfolio was managed in

accordance with the Bank’s Foreign Investment

Policy which informed the operating guidelines

employed, the strategies devised and the risk

management arrangements that were observed.

There were no changes to the objectives of the

reserve management function as approved by

the Board of Directors to:

I. Support and maintain confidence in

monetary policy;

II. Provide the capacity to support the

orderly functioning of the foreign

exchange market;

III. Absorb shocks brought on by crisis

in the domestic and international

economies; and

IV. Enhance the confidence of the

international capital markets by

demonstrating that Jamaica can

meet its external obligations.

To realize these objectives, the reserves

continued to be managed with a bias towards

capital preservation and liquidity maintenance,

with income maximization as a secondary

objective.

Table 50

Change

2011 2012 (US$)

GOJ Payments 1 365.5 1 242.4 -123.1

Debt 1279.1 1 129.6 -149.5

Principal 723.9 605.1 -118.7

Interest 555.2 524.5 -30.8

Other Payments 86.4 112.8 26.4

Intervention 617.2 654.8 37.6

Public Sector Facility 732.5 901.4 169.0

Other Payments* 33.1 38.5 5.3

Total Cash Outflows 2 748.3 2 837.1 88.8

OUTFLOWS OF FOREIGN EXCHANGEUS$MN

*- Includes net prudential reserve outflows and Central Bank payments for notes and coins.

- 107 -

Annual Report 2012


4.3.1. Portfolio Distribution

No new class of assets was added to the

portfolio in 2012; consequently its composition

throughout the year was similar to that of 2011

(see Table 51). The portfolio continued to be

dominated by money-market instruments,

as opportunities for investing in the bond

market remained limited. Bond acquisitions

were confined to placements in AAA/AA+

rated securities of governments, agencies of

governments and supranational entities as well

as money market investments in P-2/A-1 and

Aa1/AA+ rated financial institutions.

The continued dominance of placements in

money market instruments was aimed primarily

at mitigating reinvestment risk. In order to

reduce the risk of exchange rate losses the

portfolio was managed with a bias towards US

dollar denominated investments with 75.3 per

cent of the portfolio, excluding the Allocation

of Special Drawing Rights, held in US dollar

denominated securities.

4.3.2. Investment Climate

The investment climate in 2012 was largely

similar to that of 2011 and was characterized by

low interest rates and high credit risk. During

the year, a range of intersecting and disparate

factors influenced the financial markets. The

most significant of these were:

I. The sovereign debt crisis in the

Eurozone, which was manifested in

the slowdown of economic growth

across the region and the need to

bail out banks in the most severely

affected countries;

II. Downgrades of the credit worthiness

of a number of financial institutions

by the rating agencies due to

exposure to credit risk associated

with the Eurozone;

III. Uncertainty surrounding the

outcome of the Presidential election

in the USA, which could have an

impact on the financial markets;

IV. Fears that lawmakers in the USA, by

01 January 2013, would not agree

on a compromise to avoid the “fiscal

Table 51

Asset Classes

US$MN % US$MN %

Money Market Investments 1 780.6 63.1 1 174.1 59.3

Bond Holdings 569.3 20.2 374.7 18.9

External Fund 140.1 5.0 141.1 7.1

Total Funds Invested 2 490 88.3 1 689.9 85.3

Allocation of Special Drawing Rights 330.4 11.7 290.9 14.7TOTAL 2 820.4 100.0 1 980.8 100.0

DISTRIBUTION OF FOREIGN ASSETSas at 31 December

2011 2012


Bank of Jamaica

cliff”, which refers to the expiration

of a number of Bush-era tax laws.

This would substantially affect taxes

and budgetary spending, that could

adversely affect that country and

the rest of the world; and

V. The Federal Reserve Bank System

maintaining interest rates at

historically low levels (0%-0.25%)

and indicating that this policy would

be maintained for an additional two

years.

These factors resulted in volatile financial

markets, with the bench-mark 10-year US

Treasury yield reaching a high of 2.39 per cent

in March 2012. However, by end-July the

yield was at a historic low of 1.43 per cent but

increased to 1.78 per cent by the end of the year.

In addition to the challenging financial market

environment, growth in the US economy

remained sluggish although showing signs

of real improvement as the housing market

began to recover, energy production expanded,

credit standards eased and the labour market

improved. Further, the rates of growth of major

economies fell below forecast particularly those

for China, India and Germany.

4.3.3. Investment Strategy

In response to the challenging market

conditions, the Bank maintained a defensive

investment strategy throughout the year.

Emphasis was placed on high quality

money and capital market investments. The

low interest rates, coupled with increased

uncertainty in the markets and credit ratings

downgrades of some of the Bank’s counter-

parties significantly influenced the decision

to retain an overweight position in the short-

term investments with increased placements

at the Bank for International Settlements and

the Federal Reserve Bank of New York. In

this regard, the overall portfolio duration was

shortened, reducing the Bank’s exposure to

interest rate risk.

The earning capacity of the portfolio was also

adversely affected by a limited supply of bonds

and small issue size within the investment grade

dictated by the Bank’s Foreign Investment

Policy. However, the Bank was able to maintain

a similar proportion of the portfolio in fixed rate

instruments, in addition to extending the tenor

on money market placements.

4.3.4. Portfolio Performance

Average income earning assets for the year

was US$2 339.0 million, which was US$661.0

million or 21.2 per cent below budget and 22.0

per cent lower than in 2011 (see Table 52).

Portfolio income of US$16.2 million was US$5.0

million or 23.7 per cent lower than in 2011.

The average yield on the portfolio was 0.69 per

cent per annum in 2012, compared to 0.71 per

cent in 2011, reflecting the continued fall in

Treasury yields across major financial markets,

which affected both capital and money market

investments.

- 109 -

Annual Report 2012


Table 52

Earnings % of Earnings % of

US$MN Earnings US$MN Earnings

Money Market Investments 6.9 32.7 3.4 21.0

Bond Holdings 13.1 61.7 11.0 67.9

External Funds 1.2 5.6 1.8 11.1

Total 21.2 100.0 16.2 100.0

Average Income Earning Assets 3 000.0 2 339.0

Rate of Return (%) 0.71 0.69

FOREIGN INVESTMENT INCOMEFor the Years Ended 31 December 2011 & 2012

2011 2012

Assets

- 111 -

5. Payment System Oversight

is scheduled for completion in 2013.

In accordance with the Bank’s commitment,

the Payment System Oversight Policy and the

JamClear-RTGS Access Policy were published

during 2012. These policies are intended to

inform payment systems stakeholders on the

principles and criteria that inform execution

of the Bank’s oversight function and access

to JamClear-RTGS, a systemically important

payment system.

5.2. Retail Payment Systems

Developments

5.2.1. Electronic Retail Payment Services

In mid-year, the Guidelines for Electronic

Retail Payment Services was published for

stakeholders’ comment prior to implementation.

This was in keeping with the collaborative

approach to payment systems development and

the Bank’s commitment to engage stakeholders

in guiding the process of development and

innovation while promoting safety and

efficiency in the sub-sector.

The Guidelines provide the framework that

will support the implementation of innovative

electronic retail payment services which will

foster and maintain public trust and confidence

in electronic means of payment, while at the

5.1. Background

During 2012, the Bank continued to ensure the

safety, efficiency and security of the National

Payment System (NPS). This included daily

clearing and settlement operations which were

executed in accordance with agreed rules and

operating guidelines. In addition, the Bank

continued to strengthen its oversight capacity

as well as the implementation of phase 2 of the

Payment Systems Reform Programme. Phase 2

initiatives consist of:

• RetailPaymentsSystemReform;

• GovernmentPaymentsReform;and

• ElectronicTradingPlatformforFixed

Income Securities.

The strengthening of the oversight capacity

included the adoption of the revised

international standards for payments and

securities settlement systems, which are now

consolidated and updated to the Principles for

Financial Market Infrastructures (PFMIs). This

consolidation and broadening is to ‘facilitate

the clearing, settlement, and recording of

monetary and other financial transactions that

can strengthen the markets they serve and play

a critical role in fostering financial stability’. The

PFMI standards incorporates the provisions in

the previous standards for securities settlement

and payment systems as well as standards

for Central Counterparties (CCPs) and Trade

Repositories. Full implementation of the PFMIs

- 112 -Payment Systems Oversight

Bank of Jamaica

to be migrated to the JamClear-RTGS from

the ACH during 2012. The decline in large

value payments cleared in the ACH resulted

in a further reduction of the settlement risks.

The review of the remaining settlement risks

indicated that a further reduction in the

value threshold was required and as such,

the threshold was lowered to $3.0 million in

April. This reduction was in accordance with

the phased approach previously agreed with

the commercial banks. The final review of the

value threshold will occur in 2013 when it is

expected that further progress will be made

towards full implementation of the $1.0 million

threshold for payments settled on a deferred

net settlement system through the ACH.

5.2.5. Fixed Income Trading Platform

The project implementation was initiated in

the last quarter of 2012, with the formation

of the Market User Group (MUG) comprised

of representatives from the Jamaica Stock

Exchange, Financial Services Commission

(FSC), the Ministry of Finance, the Jamaica

Securities Dealers Association and the Bank of

Jamaica. At end-2012, a detailed project plan

was tabled and agreed by the MUG.

5.3. Payment Systems Activities

5.3.1. JamClear Systems

In 2012, a number of system modifications was

applied to the JamClear systems (JamClear-

RTGS and JamClear-CSD) to enhance security

and efficiency. No major disruptions and

same time promoting financial inclusion.

Entities wishing to be electronic retail payment

services providers must be authorized by the

Bank and will be required to operate within the

parameters of the Guidelines.

5.2.2. Government Payments

In the September 2012 quarter, the first phase

of the automation of Government payments

was implemented. This focused on establishing

arrangements for the GOJ, through the

Accountant General’s Department, to settle

large value and time critical payments in

JamClear-RTGS. It is anticipated that the

execution of large value Government payments

via JamClear-RTGS will further enhance

system safety and efficiency by eliminating the

systemic risk associated with the use of cheques

to settle these transactions.

5.2.3. New Reports

During 2012, a new reporting regime for Bill

Payment Service Providers was implemented

in light of the increasing market activity.

Providers of payments services were required

to submit information on their respective

payment activities on a monthly basis as of July

2012. The main service providers- Bill Express,

Paymaster, Quik & EZ Pay submitted reports,

as required.

5.2.4. Automated Clearing House (ACH)

Value Threshold

Commercial banks comfortably achieved the

targeted threshold for volumes of transactions

- 113 -

Annual Report 2012

Payment Systems Oversight

operational instability occurred as a result of

these modifications. The changes included

improved notifications and warnings relating

to system security as well as an upgrade of the

gateway facility and processing time to improve

efficiency. During the year, the JamClear

systems maintained the benchmark 99.0 per

cent reliability.

5.3.2. Retail Payment Systems and

Instruments1

There was an increase in the use of electronic

payment methods, when compared with use

of cheques in 2012. This increase resulted

from efforts directed at minimizing risks in the

payment system and engendering consumer

confidence in the use of alternate payment

instruments, while maintaining safety and

efficiency. The impact of the changes in the

ACH value threshold was seen in the increased

settlement of large value and time critical

payments in JamClear-RTGS and a decline

in cheques cleared both in the ACH and the

proprietary systems of the commercial banks.

For the review year, there was a notable

increase in ABM and POS transactions through

the increased usage of debit and credit cards

across the Multilink and commercial bank

proprietary systems.2 The increase in ABM 1 Retail Payment Systems include the Automated Clearing House (ACH), Multilink and commercial banks internal proprietary systems. Retail payment instruments include terminals (ABM & POS), cards, cheques, direct debits and direct credits. 2 The Multilink system reflects activity for domestic debit card payments across the respective participants such as commercial banks, building societies and credit unions at Points-of-Sale and ABMs.

usage indicated a possible preference for cash

usage by consumers. This is an area that will be

targeted in the coming year as the Bank seeks

to ensure the security and safety standards for

the NPS.

5.3.3. Cheque Clearing Activities

For 2012, total cheque volumes in the ACH was

7.9 million valued at $1.1 trillion, representing

declines of 7.1 per cent and 20.0 per cent in

volume and value, respectively, relative to

2011. The average ACH cheque was $139 241

in 2012, relative to $177 267 for 2011. There

were 11.4 million cheques valued at $1.5

trillion processed by the proprietary systems

of commercial banks for 2012, representing


volumes and value, respectively. The average

value of a proprietary cheque processed

declined to $129 932 from $155 984 for 2011.

5.3.4. Electronic Payment Activities

There were direct debits and credits cleared

through the 37 ACH were 1 410 837 valued at

$91.0 billion and represented an increase of

18.9 per cent in volume and a decline of 40.2

per cent in value. This decline in value was

attributed to the ACH value threshold which

limited large value payments, while promoting

the clearing of small value or true retail

payments. This effectively reduced settlement

risk in the ACH. The highest levels of electronic

payments were reflected in the use of debit and

credit cards through the Multilink system and

the proprietary systems of commercial banks.

- 114 -Payment Systems Oversight

Bank of Jamaica

For 2012, the total completed ABM transactions

processed through Multilink was 10 121 425

valued at $56.2 billion, representing an increase

of 3.0 per cent in volumes but a decline of 1.0

per cent in value, compared to 2011. POS

transactions processed totalled 6 027 247 and

were valued at $28.3 billion, representing


volume and value, respectively, compared to

2011.

The proprietary reports from the commercial

banks, excluding their Multilink payment

activities, indicated an upward trend in

electronic payments generated by debit and

credit card activities during the reporting

period. Of note, credit card payments are not

processed through the Multilink network.

Over the review year, a total of 35.8 million

ABM transactions valued at $331.6 billion were

processed, relative to 29.6 million valued at

$204.3 billion for 2011. Total POS transactions

processed was 13.5 million valued at $103.6

billion, relative to 10.8 million valued at $81.1

billion for 2011.

There were 14.5 million credit card payments

valued at $135.5 billion for 2012. These figures

represented increases of 26.0 per cent and 20.0

per cent in volumes and value, respectively,

relative to 2011.

5.3.5. Instruments and Channels

Debit and credit cards remained the primary

electronic payment instruments in 2012, with

delivery channels remaining ABM and POS

terminals. For the review period, debit and

credit cards in circulation increased by 11.6

per cent and 6.2 per cent, respectively, relative

to 2011. At end-2012, debit and credit cards

in circulation totalled 2.1 million and 208

774, respectively. The total number of ABM

terminals installed by commercial banks was

424 at end-2012, an increase of 1 relative to

2011. There were 16 565 POS terminals at end-

2012, an increase of 15.5 per cent relative to

2011.

5.3.6. Bill Payment Activities

In accordance with the PCSA, for July to

December 2012, 5 132 429 transactions valued

at $39.5 billion were processed in the payment

system. The bill payment providers that

reported were Paymaster, Bill Express, owned

by Grace Kennedy and Quik & EZ Pay owned

by Prime Trust Financial Services.

5.3.7. Clearing of Selected Foreign Currency

Items

The manual clearing process for foreign

cheques drawn on local banks facilitated by

the Bank during 2012, represented cheques

denominated in US dollars, Canadian dollars,

Great Britain Pounds and Euros. Items cleared

locally totalled the equivalent of US$1.9 billion,

a decline of 14.0 per cent when compared to

2011. Of total foreign currency cheques

cleared, US dollar cheques accounted for 97.0

per cent, similar to 2011.

