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Current account deficit narrowing to 6.8% of GDP

Published:Wednesday | August 27, 2014 | 12:00 AM
A section of the port in Kingston. - File

McPherse Thompson, Assistant Business Editor

Jamaica's current account deficit is expected to be about 6.8 per cent of Gross Domestic Product (GDP) for fiscal year 2014-15, narrower than expected, at this stage of the four-year economic support programme with the International Monetary Fund (IMF), according to central bank Governor Brian Wynter.

The narrowing of the current account deficit has had an influence on the foreign exchange market in that it has slowed the depreciation of the Jamaican dollar vis-à-vis the United States dollar "and we expect that as long as there is adequate supply to meet the demand that that will continue," he said.

However, Wynter said the seasonal demand in foreign exchange flows to stock up or buy for the Christmas season will become evident over the next two months, and with that there could be a slowdown in supply.

However, he said the patterns they have seen in the past have been disrupted by the change in policy. "The strong stance on the fiscal side to a combination of those policies with the exchange rate has changed the dynamic somewhat, as evidenced by the current account," he said.

Addressing the quarterly monetary policy press briefing at the Bank of Jamaica's downtown Kingston offices on Monday, the Governor said, "I'm pleased to say that we are certainly out of some of the difficult times of a year or so ago when we had much lower reserves and did not have any assurance that access to markets were available to the Govern-ment or the central bank. That's completely changed."

He added: "I am more confident now than I was a year ago, much more confident in our capacity to withstand shocks that could occur and continue with the programme. So it's very good news for those who need to make decisions to invest. The capacity of the system to manage stability over the next few years is much, much better than it was a year ago."

Substantial deficit

According to the June 2014 IMF country report on Jamaica, the current account deficit remains substantial but has improved sharply. The ongoing fiscal consolidation, weak domestic demand, and an eight per cent adjustment in the real exchange rate have all contributed to the external adjustment.

The current account deficit was 9.5 percent of GDP in 2013-14, a reduction of two percentage points relative to the previous year.

It said import compression has been the principal factor in driving the recent correction of the current account.

In the coming years, it said, increased domestic production is expected to reduce reliance on imports, and the current account deficit should continue to adjust downwards.

The identified pipeline of foreign direct investment inflows, attracted by improving confidence and competitiveness will help finance the current account over the medium term, it added.

The report said policies to raise productivity and remove obstacles to investment and trade will be essential to complement exchange rate adjustment in restoring external competitiveness and lowering the current account deficit toward its longer-term equilibrium of around five per cent of GDP.

Responding to questions about the notion of reform fatigue, Wynter said alternatives to the current IMF programme would be catastrophic.

"The path we are on is the right path. We need to focus on it, continue to pay attention to the most vulnerable, but if we shrink from taking the steps that we have taken so far, from taking the steps that we need to take going forward, we would, in a sense, have wasted the efforts and the sacrifices that have been contributed by the stakeholders over the last two years," the Governor said.

"That would be more than a shame. The fact that the programme has returned to growth, the fact that we have seen employment gains, the fact that we have seen investments pick up, (and) I think we should not shrug off the significance of the bond issue in terms of what it is telling us from the international perspective. That has eased the pressures on the programme considerably and has created more space and flexibility for Jamaica," he said.