Jamaica losing two-thirds of tourism earnings to COVID - IMF assistance to offset ‘profound BOP shock’
Before the pandemic, Jamaica’s tourism and travel receipts were tracking above US$3 billion. Remittances were fairly close behind at around US$2.3 billion.
But projections in the International Monetary Fund’s, IMF, newly released country report on Jamaica shows that the post-COVID inflows from the top two foreign exchange earners are projected to fall so hard that together they won’t even be able to match the receipts that the travel market alone, which encapsulates tourism, previously brought to the table.
Tourism is projected to fall by more than two-thirds or over US$2.12 billion to US$995 million, while remittances are expected to drop to US$1.9 billion. Together, their post-COVID inflows totalling US$2.9 billion are projected to underperform the pre-crisis tourism receipts by around US$216 million.
Tourism earnings were tracking at US$3.1 billion when the coronavirus began taking its toll on economies that Jamaica depends on for tourists.
Put more starkly, the post-crisis receipts from tourism and remittances are forecast to fall to just around half the US$5.4 billion of value they represented before the pandemic. Remittances are expected to decline by 17 per cent and tourism by 68 per cent.
It’s data like that and projections that the country’s balance of payments will see a dramatic deterioration of its current account deficit from 2.3 per cent of GDP to 7.3 per cent that led Jamaica towards a new IMF financing facility to held ride out the pandemic and deal with its after-effects.
The IMF backing also opens the door for Jamaica to obtain other financing from donor agencies for budgetary and other support.
The IMF in granting balance of payments support to Jamaica under its Rapid Financing Instrument facility, the RFI, projects the economy will shrink by 5.3 per cent this year.
The forecast aligns with the Bank of Jamaica’s, BOJ, estimate of a 5.1 per cent contraction.
In data published by the IMF this week, projections show that Jamaica’s tourism market is not expected to recover to pre-COVID levels until around 2023 or 2024.
The central bank, which has been monitoring the financial system for signs of strain, opted to leave its policy rate unchanged at 0.5 per cent at last assessment on Monday, May 18, saying inflation was still within its target range.
The Friday before that, BOJ moved to boost liquidity through a two-point reduction in the amount of cash that banking institutions are required to park at the central bank. It adjusted the cash reserve ratio to the statutory limit of 5 per cent for JMD and 13 per cent for foreign currency, effective May 15, freeing up about $14 billion of cash in Jamaican currency and another US$70 million of foreign currency for transactions.
BOJ’s next interest rate decision is scheduled for June 29.
The IMF noted that Jamaica – which will draw down the RFI funds as needed – faces a pronounced shock to its balance of payments, the measure of one country’s trade and financial transactions with the rest of the world, due to the ‘sudden stop’ of tourism activity, falling remittance inflows and weak mining exports.
Some of those effects are expected to offset by a lower oil bill due to the collapse world prices for crude. Jamaica’s oil imports were estimated at more than US$1.42 billion in the past fiscal year, but the IMF report on Jamaica estimates the bill will fall dramatically to US$656 million post-COVID – a projected saving of 54 per cent.
Still, that would only free up US$767 million, which means the offset would only be about 30 per cent of the US$2.5 million of projected losses from tourism and remittances.
On the financial account, foreign direct investment inflows are expected to decline, said the IMF, adding that the combined effect is an urgent external financing need of nearly US$1.2 billion or close to eight per cent of GDP that it’s support alongside resources from international financial institutions – such as IDB, World Bank and the CDB – should be able to fulfil.
The new IMF programme as designed should serve to limit drawdowns on BOJ’s reserves, which were projected at US$3.3 billion. In April the NIR was estimated at US$3.1 billion.
The central bank is projecting inflation at 4.5 per cent for this fiscal year, ending March 2021, and a slightly lower rate for the next period. The projection for this year falls towards the low end of the inflation target range of 4-6 per cent.
In his quarterly monetary policy press briefing on Wednesday, BOJ Governor Richard Byles said the near-term inflation forecast was based on outlooks for commodity prices, particularly oil and grain, as well as generally lower inflation rates among Jamaica’s main trading partners, especially the United States.
“These factors will cause lower rates of increase in retail prices and in domestic energy-related prices … despite a depreciated exchange rate,” the governor said. The weighted average selling rate of the Jamaican dollar to the USD reached a new high of $147.39 on Monday before retreating to the $146 band the following day.
Byles said the inflation forecast also takes into account the temporary stop in tourist arrivals and spending, and a seven per cent reduction in remittance inflows.
“These conditions will cause a deceleration in agricultural food prices as excess supplies will emerge for the duration of the period over which the tourism industry is closed,” the BOJ governor said.
The IMF says the principal risk facing Jamaica arises from the pandemic being more severe and long-lasting than is currently expected.
“Be assured, however, that with careful management, at US$3.1 billion at end-April 2020, the net international reserves of the Bank of Jamaica are adequate to weather this storm,” Byles said.