The
Jamaican Economy
The
Jamaican economy again declined by registering a growth
rate of negative 0.4 percent, in comparison to the negative
0.5 percent recorded in 1998, again missing the targeted
2 - 3 percent growth margin. The economy appears to be
slowly recovering from the lengthy recession caused by
financial sector difficulties and a lengthy drought, as
recently pointed out by the IMF. However, much work needs
to be done in many areas, as hot on the heels of the IMF's
optimistic outlook, comes the news that Jamaica was "ranked
as one of the most risky of the emerging markets in which
to invest".
The current GDP target of 1.5% for 2000/2001 may also
be missed and the more "risky" out-turn of 0.5% is more
likely, due to a slower than expected fall in interest
rates and sluggish economic recovery.
While the government has proposed to provide jobs in
the IT, small business and garment sectors via the production
train, it faces the immediate impact of high unemployment
and job market tightness, bolstered by the recent massive
spate of redundancies from Grace, Ciboney, Sarah Lee,
JPSCo, BNS, D&G, and the proposed cut in the island's
teaching staff. These redundancies may contribute to
the already dangerous level of crime being experienced
by the country, which could have consequences for the
business and services sector. These factors coupled
with the slower-than-expected recovery in the financial
and agricultural sectors, may result in the government
not attaining its 2001/2002 growth targets. However,
Jamaica is expected to benefit from recent developments
in trade, where the country is fully eligible for the
preferential trade provisions via the expanded Caribbean
Basin Initiative (CBI), which gives us greater duty
free access to the US market.
Monetary
Developments
Monetary
policy balanced the desire to maintain low inflation rates
with the need to facilitate a reduction in interest rates
while maintaining stability in the foreign currency market.
Interest rates on government benchmark 6-month treasury
bills (T-bill) trended down over the year with the exception
of a spike in November before again beginning a downward
trend into the latter part of the fiscal year. The spike
resulted from the government's domestic borrowing to compensate
for the fallout in programmed external funding. The six-month
T-bill fell to 17.04% in August 2000, as compared to 20.63%
in August of 1999.
Keeping with the downward trend of interest rates, the
BOJ gradually reduced the Reverse Repurchase Rates (repos)
over the course of the fiscal year. The rate on 30-day
repos declined from 20.75% at end of FY 98/99 to 17.3%
at the end of FY 1999/00 and stood at 16.45% during
August of 2000. Commercial banks' average loan rates
declined from 39% at the beginning of the fiscal year
to approximately 34% at March and stood at 32.75% in
August. Average savings rates have declined from 11.50%
in August of 1999 to 10.11% in August of 2000. The spread
between commercial banks' savings and loan rates narrowed
by 4 percentage points over the period. Also in keeping
with declining interest rates, cash reserve requirements
were reduced by 1% in June and September 2000.
Declining interest rates are a key element of the government's
fiscal programme, and are expected to continue their
downward trend throughout the rest of 2000 into 2001.
However, the 4% "temporary" hike in the BOJ's 9 and
12 month reverse repurchase rates at the beginning of
October, may impact on these downward trends. Given
the trend of slowly declining rates over the past six
months, the Government may miss its 14% target set for
the end of 2000 by 1 ½ to 2 percentage points.
During the latter part of the 1999 calendar year, money
supply (M2) had been increasing at an average rate of
just under 20 percent, but has since tapered off. The
net growth rate of M2 for the January to May 2000 period
was 1.1%, which is less than the 7.3% recorded for the
same period in 1999. Base Money has declined by 4.61%
over the twelve months ending July 2000, in comparison
to an 8.2% reduction for the corresponding period in
1999. The contraction in base money has been as a result
of tabled reductions in the cash reserve ratio for financial
institutions. The ratio is tabled to decrease by 1%
every three months to the end of the year. This has
thus far been achieved in June and September, with the
final reduction scheduled for December 2000. The freeing
up of liquidity that these reductions facilitate to
both private and public sector agents may not be readily
accessible by the former, who may be crowded out of
the market by heavy public sector borrowing. The marginal
decline in base money thus far in 2000 is an indication
that government is concentrating on achieving some semblance
of growth.
Foreign
Exchange Developments
The
decline in interest rates as well as the delay in accessing
the international capital market led to some pressure
in the foreign currency market during the latter part
of the fiscal year. Intervention by the BOJ, however,
facilitated an orderly depreciation, and pressure on the
currency was relieved with the inflow of Euro 200 million
raised on the international capital market as well as
US$100 million from the forward sale of bauxite.
