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The economic 'jigsaw puzzle'

Published:Sunday | February 7, 2010 | 12:00 AM

Dennis Morrison, Contributor


As I tried to explain in last week's column, one important consequence of the world recession was that when oil prices collapsed in late 2008, consumers got an ease in their gasolene and electricity bills. This relief continued into the early months of last year, and was assisted by falling grain prices from previous record highs in early 2008. So that, even as the decline in the economy was inflicting pain, cost-of-living pressures moderated here in Jamaica and in nearly all other countries.

In fact, the combined effect of oil- and grain-price declines was that the rate of inflation in Jamaica dropped to zero in the last three months of 2008 and remained low in the early months of 2009, notwithstanding the spike in domestic food prices as a result of Hurricane Gustav. This was confirmed in the inflation report published a few days ago, which showed that we ended 2009 with a rate of 10.2 per cent, which was significantly below the 16.8 per cent recorded in both 2007 and 2008.

Increasing pressure

But even as the 2009 figure was an improvement, as I pointed out, gasolene and electricity bills in Jamaica went back up in the second half of 2009, pushing up the cost of living. It is important to note that the inflation rate was three per cent for the first half of the year but rose sharply to 10.2 per cent for the full year. Thus, while the tempo of price increases remained moderate in the US and our other trading partners throughout 2009, cost-of-living pressures were reignited in Jamaica in recent months.

The resurgence in the inflation rate is a matter of serious concern because this factor is a critical piece of the economic 'jigsaw puzzle' of Jamaica. As has been widely discussed over the last two decades, the inflation rate influences movements in the rate of exchange for our currency, interest rates, and the general stability of the economy. And this applies to households, which must manage their money at a time of pay freezes, and to businesses, which must keep costs under control if they are to remain viable. As we learnt in the discussions about the Jamaica Debt Exchange (JDX), the inflation rate must go down soon if savers are to get a real return on their investments, since interest rates have been slashed.

If the truth be told, Jamaica has had an atrocious record of managing inflation over the past four decades, having achieved single digits in less than 10 of those years. This, and long-running fiscal deficit are two of the reasons why interest rates have remained high for so long. As I have written many times, we cannot expect to have low, nominal or real interest rates unless the inflation rate is brought down to low single digits and consistently maintained at that level for an extended period.

Wage pressure, which had been an important factor pushing up inflation rates in the mid- to late-1990s, has been less pronounced in recent years. The current freeze in public-sector pay will have a further dampening effect on increases across the economy. Like wage pressure, the on-going fiscal deficit has also been a contributory factor to Jamaica's high inflation. Achieving the targets set in the International Monetary Fund agreement is, therefore, essential to the objective of lowering inflation and interest rates.

Along the way, we must develop mechanisms for dealing with the extremes of floods and hurricanes on the one hand, and drought on the other. In no less than five years in the past decade, flooding and hurricanes devastated domestic food production, leading to spikes in food prices that threw inflation targets off track. By now, we should have worked out how to supplement food supplies at times of disruption, either by managed importation, or post-harvest storage.

The water shortage now affecting domestic supplies is signalling to us that if rainfall levels do not increase soon, domestic agriculture could be hurt. Available data show that average island rainfall levels dropped in the traditional rainy months of September and October last year, and sharply in the month of November, when it was only 47 per cent of the 30-year mean for that month. This is a recurring problem, as we are still to formulate and implement fundamental plans for the storage and use of water, as well as crop zoning.

Serious investment needed

As we grapple with the task of reducing the impact of flooding or drought on inflation, interest rate, exchange rate, and on the overall economic environment, it is vital that we recognise that serious investment will have to be mobilised for these aspects of our infrastructure. Now more than ever it cannot be left to the state sector alone to carry out this task. Private-sector investment will be needed. But it has, however, been hard in this 'land of wood and water' to shift the attitude that water is cheap; and to influence the wasteful habits in its use.

With high return, previously low-risk government debt instruments are likely to be less available in the coming period and investors looking for alternatives, projects in the area of water infrastructure should be packaged to attract private-sector institutional investors. Along with this, it will be necessary for there to be an appropriate regulatory framework that allows for a more realistic approach to the pricing of water. Legislation already in effect can serve as a platform for launching such an initiative.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.