- 115 -

6. Banking Services

System (CTMS) that settles transactions in

the RTGS, the Bank facilitated the training

of the GOJ’s staff and granted them access

to the JamClear-RTGS in September 2012 to

commence the origination of payments. There

were efficiency gains to the system from this

action, as the Government was the single most

significant initiator of large value transactions.

This training enabled the Government to

create its own files in the system, taking full

responsibility for verifying the accuracy and

timeliness of payments.

During 2012, the Bank lowered the ACH value

threshold from $5.0 million to $3.0 million as

part of its risk mitigation strategy of having all

large value transactions settled in the RTGS.

This allowed for the migration of cheque

transactions with values equal to or greater

than $3.0 million from the ACH to the RTGS for

settlement.

The Bank continued to act as participant in

the ACH by negotiating cheques drawn on

commercial banks as well as sending and

receiving electronic files with cheque data,

direct debits and credits to and from the ACH

Operator. In addition, the Bank continued to

effect the settlement of clearing balances on

the accounts of commercial banks, provided

oversight to ensure the efficient operations

of the clearing system and supervised the

6.1. Banking Services

During 2012, the Bank continued to provide an

array of banking services to its customers.1 In the

provision of these services, the Bank operated

the JamClear Real Time Gross Settlement

(RTGS) system, which is a Systemically

Important Payment System (SIPS) in Jamaica.

Additionally, the Bank continued to provide

operational and administrative support to the

Automated Clearing House (ACH), another

SIPS, owned and operated by the seven

commercial banks.

The JamClear RTGS is specifically designed

to clear large value, time critical payments by

financial market participants on accounts held

at the Bank in real time throughout the business

day. Payments settled in the RTGS are final and

irrevocable. The RTGS is fully integrated with

the JamClear Central Securities Depository

(JCSD), thereby facilitating settlement on a

Delivery versus Payment (DvP) basis of all

Government of Jamaica (GOJ) and Bank of

Jamaica securities traded in the domestic

market.

In the context of the Government’s strategy to

implement a Central Treasury Management

1 The Bank’s customers include the Government, licensed financial institutions, primary dealers, selected brokers of the Jamaica Central Securities Depository (JamClear-CSD) and regional central banks.

- 116 -Banking Services

Bank of Jamaica

manual clearing process in order to facilitate

the processing of items that do not qualify for

the ACH. The Bank also supervised the manual

clearing of foreign currency cheques which

were drawn on domestic banks.

6.2. JamClear-CSD

During 2012, the Bank continued to facilitate

the safe and efficient clearing, settlement and

custody of BOJ and GOJ domestically issued

Fixed Income securities, with the exception of

Treasury Bills, electronically in real-time. As

Registrar, the Bank also continued to deliver

registry services including the registration

of new debt issues, dematerialization and

immobilization of securities, on-going

maintenance of ownership records, distribution

of maturity proceeds and interest payments,

withholding tax certificates and audit

confirmations. The total value of securities

held in JamClear-CSD as at end- 2012 was

$848.4 billion and US$1.069 billion compared

to $863.7 billion and US$917.3 million at end-

2011.

JamClear-CSD also provided a wide variety

of depository services including repurchase

and reverse repurchase transactions, pledges,

primary issues, purchase and sale of securities,

free-of-payments and entitlement proceeds.2

Pledges had the highest utilization over the

review period accounting for 37.6 per cent of

the total volumes traded. Entitlement proceeds

and repurchase agreements accounted for

28.6 per cent and 13.3 per cent, respectively

(see Table 53). During the year, the Bank also

ensured that entitlement proceeds were paid at

the start of the business day in JamClear-CSD.

2 Entitlement proceeds include payment of interest and principal..

Table 53

Transaction TypesVolume

2011% of Vol.

Volume 2012

% of Vol.

Delivery Versus Payment 893.0 0.4 432.0 0.2

Free Of Payment 13 212 6.5 12 945.0 6.8

Initial Placement (Primary Issue)

14 237 7.0 12 119.0 6.3

Entitlement Proceeds 59 420 29.0 54 631.0 28.6

Pledges 78 603 38.4 71 767.0 37.6

Repurchase Agreements 23 729 11.6 25 395.0 13.3

Taxation 14 050 6.9 13 299.0 7.0

Sub-total 204 144 99.8 190 588.0 99.7

Bill Payment 479 0.2 489.0 0.3Total 204 623 100.0 191 077.0 100.0

JAMCLEAR-CSD TRANSACTION TYPES by Volume 2011 – 2012

- 117 -

Annual Report 2012

Banking Services

A total of 190 588 transactions was processed

in JamClear-CSD for both BOJ and GOJ

instruments, with nominal values of $21.9

trillion and US$32.5 billion, respectively. In

comparison to 2011, transaction volumes

declined by 13 556 or 6.6 per cent, while

Jamaica Dollar nominal values grew by J$

306.8 billion or 1.0 per cent (see Chart 37). The

reduction in volumes was due to declines in all

transactions except repurchase agreements and

bill payment while the increase in transaction

values was due to marginal growth in pledges

and repo transactions (Chart 38 and Chart 39).

The participants in JamClear-CSD consisted

of all commercial banks, FIA licensees, 11

Chart 38 JamClear - CSD Annual JMD Values

0100020003000400050006000700080009000

10000

Billi

ons

2011

2012

Chart 37 JamClear-CSD Volumes and JMD Nominal Values 2012

- 118 -Banking Services

Bank of Jamaica

the intra-day liquidity facility 2 708 times,

reflecting an increased usage of 7.0 per cent,

relative to 2011. The average value of intraday

liquidity provided by the Bank increased over the

period, with the highest utilization in October

2012 (see Chart 40). The peak in October was

attributed to scheduled time critical payments

on behalf of commercial banks end-users.

Chart 39 JamClear - CSD Annual USD Values

0

5

10

15

20

25

30

Billi

ons

2011

2012

primary dealers, 23 secondary dealers and the 2

issuers – the Bank of Jamaica and the Ministry

of Finance and Planning (MOFP). The number

of participants remained at 45 at end-2012, as

there was one new participant while one was

de-registered. There were 25 159 beneficial

owner accounts in JamClear-CSD at end-2012,

an increase of 2 101, relative to end-2011.

Over the review year, 16 participants accessed

- 119 -

Annual Report 2012

Banking Services

Chart 40 Comparison of Daily Average Liquidity Utilized - 2011 & 2012

20

25

30

35

40

45

50

40179 40210 40238 40269 40299 40330 40360 40391 40422 40452 40483 40513

Daily

Avg

. Liq

uidi

ty (J

$ Bi

llion

s)

Daily Average Liquidity 2011 Daily Average Liquidity 2012

- 121 -

7. Currency Operations

7.1. Currency in CirculationThe total value of circulatory banknotes

increased by approximately 3.0 per cent to

$62 150.2 billion at end-2012, relative to end-

2011 (see Chart 41). The $1000 note accounted

for 72.0 per cent of the total value of notes in

active circulation at end-2012, relative to 71.0

per cent at end-2011. This was followed by the

$500 note which accounted for 12.6 per cent,

compared to 13.5 per cent for the previous

year. The $5000 note represented 9.3 per cent

of the total value of notes in active circulation

at end-2012, relative to 9.4 per cent for the

previous year. Of the total value of banknotes

in circulation at the end of 2012, 0.3 per cent

consisted of withdrawn notes, i.e., $20, $10, $5,

$2, $1 and $0.50.1

The value of coins in circulation at end-2012

was $3.4 billion, representing an increase of 9.1

per cent relative to the previous year (see Chart

1 Withdrawn notes are a liability of the BOJ and therefore are included in the calculation of currency in circulation.

42). Approximately 40.8 per cent of the total

value of coins in active circulation consisted

of $20, while the $10, $5 and $1 represented

22.6 per cent, 15.3 per cent and 18.3 per cent,

respectively. This compares to 40.0 per cent,

22.0 per cent, 15.2 per cent and 18.3 per cent for

the $20, $10, $5 and $1 coins, respectively, for

2011. Of the total value of coins in circulation,

1.3 per cent or $45.1 million represented

withdrawn coins, i.e. $0.50, $0.20, and $0.05.

7.2. Currency IssueThe total value of banknotes issued for 2012

amounted to $243.4 billion (see Table 54). This

represented an increase of 1.4 per cent when

compared to the previous year. The $1000 note

constituted 75.0 per cent of the total value of

notes issued compared to 74.0 per cent in

the previous year. This note, together with

the $500 note, accounted for 92.9 per cent of

the total value of decimal notes issued for the

review year, relative to 92.5 per cent for 2011.

The $5000 denomination represented 2.5 per

$47.194$49.947

$54.625$60.344 $62.150

$0

$10

$20

$30

$40

$50

$60

$70

2008 2009 2010 2011 2012

BIL

LIO

NS

TOTAL VALUE OF BANKNOTES IN CIRCULATION

DEC.

$2.430$2.592

$2.836$3.107

$3.388

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

2008 2009 2010 2011 2012

BIL

LIO

NS

TOTAL VALUE OF DECIMAL COINS IN CIRCULATION

Chart 41 Chart 42

- 122 -Currency Operations

Bank of Jamaica

cent, relative to 2.8 per cent for the previous

year. There was a decline of 10.6 per cent in the

quantity of new notes issued for 2012 compared

with a reduction of 4.6 per cent for 2011. This

sharper decline coincided with the introduction

of more durable substrates for the printing of

banknotes.

The total value of coins issued for the review

year amounted to $497.0 million, which was

3.7 per cent above the total value issued for

2011. The $20 coin accounted for 49.9 per

cent of the total value of coins issued for 2012,

relative to 49.6 per cent for 2011. In terms of the

number of pieces of coins issued, the $1 coin

represented 49.2 per cent of the total number

of pieces issued for 2012, compared to 48.7 per

cent for 2011.

7.3. Currency Redemption

Banknotes redeemed during 2012 were valued

at $241.6 billion, 3.1 per cent above the figure

for the previous year.2 The $1000 and $500

2 From 2008 to 2012, the average yearly redemption was $227.8 billion

banknotes accounted for 74.8 per cent and 18.2

per cent, respectively, of the value of banknotes

redeemed for 2012 relative to 73.6 per cent and

19.1 per cent for 2011. Coins redeemed in 2012

were valued at $215.5 million, representing an

increase of 3.5 per cent relative to the figure

for the previous year. The $20 denomination

accounted for 59.3 per cent of the total value

of coins redeemed for 2012, relative to 57.6 per

cent for 2011. The $10 and $5 coins represented

27.3 and 10.6 per cent, respectively, of the total

value of coins redeemed for 2012, compared to

28.3 and 10.0 per cent for 2011.

7.4. Quality of Banknotes For the review year, 385.0 million notes valued

at $236.9 billion were processed, compared to

325.1 million pieces valued at $230.2 billion

for the previous year. Of the total number of

notes processed, 64.6 per cent was classified

as re-issuable notes. The note-sorting machine

deemed 34.4 per cent of the notes processed

as unfit to enter circulation and automatically

shredded these notes. The remaining notes

were rejected by the note sorting machines

% Change

Denomination $BN Share % $BN Share % (value)

$5,000 6.7 2.8 6.0 2.5 -10.2

$1,000 176.9 73.7 182.5 75.0 -3.2

$500 45.1 18.8 43.7 17.9 -3.2

$100 9.7 4.1 9.5 3.9 -1.8

$50 1.6 0.7 1.7 0.7 1.4Total 240.1 100.0 243.4 100.0 1.4

COMPARISON OF NOTES ISSUED (VALUE)(End of Period)

2011 2012

Table 54

- 123 -

Annual Report 2012

Currency Operations

and subsequently shredded off-line. A total of

161 166 025 pieces of notes were destroyed by

shredding.

7.5. Counterfeit DetectionThe total number of counterfeit notes detected

was 3 549 representing a value of $2 509 600 for

2012, compared to 4 280 pieces valued at $3 479

250 for the previous year. The counterfeit notes

detected in 2012 were 0.004 per cent of the total

value of banknotes in circulation at end-2012.

This is equivalent to 24.4 counterfeit notes

per one million genuine notes in circulation,

relative to 29.7 pieces per million at the end-

2011. The Bank identified 44.1 per cent of the

total number of counterfeit notes detected in

2012, relative to 32.4 per cent for 2011.

7.6. Jamaica 50th Anniversary of

Independence Commemorative

Banknotes and CoinsIn observance of the nation’s 50th anniversary

of political independence, the Bank issued a

series of commemorative banknotes in 2012.

This series consisted of the five denominations

in circulation- the $5000, $1000, $500, $100 and

$50 notes, with modifications to their original

design. The faces of the notes were unchanged,

except for the superimposition of the National

Logo for the 50th Anniversary of Independence

over the watermark area of each denomination.

On the reverse of each note, the unique design

for each denomination was replaced with a

common vignette, a photograph of a group of

children from Central Branch Primary School

(circa. 1962), depicting the National Motto

“Out of Many, One People”. These notes were

put into circulation on 23 July 2012.

In order to extend the useful lives of some of

the notes, four denominations were printed

on more durable substrates. The $1000, $500

and $50 notes were printed on pre and post-

print varnished cotton. The $100 was printed

on a composite material known as Hybrid®,

which is a combination of protective polyester

film layered around a cotton fibre core. For

technical reasons, the $5000 substrate could

not be upgraded.

The Bank also issued two commemorative coins,

gold and silver, with both having similar design

features. The obverse side of each coin features

the Jamaica Coat of Arms and the reverse side,

the National Logo for the 50th Anniversary of

Independence celebrations. Each coin has a

face value of $50 and a diameter of 28.4 mm

with milled edges. These coins consist of 22

carat gold and 92.5 per cent silver, respectively.

In addition, the Bank released a limited number

of legacy banknotes sets with six withdrawn

notes, the $0.50, $1, $2, $5, $10 and $20, as a

special commemorative package.

7.7. Numismatic ProgrammeOlympic Gold and Silver Coins

The Bank released gold and silver Olympic

coins in 2012, in honour of the eight athletes

who have won individual Olympic gold medals

since Jamaica began participating in the Olympic

Games in 1948. These coins have a common design

with the Jamaica Coat of Arms on the obverse and the

portrait of the eight individual gold medal winners on

the reverse. Each coin has a face value of $100. The

gold coin contains 22 carat gold while the silver coin

consists of 92.5 per cent silver.

In celebration of the Diamond Jubilee of Queen

Elizabeth II, the Bank in collaboration with the MDM/

World Coin Association, sanctioned the issuing of a

commemorative silver coin. This coin, which was sold

internationally by the World Coin Association, has a

face value of $25 and featured the Jamaica Coat of

Arms on the obverse and the St. Edwards Crown on

the reverse.

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8. Administration

8.1 Administration

8.1.1 Overview

During the review year, work continued under

the Bank’s Organisational Development

Programme with the objective of improving

organisational effectiveness and efficiency. In

addition, the Succession Management Policy

was revisited and the training and development

programmes were refocused towards equipping

staff members to be able to function in several

areas of the Bank. Further, programmes to

improve operational efficiency and reliability

of the physical plant and equipment were

implemented as well as phase 3 of the energy

management programme.

