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The medium term macroeconomic programme articulated in FY 2003/04 outlined a path for achieving fiscal balance within a stable macroeconomic environment. The fiscal operations were forecast to improve gradually from the deficit of 7.3% of GDP recorded in FY 2002/03 to a deficit of 5.0% - 6.0% of GDP in 2003/04 and a balanced budget in 2005/06. The programmed improvement in the fiscal operations in 2003/04 was formulated around the achievement of economic growth of 2.7%, inflation of 7.0%, stability in the foreign exchange system and an average interest rate of 18.0%. In FY 2003/04 the Jamaican economy is estimated to have recorded real GDP growth of 2.2%. Inflation is estimated at 16.5%, the exchange rate depreciated by 8.5%, the average six-month Treasury Bill rate was 23.48%, net international reserves increased by US$229.0mn and Central Government generated a fiscal deficit of 5.8% of GDP.
The 2003/04 fiscal operations generated a fiscal deficit of 5.8% of GDP, in line with the targeted 5.0% - 6.0% of GDP and a significant reduction on the 7.3% of 2002/03. Among the factors contributing to attainment of the targeted deficit were containment of discretionary expenditure and robust revenue efforts. The contribution of the new revenue measures to the achievement of the targeted deficit was significant despite adjustments to the original proposals and these measures form a significant proportion of the 27.7% increase in revenues recorded over receipts for 2002/03. Central Government expenditure in 2003/04 was 4.8% ahead of budget as a result of higher than programmed spending on interest payments and wages and salaries. The additional interest payments reflect the higher than anticipated level of interest rates that prevailed throughout the year. The increased wage and salary payments are due to higher than anticipated new rates and retroactive payments. In recognition of the challenges facing the Government and the need to establish sustainability in the fiscal operations, the Government and the Jamaica Confederation of Trade Unions (JCTU), after three months of discussions, signed a Memorandum of Understanding (MOU) agreeing to a two-year policy of 'wage restraint'. The effective period of the wage restraint is April 1, 2004 to March 31, 2006. Attainment of the targeted deficit level alongside economic growth also facilitated a reduction in the debt/GDP ratio in line with the medium term objective of attaining a sustainable debt profile.
In early 2003, demand in the foreign exchange market intensified leading to depreciation of the Jamaica dollar by 19.5% between April 1, 2003 and May 16, 2003. Sustained intervention by the Central Bank had very limited effect and it took moral suasion exercised by the Most Honourable Prime Minister to restore order in the foreign exchange market. At end-March 2004 the Jamaica dollar exchange rate for the US dollar was J$61.01:US$1.00 reflecting a 9.2% appreciation over the value of J$67.22:US$1.00 at May 16, 2003 and a depreciation of 8.5% over the J$56.24:US$1.00 at end-March 2003. Central bank intervention in the foreign exchange market early in the fiscal year resulted in a decline in the NIR. The NIR declined from US$1,339.7mn at end March 2003 to a low of US$1,080.1mn by end-August 2003. At end-March 2004 the NIR had increased to US$1,568.7mn largely due to the raising of US$353.0mn in the international capital market by the fiscal authorities and buoyant earnings from tourism and mining activities. Central Bank efforts to restore order to the foreign exchange market also took the form of increased yields on reverse repurchase instruments. In late March 2003 the Central Bank adjusted interest rates on its reverse repurchase instruments as follows:
Inflation The inflation rate for FY 2003/04 is estimated at 16.5%. The increased inflation rate had its root in the rapid depreciation of the Jamaica dollar that characterized the first two months of the fiscal year, higher international market prices for oil and other commodities and the new tax measures announced in April 2003. The heavily weighted "Food and Drink" category recorded a 15.5% increase largely as a result of the adverse exchange rate movements. "Transportation" recorded a 26.2% increase initiated by an increase in bus and taxi fares. Also contributing to the higher transportation costs were significant increases in airline fares. "Fuels and Other Household Supplies" recorded a 20.4% increase primarily due to a 27.0% increase in the fuels sub-group.
