AS WE head into a new fiscal year, we sense a greater degree of uncertainty among citizens and business interests, more so than in the recent past. This uncertainty has manifested itself in the currency markets.
Last year, when the budget was read, there was little or no anxiety swirling about. This year seems filled with greater concerns and the issues are genuine. Government expenditure continues to far exceed its tax revenues, and Jamaica continues to consume more than it earns. Unless these two fundamental problems are corrected, we will continue to experience serious social and economic challenges with negative consequences for the future.
Like the rest of the country, we hope that action plans with corrective measures are quickly implemented to reverse these critical problems. Below are some of the key indicators.
The Minister's groan could be heard by the market as the March treasury bill auction coincided with the Bank of Jamaica's (BoJ) decision to hike its full range of repo rates. As expected, the six-month treasury bill yield at 33.46 per cent mirrored the 180-day repo at 33.15 per cent.
The BoJ rewarded investors while institutions were punished from rising cost of funds, as repo rates returned to levels not seen since 1996. Real interest rates are now close to 30 per cent during this latest round of intervention to stabilise the currency market. Market liquidity had dried up but BoJ's action seemed to have little effect on the market as the local currency depreciated three per cent over the past three weeks. Analysts are concerned that sustained real rates for a protracted period could put the economy at risk through its negative impact on the fiscal accounts.
The Consumer Price Index was negative for a second straight month, with prices falling 0.6 per cent in February. A reduction in the prices of "starchy foods" and "vegetables" caused the food and drink group, which comprises 56 per cent of the Index, to go down, despite higher prices across all other categories.
The fiscal deficit worsened by $17 billion compared with last year, and was $22 billion behind budget. Revenues were off 10 per cent, while expenditure was eight per cent above targeted levels. As a result of these negative developments, the projected year-end deficit was revised by the Ministry of Finance to 8.4 per cent, compared with the four per cent originally projected. The markets reacted very negatively to this information.
The Net International Reserves (NIR) grew by US$150 million in March as the BoJ sought to rebuild reserves for the Government's fiscal year-end. This information was recently disclosed by the Ministry of Finance in response to a negative report from an institutional credit rating agency. However, the significant accumulation of reserves without any new borrowing or divestment suggests continuing inflows into the market. The currency has moved from $51 in January to more than $57 currently.
Tourist arrivals rose by 21 per cent when compared to the similar period last year. Stopovers were up 12 per cent as all markets saw growth (USA up nine per cent, Europe up 32 per cent, Canada up four per cent, Latin America up 17 per cent). Cruise-ship visitors grew at a faster pace, with a 30 per cent jump as ship calls moved from 60, compared with 46 last year. Cruise-ship visitors now exceed stopovers, comprising 54 per cent of January's aggregate arrivals.
The negative trends noted in our current accounts continue to worsen. Imports grew three per cent to US$2.60 billion, while exports fell 13 per cent to US$0.84 billion as our trade gap continues to widen. Growth in remittance flows continues to plug the hole in our balance of payments, helping to offset declines in tourism receipts.
US deposits rose to US$1.43 billion, an increase of US$253 million over last year. Deposits continue to rise as locals hold foreign exchange accounts at home where better interest rates are available.
Internal debt was up $60 billion in the last 12 months as the remaining FINSAC debt was converted to Local Registered Stocks and became interest-bearing.
External debt increased seven per cent, primarily from new global bonds issued in 2002.
Article written by Deon McLennon, Assistant Manager, Research & Analysis at Pan Caribbean Merchant Bank. Please call 929-5583 for more information.