8.1.2 Organization Development

The Bank’s 2012 Strategic Objectives

were supported by initiatives under the

Organisational Development Programme aimed

at aligning human resources, work processes

and technology to promote improvement in

efficiency and effectiveness. In this regard,

comprehensive analyses of selected core areas

and critical support functions were undertaken

to ensure appropriate deployment of staff.

Jobs were redefined and new job descriptions

developed in cases where functions had

changed based on new or expanded mandates.

Additionally, a formal Succession Management

Programme and Policy was developed

during the year and approved by the Bank’s

Management for implementation in 2013.

8.1.3 Staffing and Employee Relations

The Bank’s staff complement was 585 at the end

of the review year. This reflected a decrease

of 0.7 per cent relative to end-2011. The

staff complement comprised 503 permanent

employees and 82 fixed term contract staff.

For 2012, the Bank’s staff attrition rate was 6.5

per cent for 2012, compared to 5.7 per cent for

2011. The rate of attrition partly reflected an

increase in the number of retirees to 13 in 2012

from 7 in 2011.

The industrial relations environment within

the Bank remained calm in 2012. During

the year, the Management had discussions

with the Bustamante Industrial Trade Union

(BITU) which represents unionized staff. These

discussions were guided by the Government’s

policy directives relating to public sector wages

and benefits for the contract period 01 April

2012 to 31 March 2014.

8.1.4 Training and Development

The Strategic Plan for 2012 required that the

Training Institute accelerated the process of

identifying the organization’s training needs.

To this end, the Training Institute developed and

implemented targeted training programmes

aimed at the realisation of higher levels of staff

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Bank of Jamaica

productivity and efficiency.

In August 2012, the new training programme

was launched under the theme, Vision 2015:

Targeted Training - Creating a New Generation

of Central Bankers. This training will lay the

foundation for a cadre of central bankers who

fully understand the complete mandate and

functions of the central bank, allowing them to

function in several areas.

During the year, members of staff benefitted

from 164 training programmes. This included

37 overseas programmes which were attended

by 53 members of staff. These overseas

programmes were conducted or sponsored

by regional and international organizations

including the Caribbean Regional Technical

Assistance Centre (CARTAC), World Bank,

International Monetary Fund, Centre for

Latin American Monetary Studies (CEMLA),

Caribbean Group of Bank Supervisors (CGBS),

the Federal Reserve Board and other central

banks.

The training programme during the year

was enhanced by collaboration with various

organisations. This included hosting of the

XV Annual Conference of Human Resource

Managers of Central Banks in the Caribbean

Region over the period 05 – 08 September 2012

which was attended by 21 delegates from 8

regional central banks. The Bank also partnered

with the International Finance Corporation

(IFC) and the Canadian International

Development Agency (CIDA) to host the

Caribbean Credit Reporting Conference at the

Jamaica Conference Center on 30 November

2012. In addition, the Bank collaborated with

CEMLA in hosting the first regional Payment

System Workshop for the Caribbean and

Latin America region over the period 05 – 07

December 2012.

During the review year, the Bank continued

its partnership with HEART/NCTVET to train

and certify staff members in selected skills

and competencies. Additionally, the Institute

facilitated 12 e-learning interventions with

176 participants relative to four programmes

with 86 participants in 2011. This increase is

reflective of the new thrust to advance the use

of e-learning as a tool for achieving higher

levels of efficiency in training. In addition,

there was a number of fora on health and

lifestyle, including an annual health seminar

for pensioners convened in December as part of

the Bank’s ongoing health awareness measures

for its pensioners.

8.1.5 Pension Administration

The Bank, as Administrator and Investment

Manager of the pension scheme, fulfilled

the reporting requirements to the Financial

Services Commission (FSC) for the year.

Reports submitted included the annual report

on the pension scheme’s operations for 2011,

responses to surveys and a special questionnaire

designed to assess the Scheme’s preparedness

to implement the requirements of FATCA. A

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Annual Report 2012

Administration

comprehensive review of the pension scheme’s

constitutive documents continued in 2012

and it is anticipated that reviews by the Board

of Directors and Trustees will be finalized in

2013 to facilitate completion of the registration

process by the FSC.

There were 1 025 members of the pension

scheme at the end of 2012, a net increase of

11 relative to 2011. Membership comprised 502

active staff members, 255 pensioners and 268

deferred pensioners. For the review year, 28

members attained or were granted pensionable

status including 15 deferred pensioners.

8.1.6 Plant and Physical Infrastructure

During 2012, the Bank intensified efforts to

optimize the performance of the physical

plant and equipment, advance its Energy

Management Programme as well as implement

environmentally friendly initiatives. The key

strategies included:

1) Formation of a new Environment and

Energy Management Committee with

an expanded mandate to include the

‘greening’ of the organization;

2) Development and implementation of

phase 3 of the Energy Management

Programme;

3) Completion of the Glass Fenestration

System project which offers protection

against Category 5 hurricane-force

winds and provides some degree

of insulation against heat and noise

pollution;

4) Commencement of comprehensive

assessments of the physical plant and

equipment and the development of a

time table for modernization; and

5) Commencement of the process of

facilitating an assessment of the Bank’s

carbon footprint to target areas for

improvements.

For the review period the Bank achieved a

reduction of 542 336 kWh or 12 per cent in

energy consumption relative to 2011. This

reduction exceeded the Bank’s projection for

savings between 5 and 10 per cent for the year.

In addition, the decline translated to a saving of

approximately $15.4 million.

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9. Governance

9.1. OverviewUnder the Bank of Jamaica Act, the Governor

is the Chief Executive Officer of the Bank as

well as Chairman of the Board of Directors. The

Governor is responsible for the business of the

Bank, and more specifically, the formulation

and implementation of monetary policy,

the supervision and regulation of deposit-

taking entities and other specified financial

institutions, the issuance of currency and

the provision of fiscal agency services to the

Government. In addition, the Governor has

statutory responsibility for the oversight of

Jamaica’s payment, clearing and settlement

systems under the Payment Clearing and

Settlement Act (2010).

9.2. Board CompositionThe Board is comprised of the Governor, the

Senior Deputy Governor and six independent

directors appointed by the Minister of Finance

for three-year renewable terms. The Financial

Secretary is an ex officio member of the Board.

In 2012, there were changes in the composition

of the Board of the Bank due to the resignation

of some of its members and appointments to fill

the vacancies created. Specifically, Dr. Wesley

Hughes vacated the post of Financial Secretary

during the year while Dr. Celia Brown-Blake,

Dr. Nigel Clarke, Mr. Rohan Barnett and Mr.

Mark Myers resigned on account of the change

in political administration. They were replaced

by Mr. Devon Rowe, the new Financial Sec-

retary and ex officio member, Mr. Christopher

Bicknell, Dr. Christine Clarke, Dr. Vincent Law-

rence, Miss Janice Holness and Mr. Dennis

Morrison.

All matters of importance outside the func-

tions of daily management are submitted to the

Board. Additionally, on the recommendation of

the Governor, the Board is responsible for the

appointment of auditors, attorneys, currency

agents and other agents of the Bank as well as

the Bank’s officials.

9.3. Board MeetingsThe Bank's Board is required by law to meet

at least 10 times annually. However, nine

statutory meetings were held in 2012.

9.4. Board Committee Meetings The Board’s three committees - Audit, Budget

and Human Resource Development (HRD)

continued to meet in 2012. These committees

have written terms of reference outlining their

respective responsibilities.

The Audit Committee, chaired by Dr Vincent

Lawrence, has oversight of the internal audit

- 130 -Governance

Bank of Jamaica

function and is also responsible for overseeing

the relationship with the Bank’s external

auditors. In 2012, the Audit Committee held

three meetings, satisfying the minimum

stipulation. The Budget Committee, chaired

by Dr Christine Clarke, oversees the financial

affairs of the Bank, including scrutiny of

the annual budget prior to final approval

by the Board. The committee met once in

2012, satisfying the minimum requirement.

The Human Resource Development (HRD)

Committee, chaired by Mr Dennis Morrison,

meets when necessary. The committee met

once for 2012.

9.5. Compensation of Executive

ManagementThe Bank’s Executive Management comprises

the Governor, the Senior Deputy Governor, and

three Deputy Governors. These officers are

appointed under fixed term contracts by the

Minister of Finance and Planning, as provided

for under the Bank of Jamaica Act. The

Governor and Senior Deputy Governor are also

ex officio members of the Board of Directors and

are also appointed by the Minister of Finance

and Planning for fixed terms.

The compensation of Executive Management

for the year ended 31 December 2012 is

described below.

• Salary Range of Executive

Management

$9 332 821 to $18 023 335

• Allowances - Deputy Governors

$830 856

Members of the Executive Management

team are eligible for benefits available to

other members of staff, inclusive of health

insurance, life insurance and staff loans. With

the exception of the Governor, all the executive

managers are members of the non-contributory

pension scheme sponsored by the Bank. The

Governor is paid a gratuity in lieu of pension

benefits.

The Governor is provided with a residence which

is maintained by the Bank. He is also eligible

for reimbursement of prescribed overseas

medical insurance premium and expenses for

his children’s education. The Governor and

the Deputy Governors are provided with motor

vehicles.

Non-executive Directors are not remunerated

for their services but are paid reimbursable

expenses within the scale of rates approved

by the Ministry of Finance and Planning for

Directors of public bodies. They are not eligible

for staff related benefits.

- 131 -

10. Community Outreach

10.1. Overview

Bank of Jamaica, through its outreach

programme, continues to devote some of

its resources to enhancing the educational,

cultural and social development of not only the

community surrounding its offices at Nethersole

Place, but also the wider Jamaican society. The

Bank remains committed to maintaining and

enhancing its current programmes, while being

open to the possibility of new projects aimed

at adding value to the employee and visitor

experience.

10.2. Support for Education

10.2.1. Schools’ Education Programme

The Schools’ Education Programme affords

students of all ages the opportunity to

interact with BOJ staff members and discuss

several areas of economics. During 2012,

the programme hosted 30 sessions, catering

primarily to students who studied business and

economics at the secondary school level.

10.2.2. Revision Seminars in Economics

The Bank hosted the seminar series in its

auditorium over two days in March 2012.

Each day more than 300 secondary school

students preparing for the Caribbean Advanced

Proficiency Examination (CAPE) were in

attendance.

10.2.3. Essay Competition

In 2012, the Bank hosted its essay competition,

“Essays in Economics” for students of economics

enrolled in secondary schools. There were

18 students who were from 13 schools that

participated in the competition. Chevano Baker

of Manchester High School and Oretha Gabay

of Ardenne High School were joint winners.

10.2.4. St. Michael’s Primary School

The Bank’s involvement with this inner-city

school, located in close proximity to its offices,

continued in 2012. In addition to the on-going

assistance with teaching materials, the Bank

sponsored a very successful summer school,

benefitting approximately 60 students at the

grade five and six levels.

10.2.5. Money Museum

Similar to museums worldwide, the Bank’s

money museum continued to play an important

role in the collection, display and dissemination

of historic and cultural information for the

public’s enlightenment. In 2012, more than

6 600 persons visited the Museum, the highest

number of registered visitors for a year since its

opening in 1999.

10.2.6. G. Arthur Brown Memorial Lecture

This lecture honours the memory of G Arthur

Brown, the first Jamaican Governor of the Bank

of Jamaica. The lecture is part of an educational

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Bank of Jamaica

endeavour by the Central Bank to stimulate

intellectual thought and discussion by inviting,

on an annual basis, leading thinkers from

around the globe to speak on a wide variety

of economic, social, cultural, historical and

political topics and issues.

A full auditorium listened to the 2nd G. Arthur

Brown Memorial Lecture presented by former

Prime Minister, the Most Hon. P.J. Patterson, on

the topic “Stimulating the Flow of Our Creative

Potential”. In his address, the former Prime

Minister drew on the importance of VISION

2030 to Jamaica, which he said “…speaks to

the need to develop our human creativity as

an economic resource to better compete in

a globally competitive economy”.1 He also

highlighted that “…the whole life and entire

being of George Arthur Brown was devoted

to releasing the capacity and unleashing the

will of the Jamaican people to make this little

country of ours a truly great one.”

10.3. Support for the Visual and Performing

Arts

10.3 1. Lunch Hour Concerts

These concerts continued in 2012. In

celebration of Jamaica’s 50th anniversary of

independence, the performances were selected

to display Jamaican talent over the 50 years.

Concerts were fully supported each month.

10.3 2. Artist Talk – The Artist and His Work

1 Vision 2030 is a long term National Development plan for Jamaica which sets out strategies which would put Jamaica in a position to achieve developed country status by 2030.

During 2012, the Bank featured the life and work

of two artists. In March, Barrington Watson

reflected on aspects of his life and work, in an

event that coincided with an annex exhibition

of the National Gallery’s landmark “Barrington

– A Retrospective”, in the Bank’s foyer. The

annex exhibition featured The Garden Party, a

highlight of the Bank’s corporate art collection.

The second artist was ceramist Phillip

Supersad, who engaged the audience for over

an hour with his story which was interspersed

with drumming and a demonstration of the use

of the potter’s wheel.

10.3.3. Exhibitions

Exhibitions hosted in 2012 featured ceramics

from the Association of Jamaican Potters and

The Mustard Seed Communities. As part of

“Jamaica 50” celebrations, the Bank mounted a

special exhibition on the commemorative notes

which were issued to mark the occasion. These

notes replicated a photograph of a group of

children from Central Branch Primary School

(circa. 1962), depicting the National Motto

“Out of Many, One People”.

10.3.4. University Singers in Concert

The annual concert, “An Evening with the

University Singers”, sponsored each December

by the Bank and held at the UWI Chapel,

continued to be well supported. The 2012

concert featured a special tribute to Mrs

Jacqueline Morgan, a retired Senior Director

at the Bank, who initiated the series.

- 133 -

11. Bank of Jamaica’s Strategic Objectives 2012-2015

11.1. Overview

The medium-term goal of the Bank of Jamaica

is to reduce inflation to single digit, in line

with the average inflation of Jamaica’s

main trading partners, while maintaining a

sound financial sector, in addition to robust

payments and settlement systems. In order

to enhance the Bank’s capacity to meet these

objectives, major institutional reforms are

being contemplated, viz. (i) progressively

put fulfil the requirements for full-fledged

inflation targeting (FFIT) for implementation,

once the issue of fiscal dominance has been

successfully resolved by the medium-term

economic programme; (ii) amendment of the

Bank of Jamaica Act to give the BOJ overall

responsibility for financial system stability;

and (iii) development of the Omnibus Banking

Law, which will further strengthen BOJ’s

capacity to conduct supervision and regulation

of financial conglomerates. In light of these

reforms and the increased accountability that

will accompany such institutional changes, the

Bank has defined seven strategic objectives to

provide a ‘road map’ for its operations for 2013.

These objectives, as set out below, also inform

the performance benchmarks for the Bank.

11.2. Strategic Objectives

The Bank’s objectives for 2013 are to:

1. Enhance the Monetary Policy Framework

to Achieve Inflation Objective by:

i. deepening research and development

and enhancing the monetary analysis

framework and the monetary

transmission;

ii. strengthening the inflation forecast

and policy assessment system

(IFPAS) through operationalization

of the Dynamic Stochastic General

Equilibrium (DSGE) model and

enhanced surveillance;

iii. assessing the adequacy of the Open

Market Operations structure to ensure

its effectiveness in attaining the inflation

objectives; and

iv. developing a comprehensive data

management infrastructure integrated

with the enterprise business intelligence

system (EBIS).