Balance of Payments The current account of the balance of payments recorded a deficit of US$336.6mn for the period April-August 2003, a US$110.6mn improvement over the position for the corresponding period of FY 2002/03. Increased net earnings of US$83.5mn from services, and reductions of US$34.5mn on the merchandise trade account and US$20.1mn on the income account influenced this improvement. These were partially offset by a US$27.5mn decline in the surplus on the current transfers account. The performance on the merchandise account was indicative of the combined effects of a US$7.5mn improvement in export earnings and a US$27.0mn lowering in spending on imports. The expansion of the surplus on the services account reflected an increase in net travel receipts as visitor arrivals remained buoyant, while a US$40.8mn decline in outflows, related to activities of direct investment companies was behind the reduction in the deficit on the income account. Within the current transfers account there were US$13.9mn and US$13.6mn reductions in net official and private transfers respectively compared to significant growth in inflows in the corresponding period of FY 2002/03. Within the financial account, US$167.0mn in net private inflows was insufficient to finance the respective deficits of US$7.7mn and US$336.6mn in the capital and current accounts, as well as the net official outflows of US$82.3mn, thus necessitating a US$259.6mn draw down in the net international reserves.
Exports Total exports amounted to US$500.2mn for the April-August period of FY 2003/04, and this represented a US$35.6mn (7.7%) increase in the level of exports relative to the same period of FY 2002/03. With the exception of crude materials (such as limestone and cut flowers) and tobacco, all other export categories increased. Within the traditional exports category, while manufacturing output declined (5.4%), agriculture increased marginally (0.7%) and mining grew by 9.3% mainly due to increased alumina exports. In the area of non-traditional exports, all exports except papayas contributed to the 11.1% growth in the food sub-group. Beverages also expanded by 45.0%. Crude materials and tobacco export earnings declined by 25.9% and 39.0% respectively. Other exports and re-exports improved by 11.9% and 1.5% respectively.
Imports The value of total imports for the first five months of FY 2003/04 was US$1,435.6mn and this represented a US$45.8mn decline in imports relative to the corresponding period of FY 2002/03. The imports position reflects lower spending on consumer and capital goods that outweighed the increase in raw materials imported. Spending on consumer goods declined by 9.5% to US$414.6mn, while expenditure on capital goods imports declined by 16.8% to US$243.9mn. Increased import costs for food, other fuels and lubricants and industrial supplies contributed to the lower spending on imports in these groups. Imports of crude oil fell by 51.6% to US$47.3mn relative to the corresponding five-month period of FY 2002/03 as the Petrojam refinery was temporarily closed and the enterprise increased its importation of refined oil.
Mining During FY 2003/04 total bauxite production improved by 4.1% relative to FY 2002/03. However, there were mixed performances in alumina and crude bauxite output, with alumina increasing by 7.0% while crude bauxite output fell by 2.1%. Exports of total bauxite and crude bauxite declined by 5.0% and 10.7% respectively, while alumina export increased by 7.2%. The industry is expected to grow significantly over the medium term as Jamalco plans to double its production capacity with an investment of approximately US$700mn.
Manufacturing For the period April to December 2003, the manufacturing sector showed mixed results when compared to the corresponding period of the previous year. The food-processing sub group experienced good results in general, with the food groups poultry meat, edible oils and cornmeal recording increases of 13.8%, 12.4% and 15.6% respectively, while animal feeds, edible fats and flour all recorded marginal increases of less than 3.0%. Condensed milk, sugar, molasses and dairy products registered declines of 7.7%, 29.8%, 19.7% and 26.3% respectively. The manufacture of carbonated beverages continued to show strong growth with the sub sector growing by approximately 11.2%. Rum and alcohol output registered an increase of 3.9% for the period under review, while stout production grew by approximately 6.7%. Beer, cigarette and cigar output, however, recorded reductions of 5.6%, 14.7% and 100.0% respectively. Cement production was flat for the first three quarters of the financial year reflecting the strong competition from imported cement. The output of boots and other plastic products grew by 9.0% and 10.5% respectively. The petroleum sub group registered reduced output in all products for the period April to December 2003. This was influenced by the closure of the refinery during the first quarter of FY 2003/04. The sub groupings of gasolene (37.2%), L.P.G. (46.3%), fuel oil (24.8%), turbo oil (23.0%), automotive diesel oil (41.1%) and other petroleum products (68.3%) all recorded decreased levels of output relative to the corresponding period of FY 2002/03.