However, many interventions by the BOJ did not stem
the tide of the recent depreciating bilateral exchange
rate between the J$ and US$. The exchange rate of the
J$ to US$ began at J$41.48 in January 2000, and had
slipped by $1.93 by the last trading day in August 2000.
The Jamaican dollar lost $1.69 in September 2000 alone,
and had reached a high of J$45.24 during the first week
of October 2000. In an effort to stem the slide in the
dollar, the BOJ surprisingly hiked interest rates on
its 9 and 12 month repo rates, which has seen the dollar
bouncing back to under J$45.00. The BOJ has since been
intervening heavily in the market to sustain the rate.
The dollar may level off within the J$44.00 to J$45.50
range for the rest of the year, given the current level
of BOJ intervention. However, after the current interventions
are curtailed, the dollar may continue depreciating
but at a much reduced rate.
The BOJ had previously been intervening heavily in the
market, but since the introduction of the Staff Monitored
Program, there has been a slight change in the BOJ's
intervention policy. This may be in accordance with
the SMP objective of intervening only to deal with temporary
pressures on the exchange rate, allowing it to reflect
underlying market conditions. According to the SMP,
the government believes that economic policy should
seek to avoid loss of competitiveness as measured by
the real effective exchange rate for the Jamaica dollar,
which should not appreciate in the current medium-term
macroeconomic framework.
The NIR declined during the latter stages of 1999, before
showing a strong upturn in March and achieving record
levels in August. The NIR stood at US$935.35Mn at the
end of August, an increase of US$444.59Mn over the previous
years' figure, which represents 18.2 weeks of imports,
unprecedented in recent times. This upturn is mainly
due to the sale of two cellular licenses and successful
issuance of a Eurobond and a US$225Mn 7-year bond on
the international capital market. During the latter
stages of 1999 the draw down in the NIR may have been
attributed to the BOJ's attempt to defend the local
exchange rate, as well as investment outflows in the
form of debt repayment and the current account deficit.
The current level of the NIR is on par with government's
monthly NIR targets and the US$1.2Bn target for the
end of 2001/02. Barring any significant capital flight,
these indicators suggest that the reserve position is
comfortable and should not be particularly vulnerable
in the near term. However, exchange rate developments
accompanied by the BOJ's heavy defense of the dollar,
and further debt servicing costs could impact negatively
on the achievement of these targets.
In the twelve months to June 2000, the stock of foreign
currency deposits increased by US$85.3Mn compared to
a US$36.1Mn increase for the same period in 1999. The
deposits stood at US$1,049.55Mn at the end of August
2000. However, this has not been enough to stem the
increased demand for the US$, which has contributed
to the nominal depreciation of the bilateral exchange
between the J$ and US$.
Prices
Despite
the decline in interest rates and supply side shocks from
the increase in the price of international crude oil,
single digit inflation has been maintained. For the January
to July period inflation was 4.6%, which bodes well for
another single digit out-turn for the calendar year. Though
not achieving the targeted inflation rate band of 4% to
6% for the fiscal year, it is unlikely that there will
be rapid price increases and destabilisation of the macro-economic
environment. The government has instead chosen to focus
on lowering interest rates, which is thought to be integral
to resuming growth. The out turn for FY 1999/00 was 8.44%
compared to 5.9% for the corresponding period of 1998/99.
This partly reflected higher rates for electricity, due
to the imposition of a special tariff, as well as record
high oil price levels on the international market. Monthly
inflation rates have hit 1% only twice - in April and
July thus far, which may partly be attributed to the push-factors
of severe drought conditions, oil price increases and
exchange rate depreciation. Further proposed rate increases
in electricity for September 2000 may also have a negative
impact.
External
Developments
Balance
of Payments (BOP) developments were less favourable for
the latter part of 1999 than in 1998. An increase in the
current account deficit and official investment outflows
contributed to the overall BOP deficit of US$131.3Mn for
the FY to December, compared with US$13.1Mn in 1998. The
capital and financial accounts recorded net inflows, but
the increase in private flows was not enough to compensate
for official outflows, which led to a US$131.0Mn draw
down of the NIR. However, for the January to April 2000
period, growth was seen in merchandise exports, which
was influenced by respective increases in major traditional,
other traditional and non-traditional exports.