2. Strengthen the Bank’s Institutional

Framework for Maintaining Financial

System Stability by:

i. strengthening the macro-prudential

surveillance and risk management

framework, focussing on macro-financial

forecast model; designing framework &

tools for coordinated “bottom-up” stress

- 134 -Strategic Objectives

Bank of Jamaica

testing and self-assessment of SFIs as

well as making internal preparations for

a Financial Stability Committee;

ii. enhancing the financial and prudential

database;

iii. promoting an appropriately robust

legal and regulatory framework and

maintaining an adequate and effective

supervisory framework, including the

implementation of enhanced framework

for cambio and remittance companies,

licensing and development of enhanced

ladder of enforcement for non-compliant

licensees and full implementation of

the new credit reporting oversight

framework;

iv. fostering the development of stable,

robust and efficient money and foreign

exchange markets to support monetary

and financial stability objectives,

focussing on the development of a

discount window, identifying and

implementing specific enhancements

for foreign exchange markets to broaden

the range of products and improve

market efficiency;

v. promoting the efficiency, integrity,

reliability and safety of the payment

and settlement systems, focussing on

the development of business continuity

plan (BCP) for the RTGS;

vi. strengthening the payment system

oversight towards ensuring the safety

and security of the system;

vii. taking the leading role in co-ordinating

the implementation of the CFATF action

plan leading to the fourth round mutual

evaluation of Jamaica; and

viii. leading the development of the country’s

strategies and policies in preparation

for the implementation of FATCA.

3. Benchmark and Monitor the Financial

Performance of the Bank by:

i. implementing a new suite of

management reports to support decision

strategies for effective management at

the divisional level;

ii. improving efficiency and effectiveness

of the budgeting, budgetary control and

financial reporting processes;

iii. reviewing the reserve management

function to ensure attainment of the

risk minimization, capital preservation

and return maximization imperatives,

including greater use of available funds

management expertise; and

iv. ensuring the efficiency of the currency

operations, including assessing the

performance of the new substrates and

reviewing the currency structure to

determine efficacy.

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Annual Report 2012

Strategic Objectives

4. Improve the Effectiveness of the Bank’s

Communication by:

i. reviewing and enhancing the

programme for regular external and

internal communication using new and

existing channels;

ii. emphasising topics and subjects that

relate to the organization’s strategic

direction and objectives, promoting

stakeholder discussions on monetary

policy framework and inflation objective

and introducing public education on

the new credit reporting framework,

pursuant to the scheduled launch of

operations of licensed credit bureaus;

iii. promoting financial literacy;

iv. enhancing market transparency through

timely and accurate information

dissemination to all stakeholders; and

v. ensuring the reinforcement of key

strategic messages.

5. Align the Bank’s Human Resources,

Processes, Technology and Organizational

Structure to Support the Attainment of the

Bank’s Strategic Objectives by:

i. developing and implementing a

succession management programme

to ensure that the Bank is adequately

staffed at all times;

ii. developing and administering targeted

training programmes to address the

current and future skills and competency

requirements of the Bank, consisting of

technical as well as management and

leadership training;

iii. enhancing the Bank’s organization

development programme, ensuring

the optimum organizational structure

with the required alignment of

human resources, work processes and

technology; and

iv. undertaking a strategic compensation

review.

6. Enhance the Capacity and Improve the

Stability and Performance of the Bank’s

ICT Infrastructure by:

i. enhancing the IT security arrangements

for the Bank’s data and information;

ii. strengthening the business continuity

plan (BCP) within the context of the IT

framework;

iii. facilitating the implementation of the

fixed income trading platform; and

iv. developing and implementing a foreign

exchange trading platform.

7. Implement Programmes to Improve the

Operational Efficiency and Reliability of the

Bank’s Physical Plant and Equipment by:

i. delivering agreed capital projects on time and

within budget;

ii. implementing environmental awareness

programmes, including the greening of the

Bank;

iii. enhancing the energy management

programmes; and

iv. initiating plans for the replacement of

elevators over the next 2-3 years.

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12. Calendar of Monetary Policy Developments

2012/10/30 To augment its liquidity management operations, the Bank of Jamaica offered

three variable rate instruments from Wednesday, 31 October 2012 to Monday, 05

November 2012:

(a) A 49-day Certificate of Deposit with offer limit of $6.0 billion. This coupon was

re-priced monthly at 0.6 percentage point above the one-month GOJ Treasury

Bill rate existing at the beginning of the next interest period. The initial coupon

for the first 30 days was 6.81 per cent per annum. This offer was extended to

all Primary Dealers and commercial banks, for only one day on Wednesday, 31

October 2012.

(b) A 182-day Certificate of Deposit, with an unlimited offer amount. The instrument

was re-priced quarterly at 0.8 percentage point above the three-month GOJ

Treasury Bill rate existing at the start of each re-pricing period. The initial coupon

for the first three months was 7.18 per cent per annum. This offer was extended

to all Primary Dealers and commercial banks from Wednesday, 31 October 2012

to Monday, 05 November 2012.

(c) A 364-day Certificate of Deposit, with an unlimited offer amount. The instrument

was re-priced quarterly at 1.0 percentage point above the three-month GOJ

Treasury Bill rate existing at the start of each re-pricing period. The initial coupon

for the first three months was 7.38 per cent per annum. This offer was extended

to all Primary Dealers and commercial banks from Wednesday 31 October 2012

to Monday, 05 November 2012.

- i -

Auditors’ Report

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 financial statements of Bank of Jamaica (“the Bank”), set out on pages 3 to 46, which comprise the statement of financial position as at December 31, 2011, the statements of comprehensive income, changes in capital and reserves and cash flows for the year then ended and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these 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 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 our 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, we consider internal controls relevant to the entity’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 entity’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.

KPMG Peat MarwickChartered AccountantsP.O. Box 76Kingston Jamaica

The Victoria Mutual Building6 Duke StreetKingston Jamaica

Telephone +1 (876) 922-6640Telefax +1 (876) 922-7198 +1 (876) 922-7198email: [email protected]

- ii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

- iii -

Annual Report 2012

Final Accounts for Year Ended 31 December 2012

- iv -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

INDEPENDENT AUDITORS’ REPORT TO BANK OF JAMAICA

Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Bank of Jamaica as at December 31, 2012, 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. Chartered Accountants Kingston, Jamaica _________________, 2013

BANK OF JAMAICA Statement of Financial Position December 31, 2012

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

Notes 2012 2011 J$'000 J$'000 ASSETS Foreign assets: Notes and coins 59,342 22,605 Cash and cash equivalents 3 29,784,471 36,142,913 Interest in funds managed by agents 4 13,081,356 12,098,615 Investments 5 114,375,202 167,046,339 International Monetary Fund - Holding of Special Drawing Rights 26,958,840 28,536,152 Bilateral accounts - 23,744

Total foreign assets 184,259,211 243,870,368

Local assets: Notes and coins 127,859 124,726 Loans and advances 6 1,000,000 - Investments 7 92,159,856 92,820,849 International Monetary Fund – Quota subscription 8 4,206,706 4,315,897 Due from Government and Government Agencies 9 16,426,351 18,854,846 Property, plant and equipment 10 3,424,013 3,521,325 Intangible asset 11 30,244 47,398 Employee benefit asset 12 4,712,700 4,290,100 Other 13 4,042,627 6,665,704

Total local assets 126,130,356 130,640,845

Total assets 310,389,567 374,511,213

- v -

Annual Report 2012


BANK OF JAMAICA Statement of Financial Position (Continued) December 31, 2012


Notes 2012 2011 J$'000 J$'000 LIABILITIES, CAPITAL AND RESERVES Liabilities: Notes and coins in circulation 14 64,692,948 62,675,207 Deposits and other demand liabilities 15 152,687,396 175,279,893 Open market liabilities 16 40,380,461 85,524,755 International Monetary Fund - Allocation of Special Drawing Rights 17 35,362,449 36,280,382 Foreign liabilities 16 19 Employee benefit obligation 12 718,800 641,800 Bilateral accounts 3,000 - Other 18 4,821,875 1,013,104

Total liabilities 298,666,945 361,415,160 Capital and reserves: Share capital 19 4,000 4,000 General reserve fund 20 20,000 20,000 Special stabilisation account 21 847,595 777,130 Other reserves 22 10,851,027 12,294,923

Total capital and reserves 11,722,622 13,096,053

Total liabilities, capital and reserves 310,389,567 374,511,213 The financial statements on pages 3 to 46 were approved for issue by the Board of Directors on March 6, 2013 and signed on its behalf by: Governor Brian Wynter Deputy Governor Livingstone Morrison Financial Controller Herbert Hylton

- vi -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

BANK OF JAMAICA Statement of Comprehensive Income Year ended December 31, 2012


Notes 2012 2011 J$'000 J$'000 Operating income: Interest 23 8,918,503 9,824,467 Foreign exchange gain 24 5,797,505 3,777,670 Other 111,521 126,632

Total operating income 14,827,529 13,728,769 Operating expenses: Interest on deposits & open market liabilities 25 5,322,778 8,808,439

Interest on IMF loan 871,203 1,205,386 Staff costs 26 2,235,510 2,478,880 Currency expenses 1,061,013 1,304,012 Property expenses, including depreciation 837,875 801,748 Other operating expenses 714,661 646,738

Total operating expenses 27 11,043,040 15,245,203

Operating profit/(loss) 3,784,489 ( 1,516,434) Other income/(expenses): Pension, medical and life insurance 12 232,500 164,100 (Loss)/gain on remeasurement of staff loans ( 60,138) 144,540 Gain on disposal of securities designated as available-for-sale 16,414 8,029 Gain on disposal of property, plant and equipment 4,032 2,775

Profit/(loss) for the year before transfer to pension equalisation reserve 3,977,297 ( 1,196,990) Transfer to pension equalisation reserve 22(c) ( 322,200) ( 298,400) Profit/(loss) for the year transferred to general reserve fund 9 3,655,097 ( 1,495,390) Other comprehensive income:

Change in fair value of available-for-sale securities, being total other comprehensive income for the year ( 1,866,496) 2,218,920

Total comprehensive income for the year 1,788,601 723,530

- vii -

Annual Report 2012


BANK OF JAMAICA Statement of Changes in Capital and Reserves Year ended December 31, 2012


General Special Share reserve stabilisation Other capital fund account reserves Total J$'000 J$'000 J$'000 J$'000 J$'000 (Note 19) (Note 20) (Note 21) (Note 22) Balances at December 31, 2010 4,000 20,000 709,298 9,658,503 10,391,801

Total comprehensive income for the year: Loss for the year - ( 1,495,390) - - ( 1,495,390) Other comprehensive income: Change in fair value of available- for-sale securities - - - 2,218,920 2,218,920

Total comprehensive income - ( 1,495,390) - 2,218,920 723,530

Other changes in reserves: Loss due from consolidated fund (note 9) - 1,495,390 - - 1,495,390 Transfer from coins in circulation - - 67,832 - 67,832 Transfer of surplus on defined benefit pension scheme - - - 417,500 417,500

- 1,495,390 67,832 417,500 1,980,722

Balances at December 31, 2011 4,000 20,000 777,130 12,294,923 13,096,053

Total comprehensive income for the year: Profit for the year - 3,655,097 - - 3,655,097 Other comprehensive income: Change in fair value of available- for-sale securities - - - ( 1,866,496) ( 1,866,496)

Total comprehensive income - 3,655,097 - ( 1,866,496) 1,788,601

Other changes in reserves:

Profit due to consolidated fund (note 9) - ( 3,655,097) - - ( 3,655,097) Transfer from coins in circulation - - 70,465 - 70,465 Transfer of surplus on defined benefit pension scheme - - - 422,600 422,600

- ( 3,655,097) 70,465 422,600 ( 3,162,032)

Balances at December 31, 2012 4,000 20,000 847,595 10,851,027 11,722,622

- viii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

BANK OF JAMAICA Statement of Cash Flows Year ended December 31, 2012


Notes 2012 2011 J$'000 J$'000 Cash flows from operating activities:

Profit/(loss) for the year 3,977,297 ( 1,196,990) Adjustments for:

Depreciation – property, plant and equipment 10 319,321 309,958 Amortisation – intangible assets 11 35,082 58,603 Gain on disposal of property, plant and equipment ( 4,032) ( 2,775) Employee benefits, net ( 245,200) ( 175,900) Unrealised exchange gain ( 9,647,889) ( 110,552) Subscription 109,191 ( 133,835) Unrealised exchange loss on International Monetary

Fund - Allocation of SDR's ( 917,933) 1,125,094 Interest income 23 ( 8,918,503) ( 9,824,467) Interest expense 25 5,322,778 8,808,439 Operating loss before changes in other assets and

other liabilities ( 9,969,888) ( 1,142,425) Other assets 2,580,379 ( 2,066,347) Other liabilities 3,689,331 ( 1,798,426) Due from Government and Government Agencies ( 1,142,727) ( 2,134,010)

Interest received 8,905,813 11,891,062 Interest paid ( 5,203,338) ( 9,077,051)

Net cash used by operating activities ( 1,140,430) ( 4,327,197)

Cash flows from investing activities: International Monetary Fund - Holding of Special Drawing Rights 1,577,313 226,895 Interest in funds managed by agents ( 94,118) ( 156,998) Foreign currency denominated investments 60,444,488 28,142,064 Local currency denominated investments ( 996,336) ( 1,850,238) Loan and advances ( 1,000,000) 3,460,676 Additions to property, plant and equipment 10 ( 244,707) ( 215,617) Addition to intangible asset 11 ( 17,928) ( 8,541) Proceeds of disposal of property, plant and equipment 26,730 49,261

Net cash provided by investing activities 59,695,442 29,647,502

Cash flows from financing activities: Notes and coins in circulation 2,088,206 5,990,545 Deposits and other demand liabilities (23,837,003) 24,266,500 Open market liabilities (45,144,294) (38,823,318) Foreign liabilities ( 3) 1

Net cash used by financing activities (66,893,094) ( 8,566,272)

Net (decrease)/increase in cash and cash equivalents ( 8,338,082) 16,754,033 Cash and cash equivalents at beginning of year 36,290,244 19,477,521 Effect of exchange rate fluctuation on cash held 2,019,510 58,690

Cash and cash equivalents at end of year 29,971,672 36,290,244

- ix -

Annual Report 2012


BANK OF JAMAICA Statement of Cash Flows (Continued) Year ended December 31, 2012


Notes 2012 2011 J$'000 J$'000 Cash and cash equivalents at December 31 comprise:

Foreign cash and cash equivalents 3 29,784,471 36,142,913 Foreign notes and coins 59,342 22,605 Local notes and coins 127,859 124,726

29,971,672 36,290,244

- x -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

BANK OF JAMAICA Notes to the Financial Statements Year ended December 31, 2012

1. Identification Bank of Jamaica (hereafter “the Bank”) was established under the Bank of Jamaica Act (hereafter

“the Act”) most recently amended on December 31, 2010. The Bank is domiciled in Jamaica and its principal office is located at Nethersole Place, Kingston, Jamaica.

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 relevant provisions of the Bank of Jamaica Act and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

(b) Basis of preparation: (i) Functional and presentation currency

The financial statements are presented in Jamaica Dollars (J$) which is the Bank’s functional currency.

