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The Government’s economic strategy for FY 2001/02 was geared towards achieving economic growth of 3%, reducing interest rates, continuing to generate a high primary surplus on its fiscal operations, containing inflation to between 5% and 6%, and further strengthening the country’s external position through a build-up in official foreign reserves. The policy measures adopted in pursuit of these objectives were designed around the further restructuring of the financial sector in tandem with continued fiscal consolidation through a combination of strengthened tax administration, expenditure restraint and increased efficiency within the public sector. During the year, however, economic activities were disrupted and the programme placed in jeopardy by three discrete events: In July 2001 economic activity was disrupted by social unrest in pockets throughout the country; In September 2001 the terrorist attacks on the United States of America impacted the Jamaican economy primarily through its effects on tourism and exports; and in November 2001 flooding associated with Hurricane Michelle resulted in major infrastructure damage, agricultural damage and the dislocation of persons. Wide-scale coverage of the July disturbances by the international media negatively impacted the tourism industry, as did the terrorist attacks on the USA. The closure of airports in the USA immediately following the attacks, as well as the incorporation of new security measures and processes in most international airports worldwide also led to domestic export difficulties and losses of perishables stranded in warehouses. The November floods also had an adverse effect on tourism with major damage to resort areas on the North Coast and in Negril. The combined effects of these adverse events led to lower than programmed revenues and higher than Budgeted expenditure. In an effort to limit the adverse effects of the shocks on its economic programme, the Government requested assistance from the World Bank via the Bank’s Emergency Economic Rehabilitation Loan (ERL) facility. The loan represented budgetary support to maintain macroeconomic stability, ensure sustained support for key social expenditures thus averting a reversal of the recent gains in poverty reduction, rebuild damaged infrastructure and support strengthening of the framework and environment for private sector investment and development. Also consequent on the adverse shocks to the economy the International Monetary Fund (IMF), in December 2001 approved a revision to the Staff Monitored Programme (SMP) for fiscal year 2001/02. Despite the unprecedented level of shocks to the economy in 2001, the country recorded real economic growth of 1.7% for calendar year 2001, with preliminary estimates for the fiscal year also at 1.7%.
FY2001/02 represented a major challenge for the fiscal sector, which sought to accommodate and adjust for the three shocks that impacted the economy during the year, without endangering the medium term objective of achieving a sustainable fiscal balance. The direct impact of the shocks on the fiscal sector was reflected as an increase in expenditures and a shortfall on revenues. Consequently, the fiscal deficit target was adjusted and the Government and the IMF agreed to a revision to the SMP. Provisional data on the Central Government’s Operations during FY2001/02 indicates a fiscal deficit of 3.8% of GDP, 1 percentage point greater than the Budgeted 2.8%. Contributing significantly to this outturn was the divestment of assets valued at $7.1bn, which offset to some extent the tax revenue shortfall and additional expenditure. FINSAC bonds valued at $79.3bn were absorbed by the Central Government in FY2001/02 as planned and were converted to Local Registered Stock (LRS). The payment of interest on these securities has provided additional liquidity to the financial institutions holding them. In an effort to reduce the long-term impact of the assumption of FINSAC debt on the Central Government, $15.4bn of these bonds was amortized. Divestment receipts as well as a financial sector loan from the Inter-American Development Bank facilitated this amortization. The Government filed a Schedule B Registration Statement with the United States Securities Exchange Commission (US SEC) in December 2001 with the issue of a 20-year US$250mn Global Registered bond. In February 2002, a Shelf Registration Statement was also filed with the US SEC. The Shelf will give the Government greater flexibility and the ability to access the international capital markets at very short notice in order to take advantage of market opportunities.
Declining interest rates and the maintenance of single digit inflation characterised developments in the monetary sector during FY2001/02.
