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Politics adding to uncertainty, but Wynter bullish on economy

Published:Friday | November 11, 2011 | 12:00 AM

Lingering speculation about the date of the next general elections could add to uncertainty already caused by the delay in the International Monetary Fund (IMF) reviews of Jamaica's medium-term economic programme, according to central bank governor Brian Wynter.

But "discussions are continuing with the IMF," said Wynter, while presenting the Bank of Jamaica quarterly monetary policy report Wednesday.

He said the Government was also engaged in talks with public sector unions to agree on the way forward even as public consultations on proposals for reform continued in accordance with parliamentary schedules and in public forums across the country.

As governor of the central bank, Wynter was among the team that negotiated Jamaica's 27-month standby arrangement which the IMF approved in February 2010. It included borrowings of US$1.3 billion.

The fourth, fifth and sixth quarterly reviews, which Jamaica must pass in order to draw down additional funding, has been delayed since December 2010 while the Government seeks to dispose of loss-making state assets and make headway on tax and pensions reform.

Wynter was speaking against the background of risks to the Bank's projection of a one to two per cent economic growth in the December quarter and fiscal year 2011-12, as well as forecast on inflation of one to two per cent, lower than the 2.1 per cent recorded in the September quarter.

Seasonal increases

Inflation during the review quarter largely reflected seasonal increases in the prices of domestic agricultural commodities as well as higher costs for educational items and tuition.

However, Wynter said the impact was moderated by continued weak but improving domestic demand conditions, a reversal in the price of international commodities — largely reflected a sharp fall in the price of crude oil - by 12.5 per cent for the September quarter — and an extended period of relative stability in the exchange rate, which depreciated by a negligible 0.06 per cent in the year to the end of September 2011.

He said the outlook for inflation for both the December quarter and fiscal year has incorporated a projection for the seasonal increase in demand pressure in the foreign exchange market, reflected in the usual lower net private capital inflows.

The demand for foreign exchange to facilitate current account transactions should abate given the expected moderation in commodity price increases and the seasonal increase in tourism flows, he said.

"In this context, the bank will intervene as necessary to smooth supplies in the market and ensure orderly movement in the exchange rate," Wynter said. However, he added that gross reserves would remain comfortably above the international benchmark of 12 weeks coverage of projected imports of goods and services.

The bank estimated that there was real economic growth in the September quarter, ranging somewhere between zero and one per cent - albeit at a slower pace than the average quarterly expansion of 1.8 per cent experienced for the first half of the calendar year.

The central bank governor said growth is expected to accelerate in the December quarter relative to the September quarter, an expansion driven by the mining and quarrying, hotels and restaurants, construction, and agriculture, forestry and fishing sectors.

But, he cautioned that there were risks to the projections for both inflation and economic growth.

Doubts about the date of the impending general election aside, "adverse weather conditions could derail both forecasts, while an unfavourable international environment could depress economic growth but lead to a better-than-expected inflation outturn," said Wynter.

"In addition, the persistence of weak domestic demand could also lead to lower output but a more satisfactory inflation rate," he said. "Conversely, improvements in the global economy could lead to sharper increases in commodity prices - hence higher than expected inflation - but would spur increased demand for Jamaican goods and services."