(ii) Basis of measurement

The financial statements are prepared on the historical cost basis, except for the inclusion of available-for-sale investments and certain classes of property, plant and equipment at fair value. In addition, the defined benefit asset is recognized as plan assets, plus unrecognized past service cost, less the present value of the defined benefit obligation and is limited as explained in note 2(h).

(iii) Estimates assumptions and judgements

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

- xi -

Annual Report 2012


BANK OF JAMAICA Notes to the Financial Statements (Continued) Year ended December 31, 2012

2. Statement of compliance, basis of preparation and significant accounting policies (continued):

(b) Basis of preparation (continued):

(iii) Estimates assumptions and judgements (continued):

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

The amounts recognised in the statements of financial position and comprehensive income for pension and other post-retirement benefits are determined actuarially using several assumptions. The primary assumptions used in determining the amounts recognised include the 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.

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 bank’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.

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. The method includes the use of yields on securities with similar risks and tenure at the reporting date. There is however, no single accepted market yield. Consequently, the estimates arrived at may be 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.

- xii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(c) Foreign currencies:

The rate of exchange of the Jamaica Dollar for the United States dollar is determined by the weighted average rate of trades reported by authorised dealers and cambios 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 World Markets Company Plc (WM Reuters).

Monetary assets and liabilities denominated in foreign currencies at the reporting 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 profit or loss.

(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. 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 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.

- xiii -

Annual Report 2012




(d) Financial instruments (continued):

(ii) Measurement (continued): 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

amortised cost, less provision for impairment losses 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.

[v] Interest in managed funds is classified as available-for-sale and is measured at fair value.

(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 reporting 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 of the amount and timing of such cash flows and the discount rate is a market related rate at the reporting 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 other comprehensive income, except for impairment losses and, in the case of monetary items such as debt securities, foreign exchange gains and losses, which are recognized in profit or loss. When the financial assets are sold, collected or otherwise disposed of, the cumulative gain or loss recognised in other comprehensive income is recognised in profit or loss.

(v) Cash and cash equivalents Cash and cash equivalents comprise demand deposit accounts with banks and are

shown at cost.

- xiv -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(d) Financial instruments (continued):

(vi) Other assets

Other assets are stated at amortised cost, less impairment losses.

(vii) Other liabilities Other liabilities are stated at amortised cost. (viii) 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, 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.

- xv -

Annual Report 2012




(e) Property, plant and equipment (continued):

(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 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 profit or loss. 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; however, 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.

- xvi -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(h) Employee benefits (continued):

(i) General benefits

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 other post employment benefits

Employee benefits comprising pensions, and the related post-employment assets and

obligation 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 gives 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 obligation 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 for its administration of, and

contributions to, the pension scheme established to provide retirement benefits (see note 12). 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.

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 reporting date on long-term government bonds with maturities approximating the term 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 profit or loss.

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.

- xvii -

Annual Report 2012




(h) Employee benefits (continued): (ii) Defined-benefit scheme and post employment benefits (continued): 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 contributionsto 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) Impairment:

The carrying amounts of the Bank’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated at each reporting 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 profit or loss.

When a decline in the fair value of an available-for-sale financial asset has been recognised

in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that has been recognised in other comprehensive income is recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.

(i) Calculation of recoverable amount

The recoverable amount of the Bank’s investment in loans and receivables and other

receivables 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 its value in use and its 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.

- xviii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(j) Impairment (continued):

(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 a 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 profit or loss. 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 profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in profit or loss.

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.

(k) Intangible asset:

Intangible asset represents software and is measured at cost less accumulated depreciation and impairment losses. The asset is depreciated on the straight line basis at an annual rate estimated to write down the asset to its residual value over its estimated useful life of 5 years.

(l) Revenue recognition:

Interest income Interest income is recognised in profit or loss on the accrual basis using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset (or, where appropriate, a shorter period) to the carrying amount of the financial asset. The effective interest rate is established on initial recognition of the financial asset and is not revised subsequently. Interest income includes coupons earned on fixed income investments, accretion of discount on treasury bills and other discounted instruments, and amortisation of premium on instruments bought at a premium.

- xix -

Annual Report 2012



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

(m) New, revised and amended standards and interpretations:

New, revised and amended standards and interpretations that became effective during the year:

Certain new, revised and amended standards and interpretations came into effect during the financial year. The Bank has adopted those which are relevant to its operations, none of which resulted in any change in accounting policies or material changes to the content or presentation of amounts or disclosures in these financial statements. New, revised and amended standards and interpretations those are not yet effective: At the date of authorisation of these financial statements, certain new, and revised and amended standards and interpretations have been issued which were not effective at the reporting date and which the Bank has not early-adopted. The Bank has assessed them with respect to its operations and has determined that the following are relevant to its financial statements. IFRS 9, Financial Instruments, is effective for annual reporting periods beginning on

or after January 1, 2015 (previously January 1, 2013). The standard retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortised cost and fair value. The standard includes guidance on classification and measurement of financial liabilities designated as fair value through profit or loss and incorporates certain existing requirements of IAS 39,Financial Instruments: Recognition and Measurement, on the recognition and de-recognition of financial assets and financial liabilities. The Bank is assessing the impact that the standard will have on its 2015 financial statements.

IFRS 13, Fair Value Measurement, which is effective for annual reporting periods beginning on or after January 1, 2013, defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value and is applicable to assets, liabilities and an entity’s own equity instruments that, under other IFRSs, are required or permitted to be measured at fair value, or when disclosure of fair values is provided. It does not introduce new fair value measurements, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The Bank is assessing the impact that the standard will have on its 2013 financial statements.

IAS 19, Employee Benefits, has been amended, effective for annual reporting periods

beginning on or after January 1, 2013, to require all actuarial gains and losses to be recognised immediately in other comprehensive income. This change will remove the corridor method and eliminate the ability for entities to recognize all changes in the defined benefit obligation and in plan assets in profit or loss. The expected return on plan assets recognized in profit or loss is to be calculated based on the rate used to discount the defined benefit obligation. The amendment also includes changes to the definitions and disclosure requirements in the current standard. The Bank is assessing the impact that the standard will have on its 2013 financial statements.

- xx -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(m) New, revised and amended standards and interpretations (continued):

New, revised and amended standards and interpretations that are not yet effective (continued):

IAS 1, Presentation of Financial Statements, was amended by the issue of

“Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income”, effective for annual reporting periods beginning on or after July 1, 2012, which requires an entity to present separately the items of other comprehensive income (“OCI”) that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. It does not change the existing option to present the profit or loss and other comprehensive income in two statements but changes the title of the ‘Statement of Comprehensive Income’ to ‘Statement of Profit or Loss and Other Comprehensive Income’. The Bank is assessing the impact that the amendment will have on its 2013 financial statements.

Amendments to IAS 32, Financial Instruments: Presentation, which is effective for annual reporting periods beginning on or after January 1, 2014, clarifies those conditions needed to meet the criteria specified for offsetting financial assets and liabilities. It requires the entity to prove that there is a legally enforceable right to set off the recognised amounts. Conditions such as whether the set off is contingent on a future event and the nature and right of set-off and laws applicable to the relationships between the parties involved should be examined. Additionally, to meet the criteria, an entity should intend to either settle on a net basis or to realise the asset and settle the liability simultaneously. The Bank is assessing the impact that the amendment will have on its 2014 financial statements.

Improvements to IFRS 2009-2011 contains amendments to certain standards and

interpretations and are effective for annual reporting periods beginning on or after January 1, 2013. The main amendments applicable to the Bank are as follows:

IAS 1, Presentation of Financial Statements, has been amended to clarify that

only one comparative period, which is the preceding period, is required for a complete set of financial statements. IAS 1 requires the presentation of an opening statement of financial position when an entity applies an accounting policy retrospectively or makes a retrospective restatement or reclassification. IAS 1 has been amended to clarify that (a) the opening statement of financial position is required only if a change in accounting policy, a retrospective restatement or a reclassification has a material effect upon the information in that statement of financial position; (b) except for the disclosures required under IAS 8, notes related to the opening statement of financial position are no longer required; and (c) the appropriate date for the opening statement of financial position is the beginning of the preceding period, rather than the beginning of the earliest comparative period presented. The Bank is assessing the impact that the standard will have on its 2013 financial statements.

- xxi -

Annual Report 2012




(m) New, revised and amended standards and interpretations (continued):

New, revised and amended standards and interpretations that are not yet effective (continued):

IAS 16, Property, Plant and Equipment, has been amended to clarify that the definition of ‘property, plant and equipment’ in IAS 16 is now considered in determining whether spare parts, standby-by equipment and servicing equipment should be accounted for under the standard. If these items do not meet the definition, then they are accounted for using IAS 2, Inventories. The Bank is assessing the impact that the standard will have on its 2013 financial statements.

IAS 32, Financial Instruments: Presentation, has been amended to clarify that IAS 12, Income Taxes, applies to the accounting for income taxes relating to distributions to holders of an equity instrument and transaction costs of an equity transaction. The Bank is assessing the impact that the standard will have on its 2013 financial statements.

(n) Related party balances and transactions:

A related party is a person or entity that is related to the Bank.

i) A person or a close member of that person’s family is related to the Bank if that person:

(a) has control or joint control over the Bank;

(b) has significant influence over the Bank; or

(c) is a member of the key management personnel of the Bank

ii) An entity is related to the Bank if any of the following conditions applies:

(a) The entity and the Bank are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(b) The entity is a post-employment benefit plan for the benefit of employees of either the Bank or an entity related to the Bank.

(c) The entity is controlled, or jointly controlled by a person identified in (i) (a).

(d) A person identified in (i) (a) has significant influence over the Bank or is a member of the key management personnel 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.

3. Cash and cash equivalents

2012 2011 J$'000 J$'000

Current accounts and money at call with foreign banks 29,051,024 35,504,889 Current accounts with local banks 733,447 638,024

29,784,471 36,142,913

- xxii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


4. Interest in funds managed by agents

This represents investments managed by Crown Agents Investment Management Limited (CAIML) on behalf of the Bank. The portfolio consists of investments in government bonds, treasury bills, corporate bonds and cash denominated in United States dollars and other currencies. The portion denominated in other currencies is hedged in United States dollars as required by the agreement in place between the Bank and CAIML.

5. Foreign currency denominated investments 2012 2011 J$'000 J$'000

Available-for-sale securities: US Government securities 34,711,648 47,396,266

Loans and receivables: Short-term deposits with foreign banks 79,663,554 117,923,363 Caribbean Development Bank bond - 1,726,710

79,663,554 119,650,073

114,375,202 167,046,339 6. Loan and advances

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

2012 2011 J$'000 J$'000

Denominated in Jamaica dollars 1,000,000 -

As at the reporting date, the fair value of the securities obtained and held by the Bank for the loans and advances granted was $1,330,532. All loans and advances mature within twelve months after the reporting date.

7. Local currency denominated investments 2012 2011 J$'000 J$'000

Available-for-sale securities: Jamaica Government Securities: Treasury bills 38 91 Variable rate benchmark investments 74,017,330 73,710,954 Fixed rate benchmark investments 18,142,488 19,109,804

92,159,856 92,820,849

- xxiii -

Annual Report 2012



8. 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.

2012 2011 SDR'000 J$'000 J$'000 Amount subscribed (net of reserve tranche of J$Nil): At beginning of year 31,125 4,315,897 4,182,062

Effect of exchange rate fluctuation - ( 109,191) 133,835

At end of year 31,125 4,206,706 4,315,897

9. Due from Government and Government Agencies

2012 Movements during the year Dec. 31, Advances/ (Settlement)/ Dec. 31, 2011 losses profit 2012 J$'000 J$'000 J$'000 J$'000

Withholding tax refund due 2,134,009 1,142,727 - 3,276,736 Accrued interest on Government securities 3,353,876 3,437,751 (3,353,876) 3,437,751 Net loss receivable

from Consolidated Fund 13,366,961 - (3,655,097) 9,711,864

18,854,846 4,580,478 (7,008,973) 16,426,351

2011 Movements during the year Dec. 31, Advances/ (Settlement)/ Dec. 31, 2010 losses profit 2011 J$'000 J$'000 J$'000 J$'000

Withholding tax refund due 1,339,767 794,242 - 2,134,009

Accrued interest on Government securities 5,350,558 3,353,876 (5,350,558) 3,353,876 Net loss receivable from Consolidated Fund 11,871,571 1,495,390 - 13,366,961

18,561,896 5,643,508 (5,350,558) 18,854,846

(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 the financial year of the Government. Such advances are to be repaid within three months of the end of the financial year in which the advances were made. Where advances are not duly paid the Bank is prohibited from granting further advances in any subsequent financial year until the outstanding advances are repaid.

- xxiv -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


9. Due from Government and Government Agencies (continued)

(a) (Continued) During 2012, the Bank extended credit to the Government by way of temporary advances. The amount advanced was $7.5 billion which was repaid during the year. No advances were made to the Government during 2011.

(b) The Government is required by the Act to pay to the Bank, out of the Consolidated Fund,

amounts to cover losses incurred by the Bank. Section 9 (3) of the Act provides that if in the opinion of the Minister of Finance payment to clear the losses cannot be made from the Consolidated Fund, such losses may be cleared by the issue of securities to the Bank chargeable to the Consolidated Fund. At the reporting date, losses as at 2012 of $9,711.84 million (2011: 13,366.96 million) remained unsettled.

10. 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, 2010 2,414,437 10,960 1,441,685 389,357 8,485 4,264,924

Additions 17,725 4,861 62,198 97,893 32,940 215,617 Transfer from investment property 515,507 - - - - 515,507 Other transfers 8,485 - - - ( 8,485) - Disposals/write-offs - - ( 2,503) (112,798) - ( 115,301)

December 31, 2011 2,956,154 15,821 1,501,380 374,452 32,940 4,880,747

Additions 73,930 19,277 81,409 70,091 - 244,707 Transfers 23,719 9,221 - - (32,940) - Disposals/write-offs ( 87) - ( 3,265) ( 62,244) - ( 65,596)

December 31, 2012 3,053,716 44,319 1,579,524 382,299 - 5,059,858

At cost 120,255 44,319 1,579,524 382,299 - 2,216,397 At valuation 2,843,461 - - - - 2,843,461

3,053,716 44,319 1,579,524 382,299 - 5,059,858 Depreciation: December 31, 2010 118,052 4,507 884,061 111,658 - 1,118,278 Charge for the year 120,538 1,575 113,117 74,728 - 309,958 Eliminated on disposals - - - ( 68,814) - ( 68,814)

December 31, 2011 238,590 6,082 997,178 117,572 - 1,359,422 Charge for the year 125,521 4,433 113,534 75,833 - 319,321 Eliminated on disposals - - ( 3,300) ( 39,598) - ( 42,898)

December 31, 2012 364,111 10,515 1,107,412 153,807 - 1,635,845

Net book values: December 31, 2012 2,689,605 33,804 472,112 228,492 - 3,424,013

December 31, 2011 2,717,564 9,739 504,202 256,880 32,940 3,521,325

December 31, 2010 2,296,385 6,453 557,624 277,699 8,485 3,146,646

- xxv -

Annual Report 2012



10. Property, plant and equipment (continued)

The Bank’s land and buildings were revalued in January 2010 by The C. D. Alexander Company Realty Limited, Real Estate Broker, Appraiser and Auctioneer on the open-market, existing-use basis. The surplus arising on revaluation, inclusive of depreciation no longer required, is included in property revaluation reserve [note 22(b)].

