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JAMAICA
1. General trends
The Jamaican economy finally posted positive growth of 1.5% in 2011 after three consecutive years of
decline. The major challenge now is to instil confidence in the economy after the expiration of the
US$ 1.27 billion stand-by agreement with the International Monetary Fund (IMF) in May 2012. It is clear
that the government did not meet its budget targets in the fourth quarter of 2011 due to increased
expenditure for wage increases and infrastructure improvement. Negotiations on a new agreement have
begun, and more drastic spending cuts will no doubt be required in order to bring public finances under
control. At 126%, the debt-to-GDP ratio is among the highest in the world.
The continuing difficulties in the major exports markets of Europe and the United Sates will pose
severe downside risks to the Jamaican economy if travel receipts and remittances from these source markets
diminish, as both of these categories have been improving for some time. The uncertainty surrounding a
new IMF agreement may well set off a new round of capital flight, which could result in a deterioration in
the current account balance. Thus, IMF backing is important for stimulating greater confidence, which in
turn could lead to greater foreign direct investment inflows and more multilateral financing.
On the external side, the decline in private capital inflows in the fourth quarter of 2011 may
reflect growing concerns about the lack of a new IMF agreement and the challenges posed by the slow
growth in the major export markets of the United States and Europe.
2. Economic policy
(a)
Fiscal policy
The biggest challenge facing the Jamaican economy is its extremely weak fiscal position.
Lacklustre economic activity has resulted in lower revenue collection despite revenue-enhancing
measures, such as rate increases in the general consumption tax on some items. Other measures, though
designed to reduce rates, were premised on these changes bringing positive stimulation to the economy,
thus improving growth and increasing revenue. The revenue measures were designed, to raise some
195 million Jamaican dollars ($J) in additional revenue but were unsuccessful. The structural weakness in
public finances has been aggravated by sluggish domestic activity and high unemployment. The overall
deficit in fiscal year 2011 was J$ 56.3 billion or 3.5% of GDP relative to the 3.8% in the government’s
supplementary budget1. This was an improvement over the 4.8% deficit recorded for 2010. On the other
hand, the primary surplus was J$ 6.1 billion dollars below the target of 2.1% of GDP and even lower than
the previous year’s. Relative to the revised budget estimates (April to December), government revenues
and grants were down by 4.8% while expenditure was 3% below the budget estimate. The lower revenue
reflected lower-than-expected imports and possibly increased tax evasion. In terms of recurrent
expenditure, wages and salaries and external interest payments exceeded budgetary provisions. Wage and
salary increases were due to the government’s past obligations under a memorandum of understanding
with the public sector. Capital expenditure was down by 19.6% in comparison with the budget estimates.
This fall was caused by project delays and a curtailment in expenditure due to the revenue shortfall.
Grants were also below budget as the release of some funds tied to economic performance under the IMF
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The fiscal year is from April to March.
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stand-by agreement was postponed owing to delays in the review process. Some areas of budgetary
expansion were designed to take up the slack in the event of a shortfall. The public debt continues to be a
challenge with the debt-to-GDP ratio exceeding 126% in December 2011. A significant decline to
sustainable levels in the medium term will rely on robust growth. About 45% of the debt is denominated
in foreign currency (US$), which means that debt payments can be more burdensome if there is a
currency depreciation. When the domestic debt is disaggregated, 43% is at variable rates and 53.8% will
mature within five years. The solution to the deficit problem lies in raising the primary surplus by
stimulating growth and increasing revenue, but this will depend on investor confidence, which has not yet
returned to the private sector. Data indicate that the previous IMF agreement was abandoned during the
last two quarters of 2011. The government is currently engaged in talks for a new agreement and tighter
budgetary control is expected. The previous agreement, which had been due to run for 27 months ending
in March 2012, was aimed at fiscal consolidation, debt management and a reform of the financial system,
but the targets for the last two quarters of 2011 were not met due to increased government spending.
(b)
Monetary and exchange-rate policy
The central bank maintained its cash reserves and liquid asset requirements and, as part of an
easing in monetary policy, reduced its 30-day certificate of deposit to 6.25%. The reductions in interest
rates have, however, not returned full confidence to the private sector as credit expansion has been slow.