Interest Rates Interest rates on the Central Bank’s benchmark 30-day reverse repurchase instruments (repo) declined by 2.25 percentage points from 15.50% at end March 2001 to 13.25% at end March 2002. The Government’s 6-month weighted average Treasury Bill rate declined by 2.58 percentage points from 16.88% at the start of the fiscal year to 14.30% by end March 2002. This reduction in interest rates embodied the realization of one of the main objectives of the 2001/02 economic strategy. Attaining this objective, however, was not a smooth process, as Central Bank intervention in the foreign exchange market in October necessitated increases in reverse repurchase rates, which were transmitted to interest rates of other instruments although the rate on the benchmark 30-day repo was not adjusted. However, by January 2002 interest rates had resumed the downward trend that had characterized the first half of the fiscal year. A decline in interest rates was also observed in the commercial banking sector in FY 2001/02 as the average rates of interest offered on savings and loans moved from 9.86% and 31.67% in March 2001, to 9.08% and 26.63% respectively by January 2002. In an effort to release funds to the banking institutions, there were quarterly one-percentage point reductions in the cash reserve and liquid assets ratios, which moved from 12.0% and 30.0% at end March 2001 to 9.0% and 27.0% respectively by end March 2002.
Prices Prudently administered fiscal and monetary policies have contributed significantly to maintaining single-digit inflation in FY2001/02. The rate of inflation for FY2001/02, as measured by the Consumer Price Index (CPI), was 7.6%, compared with a 6.5% outturn for FY2000/01. The 12-month point-to-point inflation rates for CY2001 and CY2000 were 8.7% and 6.1%, respectively. The 1.1 percentage point upturn in inflation in FY2001/02 relative to FY2000/01 must, however, be assessed against the background of the economic shocks that occurred in July, September and November. During FY2001/02, the heavily weighted "Food and Drink" index increased by 4.8% and this compares with a 4.1% increase in FY2000/01. A 13.9% increase in the ‘Starchy Foods’ sub-index heavily influenced the general rise in prices in the food group. The "Housing and Other Housing Expenses" index increased by 10.5% largely due to a 28.1% increase in the "Rental" costs sub-index, which was fuelled by a vibrant demand for accommodations in the Kingston Metropolitan area. Island-wide bus fare increases, prompted a 22.6% increase in the "Transportation" index in June and provided the impetus for the fiscal year increase of 25.2%. The rates of inflation for FY2001/02 and FY2000/01 to June were 2.9% and 2.3% respectively. However, inflationary impulses in the six months to December 2001 pushed the inflation rate to 7% or 2.3 percentage points higher than the 4.7% recorded in the comparable period of FY 2000/01. Contributing to the rate of increase in prices during the July-December period were the combined effects of higher postal rates, increased tuition and other school-related fees, which led to upward adjustments in the "Miscellaneous Expenses" sub-index over the July-September period. An inflation rate of 2.7% was recorded for the July-September period. During the October-December quarter, improved supplies of agricultural produce served to depress "Food and Drink" prices and this, coupled with lower imported fuel prices induced a slowdown in the rate of change of the CPI, despite a nominal depreciation of the exchange rate. There was a significant deceleration in the rate of inflation to 1.2% during the fourth quarter of FY2001/02. A 0.6% increase in the index for January 2002 induced by increased minimum wages was offset by a 0.1% decrease in the index in February 2002, resulting from a 0.5% decline in the "Food and Drink" index and a zero rate of inflation in March 2002 due to a decline in petroleum prices which counterbalanced the increases in all the other groups during the month. Monthly inflation, on average, remained below 1% for FY 2001/02, despite the three shocks sustained by the economy during the year. An important factor contributing to the maintenance of single-digit inflation was lower imported inflation from the economies of Jamaica’s major international trading partners. Imported inflationary pressures were moderated by the US recession and weakened world demand, which served to depress world prices for most commodities.
Balance of Payments Provisional data on the balance of payments for the FY2001/02 to December indicates that the current account deficit widened by US$241.4mn to US$493.9mn relative to the corresponding period of FY 2000/01. The current account deficit position resulted from respective declines of US$126.5mn, US$93.7mn and US$62.3mn in the goods, income and services accounts, which outweighed the US$41.1mn improvement in current transfers. The widening merchandise trade account was reflective of a US$62.5mn increase in import payments and a US$64.0mn decline in export earnings. The deficit on the income account resulted from increased imputed profit remittances of foreign direct investment companies and higher interest payments on Government’s foreign debt, while lower net receipts associated with the fall-out in visitor arrivals following the terrorist attacks on the US in September was behind the decline in the services account. Increased remittance flows are a factor in the improved outturn on the current transfers account. During the nine-month FY period to December, the capital account recorded an US$8.0mn deficit, while the financial account registered a US$249.4mn surplus, mainly derived from a combination of net official inflows associated with Government borrowing and private investment inflows. Within the financial account, net official inflows and net private investment inflows of US$538.4mn and US$519.7mn respectively, were more than sufficient to finance the deficits on the current and capital accounts and facilitate a US$554.5mn build-up in the net international reserves.