Management is of the opinion that there was no significant change in the value of land and building

between the valuation date and the year end. 11. Intangible asset Computer Work-in software progress Total J$’000 J$’000 J$’000 Cost or valuation: December 31, 2010 420,370 4,615 424,985 Additions 8,541 - 8,541

December 31, 2011 428,911 4,615 433,526 Additions 17,928 - 17,928 Transfers 4,615 ( 4,615) -

December 31, 2012 451,454 - 451,454 Amortisation: December 31, 2010 327,525 - 327,525

Charge for the year 58,603 - 58,603

December 31, 2011 386,128 - 386,128 Charge for the year 35,082 - 35,082

December 31, 2012 421,210 - 421,210 Net book values: December 31, 2012 30,244 - 30,244

December 31, 2011 42,783 4,615 47,398

December 31, 2010 92,845 4,615 97,460

12. Employee benefits

The Bank operates non-contributory defined benefit pension, medical, and life insurance schemes for all its permanent eligible employees and funds supplemental retirement benefits. 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.

- xxvi -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


12. Employee benefits (continued)

(a) Pension asset recognised:

2012 2011 J$'000 J$'000

Present value of funded obligations ( 6,794,000) ( 6,423,400) Fair value of plan assets 12,295,400 11,999,000 Unrecognised actuarial gains ( 788,700) ( 1,285,500)

Recognised asset 4,712,700 4,290,100

(i) Movements in the present value of defined benefit obligations

2012 2011 J$'000 J$'000

Balance at beginning of year 6,423,400 5,920,800 Benefits paid ( 404,900) ( 376,200) Service and interest costs 843,400 814,600 Actuarial gain ( 67,900) 64,200

Balance at end of year 6,794,000 6,423,400

(ii) Movements in plan assets

2012 2011 J$'000 J$'000

Fair value of plan assets at beginning of year 11,999,000 10,728,800 Contributions paid 96,800 119,100 Expected return on plan assets 1,125,300 1,113,000 Benefits paid ( 404,900) ( 376,200) Actuarial gain ( 520,800) 414,300

Fair value of plan assets at end of year 12,295,400 11,999,000

Plan assets consist of the following:

Government of Jamaica securities 11,809,200 10,728,000 Bank of Jamaica certificates of deposit 77,500 890,500 Real estate 85,000 85,000 Other 323,700 295,500

12,295,400 11,999,000

(iii) Actual return on pension plan assets 4.92% 12.73%

- xxvii -

Annual Report 2012



12. Employee benefits (continued): (a) Pension asset recognised (continued):

(iv) Credit recognised in profit or loss

2012 2011 J$'000 J$'000

Current service costs 164,300 165,800 Interest on obligations 642,300 648,800 Expected return on plan assets (1,125,300) (1,113,000) Net actuarial gain recognised ( 3,500) -

( 322,200) ( 298,400)

(v) Principal actuarial assumptions at the reporting date (expressed as weighted averages)

2011 2010 % %

Discount rate 10.5 10.0 Expected return on plan assets 9.0 9.5 Future salary increases 7 6.0

The overall expected long-term rate of return on assets is 9.0% (2010: 9.5%). The expected long-term rate of return is based on an assumed inflation rate of 7% (2010: 6%).

(vi) Historical information

Defined benefit pension plan

2012 2011 2010 2009 2008 J$'000 J$'000 J$'000 J$'000 J$'000

Present value of the defined benefit obligation ( 6,794,000) ( 6,423,400) ( 5,920,800) (4,456,300) (4,169,700)

Fair value of plan assets 12,295,400 11,999,000 10,728,800 8,976,200 7,748,000 Surplus in plan 5,501,400 5,576,000 4,808,000 4,519,900 3,578,300 Experience adjustments arising

on plan liabilities 205,300 ( 85,700) 391,000 321,000 ( 345,500) Experience adjustments arising

on plan assets ( 520,800) 414,300 511,000 155,800 197,500

- xxviii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica



(b) Obligations for post-retirement life insurance and medical benefits:

(i) Liability recognised in statement of financial position:

2012 2011 J$'000 J$'000

Present value of obligation 751,400 608,200 Unrecognised actuarial losses 6,700 76,900 Unrecognised past services costs ( 39,300) ( 43,300)

Net liability recognised in statement of financial position 718,800 641,800

(ii) Movement in present value of defined benefit obligation

2012 2011 J$'000 J$'000

Balance at beginning of year 608,200 586,600 Interest cost 62,700 70,700 Current service cost 25,100 25,800 Past service costs - 54,500 Benefits paid ( 13,600) ( 11,800) Actuarial gains 69,000 (117,600)

Balance at end of year 751,400 608,200

(iii) Expense recognised in the profit or loss: 2012 2011 J$'000 J$'000

Current service costs 25,100 25,800 Interest on obligations 62,700 70,700 Past service costs 1,900 37,700

89,700 134,200

(iv) Principal actuarial assumptions at the reporting date (expressed as weighted averages):

2012 2011 % %

Discount rate 10.50 10.00 Medical claims growth 9.50 9.00

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.

- xxix -

Annual Report 2012




(b) Obligations for post-retirement life insurance and medical benefits (continued):

(v) Historical information

Post-employment medical benefits 2012 2011 2010 2009 2008

J$'000 J$'000 J$'000 J$'000 J$'000

Present value of obligations 751,400 608,200 586,600 550,700 1,964,800 Experience adjustments arising

on plan liabilities ( 69,800) 117,700 ( 72,800) (152,400) ( 59,400)

(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 health care 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 21,700 ( 16,200) Effect on the defined benefit obligation 155,000 (119,600)

(d) The estimated pension contributions expected to be paid into the plan during the next

financial year is J$103,000,000 (2011: J$136,900,000). 13. Other assets 2012 2011 J$'000 J$'000 Items in process of collection 979 2,729 Overdrafts - 1,088 Staff loans 1,891,723 1,745,383 Ex-staff loans 37,818 33,697 Stock of unissued notes and coins 2,354,966 1,755,072 SDR equalisation [note 15(c)] - 3,151,503 Accrued interest receivable other than on GOJ securities 207,226 278,412 Other 212,773 304,066

4,705,485 7,271,950 Less:

Re-measurement of staff loans ( 651,253) ( 594,641) Provision for loan loss on ex-staff loans ( 11,605) ( 11,605)

4,042,627 6,665,704

- xxx -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


14. Notes and coins in circulation 2012 2011 J$'000 J$'000 Notes 62,150,162 60,343,817 Coins 2,542,786 2,331,390 64,692,948 62,675,207 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, 2012, were 3.88 (2011: 4.49) times the value of notes and coins in circulation at that date.

Coins in circulation are shown net of a reserve of 25% of the gross amount of coins in circulation (note 21).

15. Deposits and other demand liabilities 2012 2011 J$'000 J$'000

Government and Government agencies 8,902,218 39,604,185 Commercial banks and specified financial institutions 68,385,891 58,371,407

International Monetary Fund 73,318,622 75,222,624 Others 2,080,665 2,081,677

152,687,396 175,279,893 Jamaica dollar equivalent of foreign currency deposits 101,395,792 119,781,738 Jamaica dollar deposits 51,291,604 55,498,155

152,687,396 175,279,893

(a) Deposit and other demand liabilities include the reserve deposits prescribed by Section 28 of the Bank of Jamaica Act, Section 14 of the Banking Act, Section 14 of the Financial Institutions Act and Section 31 of the Building Societies Regulations. Reserve deposits at the reporting date were $50,131.14 million (2011: $44,756.55 million).

(b) Under Section 28A of the Bank of Jamaica Act, commercial banks and specified financial institutions may be required to make special deposits with the Bank of Jamaica in the form of cash or specified securities. There were no special deposits at the reporting date.

(c) IMF deposits of J$73,318.62 million (2011: J$75,222.62 million) include J$73,226.21 million (2011:J$75,127.81million) representing the SDR541.80 million of drawdowns under the 2010 Standby Agreement between the IMF and the Government of Jamaica converted to Jamaica dollar at the exchange rate of SDR0.00739899:J$1.00 (SDR0.00721171) the rate obtaining at April 30, 2012 (April 30, 2011). At the reporting date, the rate of exchange was SDR0.00701470844:J$1.00 (2011:SDR0.0075277031: J$1.00) which increased the required deposit to J$77,342.31 million (2011: J$72,078.05 million). This led to revaluation loss of J$4,016.40 million (2011: gain of J$3,151.50 million) (notes 13 and 18).

- xxxi -

Annual Report 2012



16. 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. In the case of funds acquired, receipt of funds is evidenced by the Bank issuing Certificates of Deposit to the depositor.

17. 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. 2012 2011 SDRs'000 J$'000 J$'000 At beginning of year 261,644 36,280,382 35,155,288 Effect of exchange rate fluctuation - ( 917,933) 1,125,094

At end of year 261,644 35,362,449 36,280,382

18. Other liabilities 2012 2011 J$'000 J$'000 Interest payable 340,110 459,550 Staff and staff-related expenses 379,397 466,117 SDR equalisation provision [note 15(c)] 4,016,038 - Overdrafts 2,486 -

Other 83,844 87,437 4,821,875 1,013,104 19. 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.

20. 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.

- xxxii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


21. 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 14).

22. Other reserves This represents the following: 2012 2011 J$'000 J$'000 Securities revaluation reserve [see (a)] 3,816,916 5,683,412 Property revaluation reserve [see (b)] 2,321,411 2,321,411 Pension equalisation reserve [see (c)] 4,712,700 4,290,100 10,851,027 12,294,923 (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 10). (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 plan are shown in the statement of comprehensive income, then transferred to this reserve.

23. Interest income

2012 2011 J$'000 J$'000

Loans and receivables: Cash and cash equivalents 64,921 23,873 Funds managed by agents 125,267 130,722 Investment securities 206,116 440,540 Loans and advances 2,767 15,752 Other 87,539 164,568

Available-for-sale: Investment securities 8,431,893 9,049,012

8,918,503 9,824,467

- xxxiii -

Annual Report 2012



24. Foreign exchange gain, net 2012 2011

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 5,417,943 3,593,000

Exchange gain on purchases and sales of foreign currencies 379,562 184,670 5,797,505 3,777,670 25. Interest expense

2012 2011 J$'000 J$'000

Certificates of deposit 4,616,797 7,892,406 Government and Government agencies (note 28) 610,790 834,059 Commercial banks and specified financial institutions 94,377 80,106 Other 814 1,868

5,322,778 8,808,439 26. Staff numbers and costs

The number of employees at the end of the year was 508 (2011: 519) full-time and 78 (2011: 86) contract. The related costs for these employees were as follows:

2012 2011 J$'000 J$'000

Salaries and wages 1,902,596 2,178,116 Statutory payroll contributions 118,267 125,788 Uniforms 29,015 20,847 Other staff costs 140,539 120,750 Staff development 45,093 33,379

2,235,510 2,478,880 27. Operating expenses Operating expenses include the following charges:

2012 2011 J$'000 J$'000 Depreciation (note 10) 319,321 309,958 Amortisation (note 11) 35,082 58,603 Auditors' remuneration 10,600 9,900 Payments for redundancies - 48,899

- xxxiv -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


28. Related party balances The Bank has a related party relationship with its Board of Directors, the members of the

Executive management, the Bank of Jamaica pension scheme and the Government of Jamaica and its agencies (see notes 9 and 15). Membership of the executive management consists of twelve (12) persons.

The statement of financial position includes balances, arising in the ordinary course of business,

with related parties, as follows: 2012 2011 J$'000 J$'000 Loans: Executive management (included in staff loans note 13) 83,290 83,578 Open market liabilities:

Pension fund 77,500 890,500 The interest rates applicable on loans to executive management 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 statement of comprehensive income includes income earned from/expenses incurred in

transactions with related parties, in the ordinary course of business, as follows: 2012 2011 J$'000 J$'000

Interest expense: Government and Government agencies (note 25) 610,790 834,059

Pension scheme 30,444 62,950 Executive management 3,106 4,648

Interest income: Executive management 2,598 2,535

Pension contribution: Pension scheme 101,173 156,816

Executive management compensation is as follows: 2012 2011 J$'000 J$'000 Emoluments included in staff costs (note 26) 161,327 226,196

- xxxv -

Annual Report 2012



29. Commitments At the reporting date the Bank had:

(a) Capital commitments as follows:

2012 2011 J$'000 J$'000 Authorised and contracted 19,783 514,549

Authorised but not contracted 9,917 22,661

29,700 537,210

(b) Operating lease commitments, payable as follows:

2012 2011 J$'000 J$'000 Within one year 9,621 9,641 30. Contingent liabilities

At December 31, 2012 and 2011, 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, 2012 and December 31, 2011.

31. 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 reporting 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 5 and 7, 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 reporting date and were as follows:

- xxxvi -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


31. Fair value of financial instruments (continued)

2012 2011 % % Foreign currency denominated investment:

US$ bonds 0.16 – 4.87 0.78 – 5.25 Local Government of Jamaica securities:

Treasury bills 6.97 6.57 – 6.58 Variable rate benchmark investments 7.31 – 8.40 7.25 – 7.59 Fixed rate benchmark investments 12.25 – 12.875 12.00 – 13.250

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.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

December 31, 2012 Level 1 Level 2 Level 3 Total J$'000 J$'000 J$'000 J$'000

Available-for-sale financial assets 34,711,648 92,159,856 - 126,871,504

December 31, 2011 Level 1 Level 2 Level 3 Total J$'000 J$'000 J$'000 J$'000

Available-for-sale financial assets 47,396,266 92,820,849 - 140,217,115

- xxxvii -

Annual Report 2012



32. Financial risk management

(a) Introduction and overview

The Bank has exposure to the following risks from its use of financial instruments: credit risk liquidity risk 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 Committee of Administration, which reports on a regular basis to the Board of Directors.

The Bank’s Audit 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 Committee is assisted in these functions by the 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 and the Audit Committee.

(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 equivalents, interest in funds managed by agents and other assets.

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

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 the credit rating ascribed by Moody’s Investor Services and Standard & Poor 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 consists of short-, medium- and long-term investments each of which have stipulated percentage limits (upper and lower) of the portfolio at market value.

- xxxviii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


32. Financial risk management (continued)

(b) Credit risk (continued)

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

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.

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.

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. Mortgages and liens are obtained for staff housing and motor vehicle loans, respectively, which must also be insured.

(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.

- xxxix -

Annual Report 2012





(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, 2012 and 2011.