The growth in broad money (M3) was 7.7% in 2011. Meanwhile, the stock of bank credit to the private
sector grew by 9.5% in 2011. In terms of the distribution of credit, overall business lending expanded by
5%, with significant increases posted by agriculture and fishing (18.5%), mining and quarrying (39%),
and transport storage and communication (32.5%). Manufacturing, on the other hand, declined by 6.3%,
but this was less than the 11% decline in 2010.
As a result of increased economic activity, the real stock of base money rose 1.7% in December
2011 relative to December 2010. The increased economic activity was partly the result of increased
demand from retroactive salary increases to the public sector and spending related to the general
elections. In 2011, the weighted average lending rate on commercial bank loans continued to decline,
moving from 20.92% in 2010 to 18.63% in 2011.
The exchange rate has been relatively stable in light of the IMF arrangements and other
multilateral financing, but may deteriorate in the absence of a new agreement. The weighted average
selling rate of the US dollar relative to the Jamaican dollar declined by 0.34% in the December quarter to
US$ 1 = J$ 86.6. The Bank of Jamaica will continue to intervene in 2012 in the event of any deterioration
in exchange rates, however much of the stability in the market will depend on a new agreement being
struck. The Bank will continue to take monetary policy initiatives such as reducing interest rates and
intervening in the foreign exchange market in order to maintain price stability and boost the economy.
3. The main variables
(a)
Economic activity
In light of the limited fiscal space and the extreme vulnerability of the economy to external
shocks, the Jamaican economy is at a delicate stage of development. The economic challenges of the
major trading partners such as the United States and the European Union have dampened overall external
demand despite some improvements in tourist receipts and remittances. In 2011, the economy of Jamaica
grew by 1.5%. This rate was an improvement from a series of consecutive annual declines over the three
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preceding years. Macroeconomic conditions were relatively stable during the year and consumer demand
appeared to pick up slightly. Growth of 5.0% was achieved by the goods-producing industries while the
services sector grew by 0.2%. At the same time, the goods-producing sector (made up of agriculture,
forestry and fishing, mining and quarrying, manufacturing and construction) contributed 26% to GDP.
Within the goods sector, agriculture contributed 7% to GDP and grew by 10.6%, while mining and
quarrying expanded by 20.1%, with a share of GDP of 2%. Construction and manufacturing registered
gains of 0.6% and 1.4% respectively.
In terms of services, all sectors showed positive growth except for transport, storage and
communications, and finance and insurance. The largest growth, of 2.6%, was in hotels and restaurants.
Meanwhile, stopover arrivals increased by 1.4% and visitor expenditure increased by 1.3%. The most
robust growth was in cruise ship arrivals (23.1%). It is reported that while arrivals have been on the rise,
this has been partly due to heavy discounting of tourism packages in order to encourage sales.
(b)
Prices, wages and employment
Inflation declined sharply to 6.0% in 2011 from 11.6% in 2010. The categories of the consumer
price index (CPI) that showed increases in prices were food and non-alcoholic beverages (0.6%),
alcoholic beverages and tobacco (0.3) and clothing (1.0%). The weights for these items in the overall CPI
are 37.4%, 1.4% and 3.3%, respectively, which suggests that increases in food and beverage prices are
significant. Much of the inflation pass-through was from international prices, which were moderated by
the stability of the exchange rate.
In 2011, real wages rose by 1.3%, in contrast to the decline of 12.3% in 2010. The increase was
the result of improved wages in mining and quarrying, and real estate and business, which saw increases
of 17.3% and 5.9%, respectively.
The unemployment rate, which was 11.6% in July of 2010, rose to 12.3% in 2011. However,
when the data are disaggregated by gender, male unemployment, which in July 2010 was 8.1%, rose
marginally to 8.9% in July 2011 while the female rates were 15.9% and 16.4%, respectively. The sharpest
decline in employment in 2011 was in the agriculture sector, which posted a drop of 14%.