Exports Exports totaled US$899.7mn for the April-December period of FY2001/02, and this represented a US$45.6mn or 4.8% decline relative to the export performance in the corresponding period of FY2000/01 as both traditional and non-traditional exports declined by US$11.3mn (1.7%) and US$26.9mn (10.6%) respectively. The declining fortunes of agriculture and mining were dominant factors behind the outturn for the traditional exports sector, while the manufactured goods sector improved. Despite improvements in the food and crude materials sub-categories, the combined influence of lower earnings from beverages, tobacco and the other sub-categories led to a decline in the non-traditional group. Export earnings for January-December 2001 declined by US$52.2mn (4%) to US$1,240.9mn relative to 2000.
Imports Imports were valued at US$2,398.5mn for the April-December period of FY 2001/02 reflecting a US$12.8mn (0.5%) increase over the levels of imports in FY 2000/01. This resulted mainly from increased spending on consumer and capital goods, as imports of raw materials declined by US$45.4mn. Higher importation of food, semi-durables and other consumer durables were behind the increase in consumer goods imports, while imports of other industrial transport equipment, construction materials and machinery and equipment fuelled the capital goods imports. Reduced spending on industrial supplies, crude oil and other fuels and lubricants fuelled the decline in the raw materials group. Total import costs amounted to US$3,365.0mn in CY2001 and this represented a US$164.9mn (5.2%) increase over the level of import spending in CY2000.
Foreign Exchange Market The nominal exchange rate of the Jamaica dollar for the US dollar depreciated by 4.1% from J$45.68 at end March 2001 to J$47.61 at end March 2002. In October 2001, strong demand for foreign currency triggered acceleration in the depreciation of the Jamaica dollar. The Central Bank as one of the participants in the foreign exchange market sold foreign currency to the market in an effort to satisfy the increased demand and also increased interest rates on reverse repurchase instruments to create an alternative avenue for the excess liquidity that was generating the depreciation. The increased demand in October resulted in a 3% depreciation of the currency during the third quarter FY2001/02. During FY2001/02, the net international reserves of the Central Bank increased from US$703.5mn at end March 2001 to US$1,941.7mn by end March 2002. This build-up occurred within the context of increased official and private capital inflows that emanated from Government’s borrowing programme and remittance flows, respectively.
Mining Bauxite production and export for the fiscal year to February 2002 experienced a modest recovery as a result of the reopening of the Gramercy plant during the third quarter of FY2000/01 and its return to full capacity in the first quarter of FY2001/02. Total bauxite production rose by 2.3% and total export of bauxite also increased by 3.4% when compared to the same period last year. This was achieved despite an isolated "wild cat" strike, which affected a major producer in the industry in the third quarter of FY 2001/02. Alumina production and exports, however, fell 6% and 3.3% respectively for the second consecutive fiscal year to February.
Manufacturing The manufacturing industry showed mixed results over the period April to December 2001. Growth in the Food Processing sub-sector was the most robust of all the sub-sectors. The products showing highest growth rates for the above-mentioned sub-sector was Molasses (99.8%) followed by sugar (42.4%). The Dairy Industry experienced heavy decline in production with Dairy products output falling 34.3%. The fortunes of the dairy industry, however, may change in the short to medium term with the planned introduction of a dairy plant, to be operated by a dairy farmers' cooperative. Financial benefits would thus accrue directly to the farmers. Beverages and Tobacco output continued to be buoyant, as beer and stout production rose 12.1% and 15.5% respectively for the period April to December 2001 when compared to the same period in 2000. It is expected that this sector will continue to experience strong growth with the planned modernization of the Red Stripe Jamaica plant and the entry of Real Rock into the domestic beer production market. Cigarette production also had moderate gains in the aforementioned period. The sub-sector Chemicals and Chemical Products experienced a steep decline in the FY2000/01. All areas, except the production of Sulphuric Acid, experienced significant declines. Petrochemicals also had declining results with production of Gasolene, L.P.G., Turbo Fuel and Automotive Diesel Oil all falling by over 10%. Cement production grew by 14% during the review period. This might be partly due to the settlement of the anti-dumping suit brought by Caribbean Cement Company against Mainland International, which resulted in tariffs being imposed on dumped cement.