(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

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

- xl -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica




(vii) Exposure to credit risk (continued)

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:

2012 2011 J$'000 J$'000

Caribbean 94,376,499 99,837,241 North America 118,850,864 139,803,129 Europe 68,759,794 105,315,654 Other 266,936 932,710

Total financial assets 282,254,093 345,888,734

(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:

2012 Within 1 1 to 3 3 to 12 1 to 5 Month months months years Total

J$'000 J$'000 J$'000 J$'000 J$'000

Deposits and other demand liabilities 152,687,396 - - - 152,687,396 Open market liabilities 36,763,974 - 3,616,487 - 40,380,461 Foreign liabilities 16 - - - 16 Other 4,821,875 - - - 4,821,875 Commitments 1,425 968 36,928 - 39,321

194,274,686 968 3,653,415 - 197,929,069

- xli -

Annual Report 2012




(c) Liquidity risk (continued)

2011 Within 1 1 to 3 3 to 12 1 to 5 Month months months years Total

Deposits and other demand liabilities 175,279,893 - - - 175,279,893 Open market liabilities 78,137,201 120,000 7,267,554 - 85,524,755 Foreign liabilities 19 - - - 19 Other 1,013,104 - - - 1,013,104 Commitments 821 16,992 529,038 - 546,851

254,431,038 136,992 7,796,592 - 262,364,622 (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 reporting date, the Bank’s net exposure to foreign exchange rate fluctuations, in Jamaica dollar equivalent, was as follows, based on currencies in which reported amounts are denominated:

- xlii -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica

INDEPENDENT AUDITORS’ REPORT

TO BANK OF JAMAICA


33. Financial risk management (continued) (d) Market risk (continued)

(i) Currency risk (continued)

2012 US Euro Pound Other Total $'000 $'000 $'000 $'000 $'000

Foreign currency assets:

Notes and coins 50,929 6,787 16,744 33,468 107,928 Cash and cash equivalents 24,510,879 566,962 687,759 3,285,424 29,051,024 Interest in funds managed by agents 13,081,356 - - - 13,081,356

Interest receivable on BHAs 184,630 - 48 18,864 203,542 Items in the process of collection 920 - 3 - 923 Investment securities 114,375,202 - - - 114,375,202

IMF- Holding of special drawing rights - - - 26,958,840 26,958,840

IMF - Quota subscription - - - 4,206,706 4,206,706

152,203,916 573,749 704,554 34,503,302 187,985,521

Foreign currency liabilities: Deposits - current accounts 17,284,541 31,154 1,544,965 412,214 19,272,874 Deposits - IMF 73,318,622 - - - 73,318,622 IMF - Allocation of special

drawing rights - - - 35,362,449 35,362,449 Foreign liabilities - - - 16 16

Bilateral - - - 3,000 3,000

90,603,163 31,154 1,544,965 35,777,679 127,956,961 Net foreign currency assets/

(liabilities) 61,600,753 542,595 ( 840,411) ( 1,274,377) 60,028,560

2011 US Euro Pound Other Total $'000 $'000 $'000 $'000 $'000

Foreign currency assets:

Notes and coins 27,117 2,118 8,387 13,354 50,976 Cash and cash equivalents 27,851,035 3,458,602 754,244 3,441,008 35,504,889 Interest in funds managed by agents 12,098,615 - - - 12,098,615

Interest receivable on BHAs 268,778 - 450 4,681 273,909 Items in the process of collection 1,517 - - 6 1,523 Investment securities 167,046,339 - - - 167,046,339 IMF - Holding of special

drawing rights - - - 28,536,152 28,536,152 IMF - Quota subscription - - - 4,315,897 4,315,897 Bilateral - - - 23,744 23,744

207,293,401 3,460,720 763,081 36,334,842 247,852,044

Foreign currency liabilities: Deposits - current accounts 42,707,389 28,564 1,450,459 372,702 44,559,114 Deposits - IMF 75,222,624 - - - 75,222,624 IMF - Allocation of special

drawing rights - - - 36,280,382 36,280,382 Foreign liabilities - - - 19 19

117,930,013 28,564 1,450,459 36,653,103 156,062,139 Net foreign currency assets/

(liabilities) 89,363,388 3,432,156 ( 687,378) ( 318,261) 91,789,905

- xliii -

Annual Report 2012




(d) Market risk (continued) (i) Currency risk (continued) Exchange rates at December 31:

2012 2011

US$1 to J$ 92.68 86.34 UK£1 to J$ 150.65 134.17 CDN$1 to J$ 93.08 84.79 Є to J$ 122.18 112.08

At March 6, 2013, the date of approval of these financial statements, the exchange rates were US$1 to J$96.59, UK£1 to J$146.18, CDN$1 to J$94.09 and Є 1 to J$126.62.

Sensitivity analysis A 10% percent (2011: 0.5 percent) devaluation of the Jamaica Dollar against currencies which expose the Bank to risk at December 31 would have increased profit by $6,002,539 (2011: $458,950) while a 1% (2011: 0.5 percent) revaluation would have decreased profit by $600,254. The analysis assumes that all other variables, in particular, interest rates, remain constant. The analysis has been performed on the same basis as for 2011.

(ii) Interest rate risk:

Interest rate risk is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument 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 financial assets and liabilities to arrive at the Bank’s interest rate gap based on the earlier of contractual repricing and maturity dates.

- xliv -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


33. Financial risk management (continued) (d) Market risk (continued)

(ii) Interest rate risk (continued): 2012 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 % AssetsNotes and coins - - - - 187,201 187,201 - Cash and cash equivalents - - - - 29,784,471 29,784,471 - Interest in funds managed by agents - - - 13,081,356 - 13,081,356 0.97 Foreign currency denominated investments 1,865,207 2,628,872 109,881,123 - - 114,375,202 0.62 Loans and advances 1,000,000 - - - - 1,000,000 7.0 International Monetary Fund - Holding of Special Drawing Rights - - - - 26,958,840 26,958,840 - Local currency denominated investments 691,970 307,048 91,160,838 - - 92,159,856 8.91 International Monetary Fund – Quota Subscription - - - - 4,206,706 4,206,706 - Due from Government and Government Agencies - - - - 16,426,351 16, 426,351 - Other assets - - - - 4,042,627 4,042,627 -

Total financial assets 3,557,177 2,935,920 201,041,961 13,081,356 81,606,196 302,222,610 - Liabilities Notes and coins in circulation - - - - 64,692,948 64,692,948 - Deposits and other demand liabilities: Jamaica dollar equivalent of foreign currency deposits 84,456,678 - - 16,939,114 - 101,395,792 0.21 Jamaica dollar deposits 17,613,770 - - 33,677,834 - 51,291,604 0.72 Open market liabilities 36,763,974 3,616,487 - - - 40,380,461 6.3 International Monetary Fund – Allocation of Special Drawing Rights - - - - 35,362,449 35,362,449 - Foreign liabilities - - - - 16 16 - Bilateral accounts - - - - 3,000 3,000 - Other liabilities - - - - 4,821,875 4,821,875 -

Total financial liabilities 138,834,422 3,616,487 - 50,616,948 104,880,288 297,948,145 - Total interest rate sensitivity gap (135,277,245) ( 680,567) 201,041,961 (37,535,592) (23,274,092) 4,274,465 -

Cumulative gap (135,277,245) (135,957,812) 65,084,149 27,548,557 4,274,465 - -



(d) Market risk (continued)

(ii) Interest rate risk (continued): 2011 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 % AssetsNotes and coins - - - - 147,331 147,331 - Cash and cash equivalents - - - - 36,142,913 36,142,913 - Interest in funds managed by agents - - - 12,098,615 - 12,098,615 1.54 Foreign currency denominated investments 117,923,363 - 49,122,976 - - 167,046,339 0.88 International Monetary Fund - Holding of Special Drawing Rights - - - - 28,536,152 28,536,152 - Local currency denominated investments - 91 92,820,758 - - 92,820,849 8.38 International Monetary Fund – Quota Subscription - - - - 4,315,897 4,315,897 - Due from Government and Government Agencies - - - - 18,854,846 18,854,846 - Bilateral accounts - - - - 23,744 23,744 - Other assets - - - - 6,665,704 6,665,704 -

Total financial assets 117,923,363 91 141,943,734 12,098,615 94,686,587 366,652,390 - Liabilities Notes and coins in circulation - - - - 62,675,207 62,675,207 - Deposits and other demand liabilities: Jamaica dollar equivalent of foreign currency deposits 29,884,487 - - 14,674,627 - 44,559,114 0.01 Jamaica dollar deposits 100,236,634 - - 30,484,145 - 130,720,779 0.25 Open market liabilities 78,137,201 7,387,554 - - - 85,524,755 5.36 International Monetary Fund –

Allocation of Special Drawing Rights - - - - 36,280,382 36,280,382 -

Foreign liabilities - - - - 19 19 - Other liabilities - - - - 1,013,104 1,013,104 -

Total financial liabilities 208,258,322 7,387,554 - 45,158,772 99,968,712 360,773,360 Total interest rate sensitivity gap ( 90,334,959) ( 7,387,463) 141,943,734 (33,060,157) (5,282,125) 5,879,030

Cumulative gap ( 90,334,959) (97,722,422) 44,221,312 11,161,155 5,879,030 -

Sensitivity analysis An increase of 300 (2011: 100bps) and a decrease of 100 (2011:100bps) basis points in interest rates for Jamaica dollar financial instruments and a change of 20 (2011: 20) basis points for United States dollar financial instruments would have increased or decreased profit and reserve by the amounts shown below. The analysis assumes that all other variables, in particular, foreign currency rates, remain constant. The analysis has been performed on the same basis as for 2011.

- xlv -

Annual Report 2012




(d) Market risk (continued)

(ii) Interest rate risk (continued):

Sensitivity analysis

Increase Decrease

Effect on Effect on Effect on Effect profit/loss reserves profit/loss on reserves

J$'000 J$'000 J$'000 J$'000 December 31, 2012

Fixed rate financial instruments - (6,566,569) - 6,605,046 Variable rate financial instruments 2,214,730 ( 362,250) (738,243) 32,057

2,214,730 (6,928,819) (738,243) 6,637,103

December 31, 2011 Fixed rate financial instruments - (5,114,797) - 7,712,088 Variable rate financial instruments 735,175 99,464 (735,175) 97,750

735,175 (5,015,333) 735,175 7,809,838

(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 general 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.

34. Subsequent event

In February 2013 the Bank voluntarily participated in the National Debt Exchange Offer (the Offer) in respect of certain domestic debt instruments issued by the Government of Jamaica. The Offer involved the exchange of domestic debt instruments (Old Notes) for new debt instruments (New Notes) having lower interest rates and longer maturities, including the introduction of new Fixed Rate Accreting Notes (FRANs) which were designed primarily for state-owned entities. The exchange was effected on 21 February 2013 when, the New Notes were issued and accrued interest on the Old Notes paid to note holders net of applicable withholding tax.

- xlvi -Final Accounts for Year Ended 31 December 2012

Bank of Jamaica


34. Subsequent event (continued)

The Bank’s acceptance of the Offer will impact on the amount and timing of future cash flows from investment in Government of Jamaica securities. The Bank’s holding of Government of Jamaica securities as at December 31, 2012 subject to the offer was $92,159.82 million which includes fair value gains of $3,331.70 million which are reflected in Securities Revaluation Reserve (note 22). The Bank’s participation in the offer involved the exchange of the portfolio of Old Notes for New Fixed Rate Accreting Notes (FRANs). The Notes were issued with J$80 of initial principal value for every J$100 of principal value of Old Notes held and will mature in 2028. Interest is payable at a fixed rate of 10% p.a. on the accreted principal value as shown below:

Accretion Rate Nominal Value % for Interest Computation

22 February 2013 80 15 August 2015 to 15 August 2020 1% p.a. 81-85 15 August 2020 to 15 August 2026 2% p.a. 86-97 15 August 2026 to 15 August 2027 3% p.a. 100

The impact of the Bank’s participation in the NDX is expected to be as follows:

(a) The Bank’s portfolio of securities earned a weighted average coupon rate of 9.4% in

2012. The New Notes (FRANs) will initially earn interest at an effective rate of 8% per annum.

(b) All New Notes will mature in 2028 but may be redeemed by the Government at any time after August 15, 2020.

(c) There is expected to be a difference between the carrying value of the Old Notes and the

fair value of the New Notes (FRANs) at acquisition which is estimated at $23,081.43 million.

The profile of liquidity, credit and market risks of the Bank’s domestic investment portfolio presented in note 32 are based on the conditions existing at December 31, 2012. The profile will change with the Bank’s participation in the National Debt Exchange.

- xlvii -

Annual Report 2012

Appendicies

A APPENDIX

Inflation Outturn

Weight in CPI Basket

2012 Per cent Inflation

2012 %Wgt Inflation

2012 %Share Inflation

2011 YOY Inflation Outturn for 2012 relative to 2011 Per

cent Inflation

% point Change Inflation

01 FOOD & NON-ALCOHOLIC BEVERAGES 37.45 14.3 5.4 77.55 5.4 8.9 01.1 Food 35.10 14.7 5.2 74.44 5.2 9.5 Bread and Cereals 6.10 8.2 0.5 7.24 8.2 0.0 Meat 7.66 11.7 0.9 12.94 9.1 2.6 Fish and Seafood 5.33 12.9 0.7 9.91 8.1 4.7 Milk, Cheese and Eggs 3.11 15.8 0.5 7.11 9.3 6.6 Oils and Fats 1.64 9.4 0.2 2.22 6.7 2.7 Fruit 1.14 18.0 0.2 2.96 17.0 1.0 Vegetables and Starchy Foods 6.85 28.4 1.9 28.09 -8.8 37.2 Vegetables 4.64 32.6 1.5 21.82 -11.2 43.8 Starchy Foods 2.21 19.1 0.4 6.10 -1.7 20.8 Sugar, Jam, Honey, Chocolate and Confectionery 1.72 7.2 0.1 1.78 20.2 -13.1 Food Products n.e.c. 1.55 10.2 0.2 2.28 7.1 3.1 01.2 Non-Alcoholic Beverages 2.35 8.4 0.2 2.86 9.4 -1.0 Coffee, Tea and Cocoa 0.66 13.0 0.1 1.24 16.9 -3.9 Mineral Waters, Soft Drinks, Fruit and Vegetable Juices 1.69 6.6 0.1 1.61 6.6 0.0 02 ALCOHOLIC BEVERAGES & TOBACCO 1.38 6.1 0.1 1.22 5.1 1.0 03 CLOTHING & FOOTWEAR 3.33 11.6 0.4 5.60 8.7 2.9 03.1 Clothing 2.12 12.0 0.3 3.67 10.3 1.6 03.2 Footwear 1.22 11.1 0.1 1.96 6.3 4.8 04 HOUSING, WATER, ELECTRICITY, GAS & OTHER FUELS 12.76 5.3 0.7 9.73 12.3 -7.0 04.1 Rentals for Housing 3.52 1.6 0.1 0.80 5.5 -3.9 04.3 Maintenance and Repair of Dwelling 0.80 8.9 0.1 1.03 7.2 1.8 04.4 Water Supply and Miscellaneous Services Related to the

Dwelling 1.32 6.6 0.1 1.27 12.7 -6.1 04.5 Electricity, Gas and Other Fuels 7.12 6.6 0.5 6.75 16.5 -10.0 05 FURNISHINGS, HOUSEHOLD EQUIPMENT & ROUTINE