Government
FINSAC
has continued its efforts to divest the assets of the
various entities under its control. Disposal of hotels,
commercial and residential real estate, and other assets
amounted to approximately J$7.0 billion during the financial
year. The recent restructuring of NCB, the sale of LOJ,
Crowne Plaza Hotel and Navy Island should also help to
reduce its debt burden.
There was some level of improvement in Government finances
for the fiscal year. Preliminary data from the BOJ indicates
a fiscal deficit of 4.5% of GDP, in line with the medium
term fiscal programme (4.6% target) to achieve a sustainable
fiscal balance. Contributing to this achievement of
the fiscal deficit target was the identification of
alternative revenue sources, reductions to capital expenditure,
and implementation of a debt strategy to minimise the
cost of debt servicing. However, despite the debt servicing
strategy, domestic debt servicing costs increased to
72% of total expenditure, up 14 percentage points over
the ratio in financial year 1998/99. The increase was
attributable to a slower than programmed reduction in
interest rates and heavier than expected delays in accessing
external financing. Although tax receipts were 3.8%
below projections, they were 13.5% higher than that
for FY 1998 / 1999, reflected in new tax measures and
increased tax compliance.
The Government's external borrowing remains on target,
as they were able to successfully meet the US$400Mn
targeted to be raised in hard currency, through the
forward sale of aluminium, a Eurobond issue and increased
borrowing on the local market in early 2000. However,
the level of debt increased for FY 1999/2000, estimated
at J$307,562.1Mn (excluding FINSAC), an increase of
J$45,226.4Mn over the previous FY. External debt fell
marginally during April and the recent US$150Mn IADB
loan approval should help to monetise some of the debt
racked up by FINSAC. The World Bank is also expected
to approve a similar sized loan, while the CDB is to
throw in US$25Mn to assist in the disposition of assets
accumulated by FINSAC.
Tourism
Growth
in tourism arrivals increased over the FY to February
despite the negative impact on arrivals caused by fears
of the effects of the millennium bug on travel safety.
For calendar year 1999, tourist arrivals stood at 2 million,
a 6% increase over 1998, with estimated earnings approximately
the same as the previous year. For the January to July
2000 period, 6.4% more stopover and 17% more cruise passengers
visited the island. The disturbing trend of a slower than
expected increase in the cumulative expenditure of visitors,
may be attributed to shorter stopover times. The outlook
for tourism, Jamaica's major foreign exchange earner,
is expected to see continued growth in the next year benefiting
from the strong U.S., Canadian and European economies.
However, the recent developments with the proposed pull
out of Princess and Carnival cruise lines, two of the
largest in the world, along with the departure of the
largest airline carrier of European tourists to the island,
may retard this sector's growth.
Outlook
Inflation
is expected to remain in single digits, but miss Government's
projected target. The main inflationary shocks during
the upcoming months are expected to come from domestic
food price inflation from the long drought, upward adjustment
in electricity rates and high crude oil prices. The exchange
rate is projected to taper off between the J$44.00 and
J$45.00 range, given the current sustained level of BOJ
intervention, throughout the rest of the year. However
it may continue its downward trend but at a much reduced
rate, after the BOJ interventions are curtailed. The high
level of reserves is expected to improve even further,
with programmed external financing from international
agencies, but sustained intervention in the foreign exchange
market may derail this outlook. Interest rates are expected
to continue falling, facilitated by single digit inflation,
programmed lowering of cash reserve ratio, prospective
strong international reserves and continued reduction
in the fiscal deficit. However, the real effect of the
recent "temporary" hike in some rates remains to be seen.
The reduction in the fiscal deficit should be achieved
through divestment proceeds, improved revenue collection
and reduced expenditure.
The approval by the IMF of the Staff Monitored Program
provides positive signal to international financial
markets, but some of the gains to be had may be eroded
by a recent report which listed Jamaica as "one of the
riskiest emerging markets" in which to invest. Overall
growth in the economy is mainly expected to come from
the strong services sector, the Information Technology
and Manufacturing sectors and the much lauded "production
train". The slower than expected recovery in Agriculture,
Bauxite and the Financial sectors, coupled with a slower
than expected decline in interest rates, may lead to
a sluggish economic recovery ?
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