Agriculture Domestic and export agricultural crops were destroyed by flood rains in the third quarter of FY2001/02 with significant damage to banana and coffee plantations. This is expected to reduce output and revenue from traditional export crops in the short term. Overall there was a 5.27% increase in agricultural output with export crops showing a 19.2% increase and domestic crops a 5.43% increase for the April to December period. It is expected that the industry will recover quickly with state assistance provided to affected farmers and through expeditious repairs to damaged infrastructure.
Visitor arrivals for the period April-February of FY2001/02 totaled 1,822,499 persons. This represented a decline of 9.2% on the number of visitors recorded for the corresponding period of FY 2000/01. The reduction in tourist arrivals during the review period is reflective of the decline in the world leisure travel industry following the September 11 terrorist attacks on the US. The attacks on the US have had a negative impact on the Jamaican tourism industry and despite a reasonable winter performance the industry is still recovering from the effects of the attacks. Stopover arrivals declined by 7.3% to 1,108,120 persons in the April-February period, as foreign national and non-resident Jamaican visitor sub-categories fell by 6.8% and 13.5% respectively, while cruise passenger arrivals declined by 11.9% to 714,379 persons. Total visitor arrivals for CY2001 was 2,116,853 persons and this represented a 5.1% decline on the level attained in CY 2000. Consequently, estimated tourism receipts for CY2001 of US$1,234.5mn was 7.4% lower than receipts for CY 2000. According to data from the Jamaica Tourist Board for the fiscal year to December, total tourist spending was US$880mn or 11.2% below the level spent in the corresponding period of FY 2000/01. Price discounting and the general decline in visitor arrivals to the island were the main reasons behind the reduced levels of expenditure in the tourism sector.
Following four years of economic decline, and against the background of two consecutive fiscal years of real economic growth, the Government intends in FY2002/03 to pursue more growth-oriented policies as it strives to place the country on a path of sustainable growth. An immediate concern for macroeconomic policy in FY2002/03 is the potential for the transmission effects of higher costs on imported fuel via the utilities and transportation sectors to the rest of the economy. International oil prices, which had stabilized within a range of US$20-US$25/barrel following a meeting of OPEC oil ministers in January 2002, have begun to increase as a result of the crisis in the Middle East. With no early resolution to the Middle East crisis envisaged, there could be negative implications for the gains made in containing inflationary impulses in Jamaica over the last six fiscal years. The Government will therefore continue to place emphasis on restraining inflation as a means of maintaining macroeconomic stability. The low interest rate environment in the US is a positive as it relates to our borrowing from the capital markets in the near term, but the emergence of the US economy is still fragile, global market demand is still weak and tentative in light of the instabilities in the oil markets. In the external sector, the tourism industry should rebound in time for the winter season, as the US economy slowly emerges from a recession and consumer confidence grows. With the economic rebound envisaged in the US, remittance flows should be boosted to the benefit of the Jamaican economy. It is also anticipated that the low inflation, growth-oriented policies would encourage foreign investment in the near-term. The domestic financial market has stabilized, and with the recent sale of NCB to a Jamaican-controlled Canadian funds-management group, it all augurs well for a more diverse and competitive sector in the long-term. Enhanced financial legislation will also provide the necessary protection and confidence for savers and investors. The productive sectors should be assisted by the declining trends evidenced in interest and inflation rates, as well as relative exchange rate stability. However, the negative impact of increased prices for imported oil is a major concern for the various productive sectors of the economy. Weather conditions permitting, the agricultural sector should continue to recover in FY2002/03, while the financial sector has been strengthened by the legislative enhancements and increased competition. Recent investment outlays in certain entities in the manufacturing sector have been successful in improving output and price competitiveness, while the construction sector should benefit from increased housing and infrastructure work in FY2002/03. The mining industry will continue to be affected as it operates against the background of work cessation at the JAMALCO plant and relatively weak global demand. A more positive outlook is expected for the telecommunications industry.
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