Briefing | Jamaica so near yet so far from a steady growth
HOW IS THE ECONOMY?
According to STATIN, inflation for the month of April 2017 was approximately 0.3 per cent, and it fell further to 0.1 per cent in May but displayed a clear structural shock, spiking to 0.7 per cent in June and 0.6 per cent in July.
This shock occurred as a result of an increase in agricultural food prices after the industry was negatively affected by flood rains. The negative effect of these floods on inflation will continue a while longer before normalising towards the end of the fiscal year.
The remainder of the inflationary pressure highlighted in June and July arose from the government's fiscal stance to increase the income tax threshold further, thus giving people more money to spend.
This was expected in the short run, as too much money chasing too few goods will result in increased prices. Increase in purchasing power will result in inflation in the short run but money neutralises in the long run.
The length of the long run depends on how long it takes to increase production, productivity and the productive capacity of the country. Nevertheless, the Bank of Jamaica believes that inflation will remain on target between four and six per cent for the 2017-2018 FY.
HOW ARE THE ISLAND'S GROWTH PROSPECTS COMING ALONG?
Unadjusted gross domestic product (GDP) increased by 0.1 per cent during the January to March quarter of 2017, but dropped considerably to -1.4 per cent when seasonally adjusted over the said period by STATIN. GDP, though, is expected to remain strong, given the praised decline in unemployment from 13.7 in 2016 to 12.2 per cent at present. This is the lowest in the country's history for some decades, according to STATIN. From scrutinising the numbers, male unemployment has fallen by one per cent and female unemployment by 3.1 per cent. These are expected to transfer to productive output; however, its effect on GDP remains uncertain, considering the fragility of the agricultural industry.
We expect inconsistencies in farming output to continue, which will reduce the growth numbers to some extent. There are still innate handicaps to be rectified if Jamaica wants to maintain consistent output, especially in the agricultural sector.
According to the Bank of Jamaica (BOJ), the increase in employment was noticeable in the category 'Real Estate Renting & Business Activities', which includes the business process outsourcing subsector. This will contribute to the service sector in GDP calculations.
WHAT ABOUT MONETARY POLICY?
The Bank of Jamaica is now serious about monetary policy. On July 1, 2017, they have transitioned from using the 30-day rate to the globally accepted overnight rate as the monetary policy signal tool. This is widely accepted and might increase the fluency of monetary policy.
The Bank of Jamaica appears to be firm on their low interest rate, low inflation accommodative strategy; however, the monetary transition mechanism appears to be held at ransom by commercial banks' profit pursuit.
In a recent press release, the BOJ governor implored commercial banks to help the monetary transition mechanism to increasing the rate of pass through from the central bank's policy rate to the commercial banks' lending rate.
"Interest rates have been trending downwards but are still too high," the governor said.
The governor assured that there is no 'crowding-out effect' occurring, as the government is not competing with the private sector for loanable funds, hence no impact on the interest rate from that angle.
Commercial banks in the small islands do not really understand the importance of soft economic policy in a rigid global geopolitical environment.
A full overview of commercial banks lending strategies and the monetary transmission mechanism in Jamaica is found in chapter 9 of my recent book: Developing Sustainable Balance of Payments in Small Countries; Lessons from macroeconomic Deadlock in Jamaica Palgrave McMillan (2017).' The book contains telling lessons on how to coordinate the economy to achieve greater efficiency and productivity.
HOW SHALL JAMAICA PROCEED?
The exchange rate has remained fairly stable at less than J$129 to US$1 for a couple of months, only reacting by basis points. The BOJ has introduced a new system for the selling of foreign currency, which they outlined has been working well, based on their objectives.
The current account continues to be an issue as outlined by STATIN's data, the value of goods imported to the island continues to be almost four times the value of goods exported from the island, which is continuing the country's negative global economic position.
If Jamaica intends to escape this low growth, high-debt (especially foreign currency debt) position, it must increase the amount and the value of the goods the nation exports. Very simple.
- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona Campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org