The new government has made reducing unemployment a top priority through its Jamaica
Emergency Employment Programme (JEEP), which was a central pillar of its election manifesto. The
programme emphasizes job creation through agro-processing and a range of other activities designed to
encourage small and medium-sized enterprises. Tax exemptions will also be offered for new investments
that are likely to create jobs. However, with heavy spending cuts likely under a new IMF agreement, such
a programme will probably be scaled down.
(c)
The external sector
The latest Bank of Jamaica estimates suggest that in 2011 the current account deficit widened by
US$ 1.135 billion to stand at US$ 20.689 billion, or 14% of GDP. This was partly the result of a
deterioration of the trade deficit as imports outstripped exports. Imports grew by 28% while exports grew
by 21.5%. Most import categories increased, with mineral fuels rising by 59% due to higher fuel costs.
On the export side, non traditional exports expanded by 45%; however, this expansion was not enough to
offset the higher import spending. As a result, the trade deficit deteriorated by 30.7% in the period
January to November 2011.
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The services account declined by 13.9%, while current transfers (mainly remittances), which are a
major source of foreign exchange, improved by 1.6%. Total remittances between January and December
2011 totalled US$ 1.921 billion, reflecting an increase of 5.8% over the 2010 figure. The overall impact
of these changes was a fall in the net international reserves of the Bank of Jamaica by US$ 205.2 million
to US$ 1.996 billion in 2011, with gross reserves representing four months of goods and services imports.
4. General trends (first quarter 2012)
The Jamaican economy picked up in the final quarter of 2011 with growth estimated at between 1% and 2%.
However, this rally was short-lived as growth fell to between 0 and 1% in the first quarter of 2012 and the
projection for 2012 as a whole is 1%. This rate is very similar to that of the fourth quarter of 2011. There are
considerable downside risks, however, since it is now clear that the IMF fiscal targets for the last two
quarters of 2011 of the standby agreement, which ended in March 2012, were not met and no new
agreement has been reached. Since the timing and the amount of a new agreement are not certain, it is
unclear how a new agreement might impact the 2012/2013 fiscal year budget, which is still being drawn up.
The growth observed in the first quarter 2012 was due to stronger domestic demand stemming
from higher remittances and to continually improving, but still weak, external demand. Positive growth
was experienced in the following sectors: agriculture, forestry and fishing, manufacturing, electricity and
water, construction, and transportation, storage and communication. The performance of agriculture can
be attributed to improved domestic demand and a slight increase in exports. At the same time, there were
contractions in insurance and mining and quarrying. In the case of mining, the decline in bauxite and
alumina production was due to problems internal to the industry, causing lower capacity utilisation.
Growth in aggregate demand was stimulated by increases in net external demand, as gross capital
formation and public consumption declined, while private consumption remained flat.
The monetary policy stance was designed to keep inflation rates stable and to provide sufficient
liquidity to the banking system. The central bank maintained its monetary policy rate, the 30 day
certificate of deposit, at 6.25%. At the same time, the monetary base declined by 8.7% in the March
quarter, a much sharper fall than in March 2011.
In line with positive growth, credit to the private sector expanded by 3.9% in the quarter under
review, although this was less than the 6% growth recorded in the last quarter of 2011. The sectors
benefiting from this expansion were agriculture and fishing, distribution, and construction. Personal
lending also increased, by 4.2%. These expansions were the result of a decline in the weighted average
lending rate, bringing the overall average rate to 17.7%, down from 20.5% in March 2011.
As a result of these policies, the annual inflation rate in March 2012 was 7.3%.
The foreign exchange market has remained relatively stable as reflected in the marginal
depreciation of 0.8% in the weighted average selling rate of the United States dollar vis-à-vis the
Jamaican dollar. As a result, the nominal exchange rate was J$ 87.30 = US$ 1 at the end of March. Due to
moderate foreign exchange pressure, the Bank of Jamaica intervened in the foreign exchange market as
gross reserves stood at US$ 189 million, or 4 months of imports, and this compared well with the
international minimum benchmark of 3 months of imports of goods and services.