The stage is set: It is now time to build – Wynter
Growth in the economy is expected to strengthen for the remainder of the fiscal year and over the medium term, Bank of Jamaica Governor Brian Wynter has assured, notwithstanding two consecutive quarters of decline which has technically put the country in recession.
Wynter said he sees progress of the country's economic reform programme and the benevolence of low oil prices presenting a unique economic opportunity for the island.
However, Jamaica will only benefit from that opportunity with growth and more and better jobs if it succeeds in enhancing productivity at all levels, the governor told his quarterly press briefing at the bank's offices in downtown Kingston yesterday.
"This is what Government's reform efforts and private-sector enterprise should be focused on," Wynter said. "In support of these efforts, the bank's monetary policy stance will remain generally accommodative but alert to react swiftly, whenever necessary, in order to ensure that inflation remains low and the external accounts remain in sustainable balance," he added.
According to the central bank governor, the very large positive shock from lower international oil prices, together with continued success in implementing the Government's economic reform programme, especially the steadfast application of fiscal discipline and continued gains in price competitiveness, present a major opportunity for the private sector.
Declaring that "The stage has been set and the foundation is being laid, it is now time to build", Wynter said monetary policy and fiscal policy are delivering macroeconomic stability.
He said that stability has been evident in the inflation rate falling faster than anticipated. Inflation in January was minus 0.5 per cent, a third consecutive month of deflation, and resulted in an annual rate of 5.3 per cent, significantly lower than the 9.3 per cent recorded for January last year. He said there was now a strong likelihood that inflation for fiscal year 2014-15 will fall below the target range of seven to nine per cent.
Wynter said stability has also been evident in the current account of the balance of payments, where the deficit has continued to narrow faster than expected.
The current-account deficit is now expected to fall below 5.5 per cent of gross domestic product (GDP) this fiscal year, down from 8.5 per cent of GDP in the previous year, and is projected to contract even further over the next 12 months, the BOJ governor said.
"This good performance is the result of fiscal consolidation, improvements in price competitiveness and the fall in international oil prices," he added.
Wynter said the exchange rate has adjusted to make Jamaica more price competitive and is now expected to move at a slower rate than in the last two years.
"I say this with an awareness of the apprehension that exists to varying degrees, regarding the prospect of further depreciation of the Jamaican dollar," he said.
"Historically, the danger of depreciation has resulted from the large and debilitating pass-through effect on domestic prices that was big enough to wipe out whatever gains had been made in competitiveness. Today, however, the pass-through effect has diminished significantly. We have seen this in the fact that, despite the depreciation of the last two years, inflation has continued to decline."
According to Wynter, "We have thereby been able to hold on to the gains that were made in competitiveness. The benefit of this is being felt on the bottom line of businesses engaged in exporting goods and services (including tourism) or in competitive import substitution."
As he has noted before, exchange-rate depreciation in the current environment is mainly a correction to compensate for the difference in inflation between Jamaica and its trading partners.
"I am encouraged to be able to report that we are making good progress towards our long-term objective of eliminating this difference completely. With this in mind, there should be less concern about occasional episodes of somewhat faster depreciation that may occur from time to time, once it is understood that they will have a more moderate effect on domestic prices," Wynter added.
The bank is projecting inflation over the next four quarters to be in the range of 5.5 to 7.5 per cent in the context of continued moderation in energy-related costs. "With this forecast, though, it is important to take note that inflation during the course of the year is likely to fall well below the range for the full year before rising later in the year," he said.
He said that lower-than-expected international commodity prices and weaker-than-expected domestic demand could cause inflation to end up below the forecast range.
Initiatives geared at an expansion in domestic agriculture could also result in lower prices for those crops. "Conversely, persistently high inflation expectations among businesses, and the potential for a stronger than anticipated pass-through from exchange rate depreciation could cause inflation to end up higher than the forecast range," he added.
The central bank is projecting that the Jamaican economy will expand within the range of zero to one per cent for fiscal year 2014-15 and to strengthen in fiscal year 2015-16 to a range of 1.5 to 2.5 per cent.
Wynter said the bank's assessment of Jamaica's recent economic performance and outlook was similar to this week's International Monetary Fund staff mission's conclusion that all the targets for the quantitative criteria and structural benchmarks for the last quarter were met and that the Jamaican remained on track in terms of the forward-looking elements of the review.