Government's macro economic programme for FY 1997/98 was designed to consolidate the gains of FY 1996/97 with respect to low inflation, exchange rate stability and adequate foreign reserves while seeking to foster economic activities Preserving the low inflation and maintaining relative stability in the foreign exchange market relied heavily on continued conservative base money management by the Bank of Jamaica (BOJ), supported by fiscal policy.

Despite drought induced price increases, especially in agricultural products, inflation fell again in FY 1997/98. The inflation rate for the April-February period was 8.0%, compared with 9.1% for the corresponding FY 1996/97 period. Indications are that the inflation outturn will be within the 8-9% target set for FY 1997/98.

The exchange rate remained relatively stable, averaging J$36.51 to US$1, notwithstanding speculative pressures in the run-up to elections. As a result of BOJ's intervention in the currency market, Net International Reserves (NIR) declined to US$595.1 million at end-March 1998. Gross reserves were equivalent to 13.1 weeks of imports.

The Balance of Payments (BOP), after recording a surplus the previous fiscal year, deteriorated to a deficit position. This reflected the combined effect of a decline in the capital account surplus and a widening current account deficit.

The fiscal operations continued to bear tremendous costs for the macro-economic gains. In the face of continued tight monetary policy aimed at reducing inflation and inflationary impulses, economic activities remained subdued. This has impacted negatively on revenue. At the same time, expenditure increased as a result of the accumulated fiscal costs associated with macroeconomic stability (reflected in increased debt and debt costs) and the higher than programmed wage bill. These restricted Government's ability to undertake the infrastructural, human and social development necessary to facilitate growth.

However, some areas have been targeted to receive support to facilitate a near-term economic recovery. The financial sector is undergoing rehabilitation and the productive sector is receiving loans at lower interest rates through the resumption of direct lending by the National Development Bank (NDB). In addition, the National Investment Bank of Jamaica (NIBJ) has been involved in equity investment in sectors that are targeted for growth under the National Industrial Policy.


MONETARY DEVELOPMENTS

The focus of monetary policy throughout FY 1997/98 was the further lowering of inflation and stability of the exchange rate. Base money management was the main operating tool of monetary policy. This was programmed to expand by 10.9% to contain the growth in money supply to 10.1%.

For FY 1997/98, base money expanded by 9.4% as compared to 15.2% in FY 1996/97. Money supply (M3) recorded growth of 7.1% over the fiscal year to January. Expansionary impulses came from increased net credit from commercial banks and public sector credit. Absorption of the excess liquidity was undertaken through open market operations and intervention in the foreign exchange market.

In response to demand pressures in the foreign exchange market and liquidity management requirements, BOJ increased the rate on its reverse repurchase arrangements (reverse repos). The rate on 30-day reverse repos increased from 18% in April 1997 to 29% in March 1998. The rate on Treasury Bills followed a similar path with the average rate on 6-month Treasury Bill increasing from a low of 16.2% in April 1997 to 28% in March 1998. Reverse repos with tenures of 90 and 180 days were introduced by BOJ in an attempt to move the market longer and reduce short-term speculation.

Commercial bank average loans and savings rates decreased marginally over the year, stabilising at 44.17% and 13.02%, respectively, by end-March 1998. The spread between savings and loans rates remained large, averaging approximately 31%.

 

PRICES

Despite inflationary impulses brought about by the prolonged drought, tight monetary policy succeeded in a further lowering of inflation for the second consecutive fiscal year. The relative stability of the exchange rate reducing cost push influences and the lowering of inflationary expectations tempering wage demands and pricing arrangements also helped. Except for the July to September period, monthly inflation was less than 1%. In December 1997, the inflation rate declined by 0.1%, the first decline in ten years. As a result of these developments, the inflation rate over the fiscal year to February was 8.0% compared with 9.1% for the corresponding period of FY 1996/97. The 12-month point-to-point rate for February 1998 was 8.3%, less than the 10.9% recorded in February 1997. The fiscal year out-turn should remain within the targeted 8%-9%.


EXTERNAL DEVELOPMENTS

Balance of Payments

Over the fiscal year to January 1998, the BOP recorded a deficit of US$95 million, compared with the US$217 million surplus recorded for the corresponding period of FY 1996/97. The out-turn reflected a US$136 million decline in net capital inflows and a US$176 million deterioration in the current account deficit. The current account was influenced by a US$146 million widening of the trade deficit. The capital account recorded a sharp US$284 million reduction in net private capital inflows.

Exports

Export growth remained flat reflecting the general downturn in the productive sectors. Over the fiscal year to January, the value of exports grew by 0.7% to US$1,146 million. A 4.2% increase in the value of traditional exports led by alumina exports (14%), and banana (4.7%) was the contributing factor. Alumina benefited from improvements in both volume and prices. Non-traditional exports declined by 5.2% mainly as a result of the downturn in the apparel and textile industry. The industry, accounting for approximately 55% of non-traditional exports, has been affected by rising operational costs, labour problems and the relocation of a number of companies to Mexico to access NAFTA benefits. Export agriculture was affected by the prolonged drought conditions.

