What did the IMF say?
THE INTERNATIONAL Monetary Fund (IMF) published its statement at the conclusion of its staff mission to Jamaica on August 22.
The IMF team visited Jamaica from August 14 to 23 to conduct discussions on the first review of the IMF-supported extended fund facility offered to Jamaica.
The IMF team met with the Minister of Finance Peter Phillips, governor of the Bank of Jamaica (BOJ), Bryan Wynter; Financial Secretary Devon Rowe, senior Government officials, members of the private sector and civil society. The IMF representative to Jamaica, John Kees Martijn, said the mission has reached a staff level understanding with the Jamaican Government on a set of economic policies outlined in the letter of intent.
He outlined that the discussions focused on the country's economic performance under the new IMF programme, short-term economic challenges that the country faces, and IMF programme aims and objectives for 2013 and beyond.
How did the economy perform?
According to BOJ's quarterly report, Jamaica met all the monetary targets with relative ease at the end of June. The net international reserves in particular, closed at US$1003.2 million, US$129.3 million above the targeted US$873.9 million. Inflation for the June quarter was 1.2 per cent, well below the 2.7 per cent registered for the first quarter ending March, and also below BOJ's forecast of 2.0 to 3.0 per cent.
The inflation rate recorded was as a result of the impact of the depreciating currency on domestic prices and lower agricultural output for some products due to drought conditions. BOJ outlined that the lower than projected inflation rate for the quarter, reflects an unexpected fall in oil prices as well as fall in consumer demand.
Total output in the economy contracted by 0.7 per cent between April 2012 and April 2013, the economy also contracted between April and June.
Despite meeting the monetary targets, Jamaica has recorded a second quarter of negative growth this year, as BOJ forecast indicated. The reduction in the country's total output is due to drought conditions in some areas, and the fact that demand has fallen due to a fall in their real wages. Unemployment, as outlined last week, has increased to 16.3 per cent, as a result of an increase in the labour force participation rate.
What are the forecasts for the near future?
Similar to their forecast for the June quarter, BOJ once more anticipates an inflation rate between 2.0 and 3.0 per cent for the September quarter. If materialised, this would be the lowest inflation for such quarter in the last five years.
BOJ outlines that inflation in the September quarter will be as a result of increase in the price of local agricultural products and processed food. Increase in total demand due to back-to-school requirements, and increase in spending for summer activities will also have an impact on the inflation rate for the September quarter.
BOJ predicts that real economic activity will increase in the next quarter. Real GDP growth for the September quarter as well as for the financial year 2013/2014 is predicted to be between 0.0 and 1.0 per cent.
This will emanate from improved investor confidence, an increase in global demand, and an increase in the availability of credit to the private sector due to the reduction in public demand for domestic credit. Risks which may affect the forecast are predicted to be minimal, BOJ anticipated that the projections can only be disrupted if local and global demand does not improve.
What is being done?
Wynter made it clear that the Government has reduced its borrowing from the domestic market, which should free up capital so that local commercial banks can lend more to private investors.
This increase in the availability of credit, should increase local investments, which should increase output, and help the unemployment problem at the same time.
With more people earning more, demand should increase as well. Fundamentally, demand in any economy cannot increase if there is not an improvement in income, income cannot increase if there is not an increase in output, and it is difficult for output to increase without increased investments.
Furthermore, any increase in output will remain inventory, if there is no increase in demand. Private investments are very important to improve economic activity and increase economic growth.
Dr André 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 email@example.com.