HOUSEHOLD MAINTENANCE 4.93 8.6 0.4 6.12 7.3 1.2 05.1 Furniture and Furnishings (inc. Floor Coverings) 0.69 9.5 0.1 0.95 9.1 0.4 05.2 Household Textiles 0.32 9.3 0.0 0.43 9.4 -0.1 05.3 Household Appliances 0.56 11.1 0.1 0.90 4.8 6.3 05.4 Glassware, Tableware and Household Utensils 0.05 10.4 0.0 0.08 7.1 3.3 05.5 Tools and Equipment for House and Garden 0.15 4.4 0.0 0.10 4.0 0.4 05.6 Goods and Services for Routine Household Maintenance 3.16 8.0 0.3 3.66 7.4 0.7 06 HEALTH 3.29 3.1 0.1 1.48 2.5 0.6 06.1 Medical Products, Appliances and Equipment 1.22 4.3 0.1 0.76 2.9 1.4 06.2 Health Services 2.07 2.4 0.0 0.71 2.2 0.2 07 TRANSPORT 12.82 2.5 0.3 4.64 3.5 -1.0 08 COMMUNICATION 3.99 -39.4 -1.6 -22.71 3.1 -42.5 09 RECREATION & CULTURE 3.36 6.6 0.2 3.21 3.0 3.6 10 EDUCATION 2.14 3.7 0.1 1.14 8.6 -4.9 11 RESTAURANTS & ACCOMMODATION SERVICES 6.19 5.3 0.3 4.75 2.3 3.0 12 MISCELLANEOUS GOODS & SERVICES 8.37 6.0 0.5 7.27 5.5 0.5

ALL DIVISIONS 100.0 8.0 6.9 100.0 6.0 2.0

Weight in CPI Basket

2012 Per cent Inflation

2012 %Wgt Inflation

2012 %Share Inflation

2011 YOY Inflation Outturn for 2012 relative to 2011 Per

cent Inflation

% point Change Inflation

01 FOOD & NON-ALCOHOLIC BEVERAGES 37.45 14.3 5.4 77.55 5.4 8.9 01.1 Food 35.10 14.7 5.2 74.44 5.2 9.5 Bread and Cereals 6.10 8.2 0.5 7.24 8.2 0.0 Meat 7.66 11.7 0.9 12.94 9.1 2.6 Fish and Seafood 5.33 12.9 0.7 9.91 8.1 4.7 Milk, Cheese and Eggs 3.11 15.8 0.5 7.11 9.3 6.6 Oils and Fats 1.64 9.4 0.2 2.22 6.7 2.7 Fruit 1.14 18.0 0.2 2.96 17.0 1.0 Vegetables and Starchy Foods 6.85 28.4 1.9 28.09 -8.8 37.2 Vegetables 4.64 32.6 1.5 21.82 -11.2 43.8 Starchy Foods 2.21 19.1 0.4 6.10 -1.7 20.8 Sugar, Jam, Honey, Chocolate and Confectionery 1.72 7.2 0.1 1.78 20.2 -13.1 Food Products n.e.c. 1.55 10.2 0.2 2.28 7.1 3.1 01.2 Non-Alcoholic Beverages 2.35 8.4 0.2 2.86 9.4 -1.0 Coffee, Tea and Cocoa 0.66 13.0 0.1 1.24 16.9 -3.9 Mineral Waters, Soft Drinks, Fruit and Vegetable Juices 1.69 6.6 0.1 1.61 6.6 0.0 02 ALCOHOLIC BEVERAGES & TOBACCO 1.38 6.1 0.1 1.22 5.1 1.0 03 CLOTHING & FOOTWEAR 3.33 11.6 0.4 5.60 8.7 2.9 03.1 Clothing 2.12 12.0 0.3 3.67 10.3 1.6 03.2 Footwear 1.22 11.1 0.1 1.96 6.3 4.8 04 HOUSING, WATER, ELECTRICITY, GAS & OTHER FUELS 12.76 5.3 0.7 9.73 12.3 -7.0 04.1 Rentals for Housing 3.52 1.6 0.1 0.80 5.5 -3.9 04.3 Maintenance and Repair of Dwelling 0.80 8.9 0.1 1.03 7.2 1.8 04.4 Water Supply and Miscellaneous Services Related to the

Dwelling 1.32 6.6 0.1 1.27 12.7 -6.1 04.5 Electricity, Gas and Other Fuels 7.12 6.6 0.5 6.75 16.5 -10.0 05 FURNISHINGS, HOUSEHOLD EQUIPMENT & ROUTINE

HOUSEHOLD MAINTENANCE 4.93 8.6 0.4 6.12 7.3 1.2 05.1 Furniture and Furnishings (inc. Floor Coverings) 0.69 9.5 0.1 0.95 9.1 0.4 05.2 Household Textiles 0.32 9.3 0.0 0.43 9.4 -0.1 05.3 Household Appliances 0.56 11.1 0.1 0.90 4.8 6.3 05.4 Glassware, Tableware and Household Utensils 0.05 10.4 0.0 0.08 7.1 3.3 05.5 Tools and Equipment for House and Garden 0.15 4.4 0.0 0.10 4.0 0.4 05.6 Goods and Services for Routine Household Maintenance 3.16 8.0 0.3 3.66 7.4 0.7 06 HEALTH 3.29 3.1 0.1 1.48 2.5 0.6 06.1 Medical Products, Appliances and Equipment 1.22 4.3 0.1 0.76 2.9 1.4 06.2 Health Services 2.07 2.4 0.0 0.71 2.2 0.2 07 TRANSPORT 12.82 2.5 0.3 4.64 3.5 -1.0 08 COMMUNICATION 3.99 -39.4 -1.6 -22.71 3.1 -42.5 09 RECREATION & CULTURE 3.36 6.6 0.2 3.21 3.0 3.6 10 EDUCATION 2.14 3.7 0.1 1.14 8.6 -4.9 11 RESTAURANTS & ACCOMMODATION SERVICES 6.19 5.3 0.3 4.75 2.3 3.0 12 MISCELLANEOUS GOODS & SERVICES 8.37 6.0 0.5 7.27 5.5 0.5

ALL DIVISIONS 100.0 8.0 6.9 100.0 6.0 2.0

- li -

Annual Report 2012

Appendicies

B APPENDIX

Annual Prudential Indicators of Commercial Banks

TABLE 6.6

Dec-10 Dec-11 Dec-12 Dec-10 Dec-11 Dec-12 Dec-10 Dec-11 Dec-12 Dec-10 Dec-11 Dec-12

J$MN1Total Assets (incl. contingent accounts) 589,909 613,637 659,786 24,393 21,449 21,315 168,338 185,472 201,368 782,640 820,558 882,4692Total Assets (excl. contingent accounts) 579,659 600,935 647,022 24,210 21,290 21,301 168,338 185,472 201,368 772,207 807,697 869,691Cash & Bank Balances 107,335 125,834 132,707 1,437 1,137 1,477 21,069 18,212 19,597 129,841 145,183 153,781Investments [incl. Securities Purch.] (net of prov.) 190,448 177,442 171,846 14,491 12,609 13,470 53,797 66,555 72,027 258,736 256,606 257,343Total Loans (gross) 251,341 266,043 307,478 7,186 6,885 5,625 87,305 89,340 95,879 345,832 362,268 408,982Total Loans (net of IFRS prov.) a 245,072 258,573 298,056 6,822 6,549 5,334 85,912 87,912 94,438 337,806 353,034 397,828Total Deposits 379,094 400,122 444,795 8,361 6,556 7,852 115,891 121,783 131,438 503,346 528,461 584,085Borrowings (incl. repos) 92,034 72,383 80,336 10,727 9,555 8,364 22,562 24,519 26,648 125,323 106,457 115,348Non-Performing Loans [NPL] (3 mths & >) 13,475 23,287 20,963 2,866 3,171 974 6,024 5,744 6,002 22,365 32,202 27,939Provision for Loan Losses 11,369 18,302 20,911 1,256 2,332 1,040 2,997 3,597 3,975 15,622 24,231 25,9263 Capital Base 60,455 63,835 65,108 3,608 2,667 3,823 20,625 22,789 23,276 84,688 89,291 92,207Contingent Accts [Accept., LC's & Guarantees] 10,250 12,702 12,764 183 159 14 0 0 0 10,433 12,861 12,778Funds Under Management 297 308 320 0 0 0 0 0 0 297 308 320Repos 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 1.2% 4.0% 7.5% -27.1% -12.1% -0.6% 5.6% 10.2% 8.6% 0.9% 4.8% 7.5%Rate of Deposit Growth 6.2% 5.5% 11.2% -35.8% -21.6% 19.8% 5.3% 5.1% 7.9% 4.8% 5.0% 10.5%Rate of Loans Growth (gross) -2.0% 5.8% 15.6% -25.8% -4.2% -18.3% 3.2% 2.3% 7.3% -1.4% 4.8% 12.9%Rate of Capital Base Growth 2.8% 5.6% 2.0% -22.4% -26.1% 43.3% 20.5% 10.5% 2.1% 5.1% 5.4% 3.3%Rate of NPL (3 Mths &>) Growth 24.8% 72.8% -10.0% 254.7% 10.6% -69.3% 24.7% -4.6% 4.5% 36.1% 44.0% -13.2%

Investments :Total Assets 1 32.3% 28.9% 26.0% 59.4% 58.8% 63.2% 32.0% 35.9% 35.8% 33.1% 31.3% 29.2%Loans (net of prov.):Total Assets 1 41.5% 42.1% 45.2% 28.0% 30.5% 25.0% 51.0% 47.4% 46.9% 43.2% 43.0% 45.1%Fixed Assets:Total Assets 1 1.9% 2.1% 2.2% 0.7% 0.5% 0.4% 1.6% 1.6% 1.7% 1.8% 1.9% 2.1%Loans (gross) : Deposits 66.3% 66.5% 69.1% 85.9% 105.0% 71.6% 75.3% 73.4% 72.9% 68.7% 68.6% 70.0%

LiquidityAverage Domestic Currency Cash Reserve: Average Prescribed Liabilities 4 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 1.0% 1.0% 1.0% 9.1% 9.1% 9.2%Average Domestic Currency Liquid Assets: Average Domestic Prescribed Liabilities 4 43.7% 37.7% 31.4% 28.1% 33.8% 32.8% 16.2% 10.7% 13.1% 36.2% 30.5% 26.7%

Asset QualityProv. For Loan Losses:Total Loans (gross) 4.5% 6.9% 6.8% 17.5% 33.9% 18.5% 3.4% 4.0% 4.1% 4.5% 6.7% 6.3%Prov. For Loan Losses: NPL (3 Mths &>) 84.4% 78.6% 99.8% 43.8% 73.5% 106.8% 49.8% 62.6% 66.2% 69.9% 75.2% 92.8%NPL (3 Mths &>):Total Loans (gross) 5.4% 8.8% 6.8% 39.9% 46.1% 17.3% 6.9% 6.4% 6.3% 6.5% 8.9% 6.8%NPL (3 Mths &>): (Total Assets 1

+ Provision for loan losses) 2.3% 3.7% 3.1% 11.5% 14.5% 4.5% 3.5% 3.1% 3.0% 2.8% 3.9% 3.1%

Capital AdequacyDeposits + Borrowings: Capital (:1) 7.8 7.4 8.1 5.4 6.1 4.3 6.8 6.5 6.8 7.5 7.1 7.6Capital Base:Total Assets 1 10.2% 10.4% 9.9% 14.8% 12.4% 17.9% 12.3% 12.3% 11.6% 10.8% 10.9% 10.4%5 Capital Adequacy Ratio [CAR] 17.2% 15.0% 12.8% 16.9% 12.3% 17.8% 22.1% 20.6% 18.2% 18.2% 16.1% 14.1%NPL (3 mths &>):Capital Base+Prov for loan losses 18.8% 28.4% 24.4% 58.9% 63.4% 20.0% 25.5% 21.8% 22.0% 22.3% 28.4% 23.7%

Profitability6 Pre - tax Profit Margin (for the Calendar Quarter) 17.6% 52.3% 12.0% 18.7% 0.7% -13.5% 28.1% 25.2% 25.7% 19.6% 48.4% 14.1%Pre - tax Profit Margin (for the Calendar Year) 22.5% 32.6% 20.8% 13.5% 5.1% -2.9% 16.4% 24.5% 22.0% 21.1% 30.8% 20.5%Return on Average Assets (for the Calendar Quarter) 0.5% 2.5% 0.4% 0.5% 0.0% -0.3% 0.7% 0.5% 0.6% 0.6% 2.0% 0.4%Return on Average Assets (for the Calendar Year) 2.8% 4.5% 2.5% 1.5% 0.4% -0.2% 1.7% 2.3% 1.9% 2.5% 3.9% 2.3%7 Income Assets/Expense Liabilities 104.3% 105.1% 102.1% 99.2% 102.1% 114.5% 109.5% 111.9% 110.5% 105.3% 106.6% 104.3%

FIA LICENSEES

31-Dec-12

ANNUAL PRUDENTIAL INDICATORS OF COMMERCIAL BANKS, LICENSEES UNDER THE FINANCIAL INSTITUTIONS ACT (FIA) AND BUILDING SOCIETIES

COMMERCIAL BANKSSystem Total (aggregation of all 3

sectors)BUILDING SOCIETIES

31-Dec-12

ANNUAL PRUDENTIAL INDICATORS OF COMMERCIAL BANKS, LICENSEES UNDER THE FINANCIAL INSTITUTIONS ACT (FIA) AND BUILDING SOCIETIES

n.a. data not availablen/a not applicable

- Based on unaudited data submitted to BOJ by supervised institutions up to 05 February 2013. Prior years indicators may have revisions arising from amendments.

a Effective January 2004, the Bank of Jamaica revised its reporting requirements in line with International Financial Reporting Standards (IFRS) and in this regard the following change was effected: 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 as an appropriation from net profits). Consequently, "Total Loans (net of prov.)" represents gross loans net of IFRS loan loss provisions per (i) above

1 Total Assets and Liabilities reflected net of IFRS Provision for Losses and include Contingent Accounts (Customer Liabilities for Acceptances, Guarantees and Letters of Credit).In keeping with IFRS, Total Assets and Liabilities were redefined to include Contingent Accounts.

2 Total Assets net of IFRS Provision for Losses and Contingent Accounts (Customer Liabilities for Acceptances, Guarantees and Letters of Credit). 3 Capital Base - Banks & FIA Licensees: (Ordinary Shares+ Qualifying Preference Shares+ 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:

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 Pre-tax Profits includes extraordinary income/expenditure and adjustments for prior period. Return on Average Assets is computed using pre-tax profits as well as assets before provision for losses (in accordance with IFRS) and including contingent accounts (Acceptances, Guarantees and Letters of Credit).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 BANKSDec-10 Dec-11 Dec-12 Dec-10 Dec-11 Dec-12 Dec-10 Dec-11 Dec-12

Required Cash Reserve ratio 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 1% / 12% 1% /12% 1% / 12% Required Liquid Assets ratio (incl Cash Reserve) 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 5% / 26% 5% /26% 5% / 26%

** 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 commercial banks and FIA Licensees.

Financial Institutions Supervisory DivisionBank of Jamaica

(i) deposit liabilities, (ii) reservable borrowings and interest accrued and payable on (i) & (ii).

FIA LICENSEES BUILDING SOCIETIES**

1

BANK OF JAMAICA Nethersole Place

P.O. Box 621 Kingston, Jamaica

Telephone: 876 922 0750 Internet: www.boj.org.jm

Documents

ANNUAL REPORT - Bank of Jamaica | Home Development Bank of Jamaica DJIA Dow Jones Industrial Index DNFBP Designated Non-Financial Businesses & Proffessions DSGE Dynamic Stochastic