For calendar year 1997, exports increased by 0.1% to US$1,388 million.

 

Imports

For the fiscal year to January, imports expanded by 6.2% to US$2,639 million, relative to the corresponding FY 1996/97 period. Increased consumer and capital imports were the primary contributors. Food, motor cars and non-durables were the major sources of growth in consumer imports. The increase in capital goods was due primarily to imports of industrial transport equipment (two aircraft for Air Jamaica worth US$92 million and buses for public transportation) as well as construction materials.

For calendar year 1997, imports expanded by 6.5% to US$3,107 million.


Tourism

The tourism industry continued to grow in FY 1997/98. Tourist arrivals increased by approximately 2% to 1.7 million over the fiscal year to February. A higher volume of stopover visitors, due to increased visits by foreign nationals, outweighed a decline in cruise passengers. Though cruise ship visitors to Montego Bay have declined, visitors to Ocho Rios have increased.

For calendar year 1997, tourist arrivals increased by 4.6% to 1.9 million.

The tourism industry stands to reap the benefits of a number of recently completed and on-going infrastructure projects. These include the expansion and upgrading of the Sangster International Airport; expansion of the cruise ship pier in Ocho Rios to accommodate mega-liners; sewerage improvement in Montego Bay; development of the Northern Coastal Highway and other roads in Ocho Rios; water supply improvements in Negril and drainage and flood control in Montego Bay.


Foreign Exchange Market

Despite strong demand pressures, the foreign exchange market remained relatively stable over FY 1997/98. Market expectations of future depreciation of the Jamaican dollar intensified in the months leading up to the December 1997 general elections. This triggered a shift in portfolios by some investors from Jamaican dollar to US dollar holdings, heightening speculative activities in the market. To maintain exchange rate stability, BOJ intervened in the market selling foreign exchange. The currency depreciated by 3.6% to average J$36.51 to US$1 for the fiscal year. BOJ's intervention resulted in a decline in the NIR to US$595.1 million at end-March 1998. This compared with US$647.2 million at end-March 1997.

 

PRODUCTION


As a result of the weak performance by the major sectors, except tourism and bauxite/alumina, output growth is not expected to increase in FY 1997/98.


Agriculture

The Index of Agricultural Production is estimated to have declined by 20.4% for the first nine months of FY 1997/98. Export agriculture also fell with the index registering a 17.3% decline compared with the corresponding FY 1996/97 period. The performance of the agricultural sector partially reflected the effects of the prolonged drought coupled with increased competition from imports.

Mining

The bauxite sector reported increased production and exports for FY 1997/98 compared with the previous year. Total bauxite production increased by 1.3% to 11.0 million metric tonnes over the fiscal year to February. Alumina production expanded by 6.6% while production of crude bauxite fell. The volume of bauxite exports increased by 4.3% to 11 million tonnes due to an 11.3% increase in the volume of alumina exported. The volume of crude bauxite exports decreased by 10.0%.

Outlook for the industry points to an increase in world alumina demand in 1998, with implications for higher export prices. A number of the bauxite companies in Jamaica plan to expand their production capacities.


Manufacturing

The manufacturing sector continued to show signs of contraction. Manufactured exports declined during the first nine months of the fiscal year and commercial bank credit to the sector has also declined. The manufacturing sector continued to be affected by the high cost of capital and increased competition from imports in the wake of globalisation and trade liberalisation.


OUTLOOK


In FY 1998/99, Government will remain committed to the consolidation of macro-economic stability and the implementation of growth oriented policies. This will create a more favourable environment for investment and business activity, and with increased support to industries through the development banks for restructuring and modernization, should facilitate sustained economic recovery.

Over the medium-term, Government will continue to maintain low inflation and preserve the relative stability of the exchange rate. Close coordination of monetary and fiscal policies remains critical to the success of the programme.

Government recognizes that a gradual improvement in the fiscal position is critical to building and maintaining confidence in the long-term viability of the macro-economic programme. As such, the FY 1998/99 Budget has been developed within a medium-term framework with the fiscal accounts projected to generate a surplus by FY 2000/01. Absorbing the debt servicing costs and moderating wage increases represent the greatest challenges for the budget.

The reduction in inflation and inflationary expectations should continue to lower wage demands in the economy. With Government's enhanced credibility from containing inflation and stabilising the exchange rate for the second consecutive year, the ongoing efforts to negotiate a social contract with management and labour should begin to pay off.

Government is confident that the foundation for moving the economy forward has been laid. The benefits of macro-economic stability - low inflation, exchange rate stability, reduction in real interest rates, reduced demand for wage and price increases - will provide the stimulus for private sector investment. As facilitator of the growth process, Government will continue to:

These measures should generate new investments in the productive sector, a revitalization of economic activities and sustained growth in income and employment.

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