Agriculture The agricultural sector made a significant recovery in the fiscal year to December 2003, with domestic crop production rising by 17.9% and livestock output averaging growth of 8.2%. Overall the agricultural sector grew by 10.3% during the review period. The agricultural exports sector however, recorded an average decline of approximately 6.4%.
During the eleven-month period to February of FY 2003/04, tourist arrivals grew by 11.6% to 2,246,069 visitors, as both the stopover and cruise passenger categories increased by 6.8% and 18.2% respectively. The continued growth in visitor arrivals in FY 2003/04 to February is reflective of the enhanced investments and the offering of more diversified tourism products, coupled with increased visits by larger cruise passenger vessels at Jamaica's ports of call. The new investments to increase room capacity, alongside a renewed marketing thrust have enhanced the domestic tourism product. The increased interest in Jamaica as a tourist destination is associated with the current concerns about international travel security in addition to the renowned disposition of the Caribbean as a tranquil destination.
The annual average inflation rate among the economies of our main industrialized trading partners remained relatively low at 1.0% to January 2004 compared with a 1.9% rate for the corresponding period last year. Within the Euro area, the annual average inflation rate was 2.0% to January 2004, which is only marginally below the 2.1% recorded for the similar period last year. The major European and Asian currencies had strengthened against the US dollar at end-December 2003 versus their rates at end-December 2002. The Yen appreciated from ¥118.19 per US$1.00 to ¥107.22 per US$1.00 and the Euro appreciated from €0.96 per US$1.00 to €0.79 per US$1.00 while the British pound strengthened from £0.62 per US$1.00 to £0.56 per US$1.00. The US dollar depreciation occurred in the context of record US current account deficits. The rate of increase in the US consumer price index declined to 1.9%, down from 2.4% in the corresponding period of 2002. Deflation continued in Japan with a rate of -0.4% recorded for the review period. Inflation in the UK was 1.3%, a decrease on the 1.7% recorded for the corresponding period of 2002. The six-month London inter-bank offer rate (LIBOR) declined from 1.4% in December 2002 to 1.2% in December 2003. The prices of soybean meal and maize/corn are of critical importance to Jamaica as these are main inputs of animal feed, in particular poultry feed. Poultry (chicken meat) is heavily weighted in the basket of goods and services that determine the Consumer Price Index and movement in the prices of inputs for poultry feed therefore impact inflation in Jamaica. The price of crude oil is also critical as it affects every aspect of the production process in Jamaica, via electricity costs and gas at the pumps. Adding the dimension of foreign exchange rate movements to the changes in international commodity prices brings into sharp focus the need to sustain relative stability in the foreign exchange market.
Cocoa prices moved to US162.3cents/kg for the review period April-December 2003 from US187.4cents/kg for the similar period in 2002, representing a 13.4% decline. For the review period, coffee prices increased by 3.6% when compared to April-December 2002, moving from US136.3cents/kg to US141.3cents/kg. Although 85.0% of coffee grown in Jamaica is sold to Japan the remainder is sold on the world market. The price of bananas (EU) increased marginally from US$731.0/mt for the period April-December 2002 to US$732.8/mt for the corresponding period in 2003, representing an increase of 0.2%. Jamaica continues to benefit from a preferential trading arrangement for bananas with the European Union (EU). However, this arrangement will be replaced by a tariff only system in 2006. Under the preferential trading arrangement for sugar the price of Jamaican sugar exports to the EU increased by 7.7% over the review period while world sugar prices declined by 3.2%. Jamaica's preferential trading arrangement for sugar with the European Union is currently being challenged in the WTO. The price of aluminium increased from US$1,340.1/mt for the April-December 2002 period to US$1,445.2/mt for the similar period in 2003, representing an increase of 7.8%. Alumina exports for the review period were 6.6% higher than the level exported in the similar period of 2002.
