Wed | Sep 18, 2019

Mark Ricketts | Language upbeat, but economic headwinds troubling

Published:Sunday | September 1, 2019 | 12:28 AM
Richard Byles, new governor of the central bank. Writes Mark Ricketts: "BOJ intervened with US$240 million in 2017, US$165 million in 2018, and so far in 2019, US$250 million. When will the raiding of the country’s reserves stop?"
Mark Ricketts
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Confidence Is so important to add belief to a country’s sense of what is possible, as well as add credibility to the conviction - “ain’t no stopping us now, we are on the move, we are in a groove”.

Such sentiment and upbeat language capture the thinking of our heavyweight economists, policymakers, and government ministers, and should be sufficient to comfort the nation.

Dr Damien King, executive director of the Caribbean Policy Research Institute, in a TVJ interview following articulated fears about a global recession, said that the country’s economic reform programme of the last six years, over both administrations, has ensured a growth momentum that insulates it somewhat from the impact of a global recession.

IMF economist Dr Constant Lonkeng Ngouana, in a recent speech at Bethel Baptist Church, pointed to positive economic indicators, including unemployment, which more than halved to 7.8% in April 2019 from 16.3% in April 2013. He told his audience that this demonstrates that the country is moving in the right direction and emphasised that Jamaica is one of the International Monetary Fund’s success stories.

Finance Minister Dr Nigel Clarke assured the nation on August 20 that the country is in a better place to absorb external shocks in the event of a global recession. He cited macroeconomic stability and the strength of various sectors and industries, including tourism, BPO, finance, and real estate and construction.

Dr Uma Ramakrishnan, IMF mission chief to Jamaica, reminded the country that since 2013, under two consecutive IMF-supported programmes, Jamaica has established an exemplary track record of economic reforms.

Prime Minister Holness on August 10 spoke in Rhyne Park, St James, at a groundbreaking ceremony for 754 new housing units, which is a joint venture between the Housing Agency of Jamaica and Chinese firm Henan Fifth Construction. He bemoaned the fact that his Government faces a challenge of communication and asked: “How do we get across to the people all the good and great things that are happening at this time?”

Bolstering the overall sense of success is the sizzling profit performance of several companies listed on the Jamaica Stock Exchange.

Against this backdrop of unbridled optimism and impressive performance, why would anyone muddy the water by worrying? The endorsements above, of economic vibrancy, should dispel any concerns that doubting Thomases like myself might harbour.

Why do I worry?

First, there has been a sharp increase in the current account deficit. In 2015, we ran a small surplus. It is now at a disappointing US$420-million deficit.

Balance of payments

The current account is a component of a country’s balance of payments. When there is a negative balance, namely a deficit, it means that more money is leaving the country than coming in, making us a net borrower from the rest of the world.

Second, our huge visible trade deficit has to be worrying and we don’t seem to be able to drive exports or contain imports.

Third, in 2018 bauxite-alumina exports rose sharply over 2017. JISCO, after purchasing the old Alpart plant which was mothballed for years, had a late start in 2017 in getting the plant up and running.

The low output in 2017 was followed by almost a full year’s production in 2018. This allowed the mining sector to record year-over-year increases that impacted positively on exports.

Bauxite-alumina has a significant impact on foreign exchange inflows in addition to contributing to GDP growth. However, this year could be hamstrung by unfortunate developments.

- The price of aluminium has declined on the world market to $1,800 from $2,500 in May last year.

- The prospect for alumina is not as encouraging given a global surplus.

- Upgrading the Alpart plant and unexpected capital expenditures on old boilers, at a time of soft commodity prices, has challenges for JISCO and the country.

- Complicating the economic landscape globally are increased sanctions and tariffs which affect trade and overall economic activity.

- JISCO’s planned US$3-billion industrial park and Special Economic Zone in St Elizabeth would have been a game-changer had development got under way this year as expected. That’s a major setback for the country.

- When commodity prices fall, be they coffee or aluminium, it is like the grim reaper taking its toll on the affected sectors. We see this with sugar where so much acreage has been taken out of production. Estates like Monymusk, where many have toiled for so long, employment has been curtailed and so has the promise of tomorrow.

Fourth, our import-dependent economy is not really on board with the efficacy of a free-floating exchange rate regime that facilitates and validates devaluations. Jamaicans want a strong dollar, even if it is overvalued. They have no objection to Bank of Jamaica (BOJ) using our precious reserves to shore up our dollar, as nobody is complaining but me, and nobody seems to be worried but me.

BOJ intervened with US$240 million in 2017, US$165 million in 2018, and so far in 2019, US$250 million. When will the raiding of the country’s reserves stop? At US$1 billion! At US$1.5 billion!

Such intervention impedes market pricing of our currency and undermines the feasibility of a viable forward market as BOJ flash sales are too frequent and unpredictable. Being biased towards revaluing the currency, they amplify volatility.

The dollar has moved from a low of $125 earlier this year to seemingly a new low of $135.

Unfortunately, much of our national debt is denominated in foreign currency requiring more devalued dollars to repay such debt. This year might repeat last year when our currency devalued and the amount the country owed increased.

Irrespective of how we try to sideline the dollar by subordinating it to the Consumer Price Index, when it devalues, prices rise.

I bring this up because the dollar’s decline is alerting the country to address structural weaknesses, labour market rigidities, and misdirection in education. If these were addressed, productivity would likely increase, which could result in meaningful economic growth.

We can’t keep kicking the can down the road until the cumulative effect can no longer be ignored. This has happened too many times. Then we have to pay a disproportionately higher cost for procrastination (the dollar and devaluation over the last 50 years); for misdirection (inequality in our educational system); for the absence of competencies in management (Petrojam, CMU, Ministry of Education); and for not substituting bold and visionary leadership for the politics of personal affection (garrisons).

 

- Mark Ricketts is an economist, author, and lecturer. Email feedback to columns@gleanerjm.com and rckttsmrk@yahoo.com.