The price of soybean meal increased from US$176.4/mt for the April-December 2002 period to US$218.4/mt for the similar period in 2003, representing an increase of 23.8%. Maize/corn prices also increased from US$102.1/mt for the review period in 2002 to US$105.2/mt for the similar period in 2003, representing an increase of 3.1%. However, wheat prices declined by 6.7% as this commodity saw prices moving from US$156.2/mt for the period April-December 2002 to US$145.7/mt for the similar period in 2003. Crude oil prices increased by 6.8% over the review period, moving from US$26.3/barrel to US$28.1/barrel. Main contributors to the rise in oil prices were the unexpectedly harsh winter conditions experienced in Europe and North America, and the Organization of Petroleum Exporting Countries' (OPEC) decision not to increase output.
The weighted average exchange rate of the Jamaica dollar for the period April-December 2003 (J$59.53:US$1.00) depreciated by 21.8% over the rate for the corresponding period of 2002 (J$48.87:US$1.00). In US dollars, crude oil prices recorded a 6.8% increase over the review period. However in Jamaica dollars crude oil prices increased by 30.1% indicating an exchange rate impact of 23.3 percentage points. There was a 25.6% increase in the Jamaica dollar price of maize/corn for the period under review as compared to a modest increase of 3.1% in the US dollar price for the commodity. While the US dollar price of wheat declined by 6.7%, the Jamaica dollar price increased by 13.7%. Oil prices have been rising since September 2003 and are currently at 13-year highs, trading at near US$40/barrel in March 2004. On March 31, 2004, OPEC opted to cut its production target by 4%, a move that industry analysts believe will drive crude oil prices higher.
With the positive developments of the buoyant hard currency flows especially from the mining and tourism sectors, and the recent raising of Euro200mn on the international capital market the country is on a path to intensify growth over the medium term. The strong inflows from the mining and tourism industries have served to consolidate stability in the foreign exchange market and facilitate a reduction in interest rates. This environment has set the base for the attainment of the 2004/05 fiscal targets. The Government intends to broaden the tax base and intensify revenue collection through strengthened legislation. The continued downward path of domestic interest rates, a more competitive exchange rate and the recent resurgence in domestic and export agriculture, tourism and mining augur well for a lowering of the balance of payments current account deficit and for economic growth prospects. Additionally, the existence of low interest and inflation rates within the economies of our main industrialized trading partners, together with the continued growth in the Euro zone and some Asian economies will serve to augment the positives occurring in the domestic financial, tourism and bauxite export sectors. International oil and commodities prices will, in the near term, continue to negatively impact the domestic economy given the current uncertainties in the Middle East and the recent harsh winter weather experienced in North America and Europe. International oil prices have been rising steadily since the Iraq war, general uncertainties in the Middle East and following the recent decision by OPEC members to cut back on output. These oil price pressures are expected to significantly impact the Jamaican economy in FY 2004/05 via the fiscal operations, balance of payments accounts and inflation. Higher costs of oil imports, which have been conservatively estimated by industry sources at US$1.0bn for the upcoming year, could prove burdensome and constrain our foreign exchange earnings from the tourism industry by lowering visitor arrivals and potential spending in the near term. Oil prices are expected to influence the balance of payments by increasing the import bill while lowering the earnings from the services account, thus producing a widening of the current account deficit. The increased demand for foreign exchange from Petrojam for fuel imports could also exert additional pressures on the market. Increased costs for food, transportation and utilities are vital areas within the CPI that will be instrumental in a higher inflation outturn in FY 2004/05 in the wake of oil price increases. There are negatives and positives to be gained from higher oil prices on fiscal operations. On the negative side, operational costs on transportation will be affected through increased fuel costs for Government vehicles, as well as higher utility costs, while a positive spin-off could be derived from improved revenues resulting from higher GCT returns that emanate from inflation and improved ad valorem taxes on the higher fuel prices. The tourism industry is poised for continued growth in 2004 with advertising campaigns geared toward broadening consumer perception of the destination. The leisure industry will also reap substantial additional room capacity benefits in the near term with the opening of Sandals Whitehouse in Westmoreland planned for December 2004 and with another Riu hotel being built on the north coast. Jamaica's growth prospects for FY 2004/05 are strengthened by the existence of vibrant growth displayed in the economies of our main industrialized trading partners, low interest and inflation rates within these countries, as well as the declining domestic interest rates and planned investments in the mining and tourism sectors.
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