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International
Developments While today we are here to discuss the Budget for fiscal 99/2000 and hence to focus on the issues of particular relevance to Jamaica, increasingly the country must realize that what happens domestically is to a large degree influenced by external factors. What happens globally is of great significance to us in terms of trade, finance and geopolitics. I am making this presentation at a point in time when these theoretical utterances can be readily appreciated as there are specific practical instances to illustrate the point. Prices at gas stations are increasing because the OPEC countries have taken a conscious decision to reduce output. The WTO has made a ruling on bananas which will have a direct impact on farmers in Portland, St Thomas and Clarendon. In summary, developments in the world economy had an overall negative impact on Jamaica during 1998. I am not for one moment suggesting that there were no positives. The fall in oil prices and the continued strength of the US economy were beneficial to us. However, the negatives outweigh these positives. These included the deepening crisis in East Asia, Russia and Brazil. This contributed to a halving of the rate of growth in global economic output in 1998 compared to 1997. Secondly, the massive loss of confidence in emerging economies resulted in a flight of capital from several countries, with credit becoming scarce and when available overly expensive. Thirdly, there is a sharp downward trend in commodity prices with non-fuel primary goods and metals experiencing an average price drop of 14%. For us, the international prices for aluminium, banana and sugar declined during 1998. There was another interesting feature of the impact of the international situation on Jamaica, in that we have been lumped in the group called emerging markets. Hence some external analysts and institutions have simply extrapolated from the problems experienced by other countries and assumed that we would suffer a similar fate. For example, there are many who having seen the build up in our NIR assumed that this resulted from short-term capital seeking higher interest rates. Others who have no knowledge of the operations of our exchange rate system speak about us having a fixed and over-valued exchange rate, while others spoke about the imminent collapse of the financial sector. Many of these erroneous views were picked up by local "analysts" who echoed the predictions of currency collapse, devaluation, capital flight and the disintegration of the financial sector. One of the amazing characteristics of this society is that a commentator who has been proved wrong, loses no credibility but simply moves to another prediction of gloom. Not only did we not collapse, but the exchange rate system remains strong, our reserves have remained strong, the trade deficit narrowed and we met all our foreign obligations in full, and on time. Perhaps the major false view of Jamaica which has been highlighted abroad is that the country has a fixed exchange rate at an over-valued level and this would lead to an exploding current account deficit, followed by an attack on the currency, losses to reserves and a sharp devaluation as happened in Thailand. 1998 demonstrated the falseness of the premises on which all these assumptions were built. The exchange rate system demonstrated the extent to which it was market driven by some depreciation but the current account balance improved by US$70 million or 4% during 1998. Furthermore, there has been no capital flight resulting from the fall out in the financial sector. Despite the fact that we were unable to borrow the full US$400 million programmed for 1998, reserves grew by over US$40 million during calendar 1998 and remained level for FY 98/99 compared to 97/98. What are some of the lessons we have learnt from the international crisis?
MACRO ECONOMIC OUT-TURN (Report Card) Having discussed the international factors which have affected the domestic economy, it is now time to look at the out-turn for a variety of macro economic indicators. We have prepared and circulated a table indicating the results for 1997 and 1998 for several indicators, including inflation, GDP, unemployment, visible trade, balance of payments, NIR, the fiscal deficit and certain monetary indicators. Whilst it would be interesting to discuss several of these indicators, I will simply focus on two. One reflecting good news in terms of achievement of target and the other, bad news, in terms of failure to achieve an important target. I begin with a discussion of the failure and that relates to growth in the real economy. At a later stage in the presentation I will say something about the informal sector and the extent to which we do not have a complete grasp of the full nature of the Jamaican economy. Nonetheless, we have to proceed with the formal data which we have and this reflects that for 1998 the economy had negative growth of 0.7%. This follows two previous years of negative growth - minus 1.4% in 1996 and minus 2.1% in 1997. Even though there were signs of improvement in this, the first quarter of calendar 1999, the last quarter of fiscal year 98/99, it is not expected that this will result in economic growth for the fiscal year being anything but flat or weakly positive. In examining the detailed information, Agriculture had negative growth of minus 0.3% and although this compares with minus 14.6% in 97, this was still disappointing. Manufacturing had negative growth of minus 4.2%. Construction also declined by minus 5.7%. On the positive side Mining and Quarrying grew by 2.6%, Electricity and Water by 6.4%, Transport, Road and Communication by 5.6%. These results were disappointing and we need to discuss why the target was missed and what is the basis for the view that 1999 will be better. I frankly admit that we underestimated the full extent of the fall out in the financial sector and hence, its impact on the real economy. The transfer of real resources to deal with the financial problems, not only crowded out other sectors, but led the Government to borrow more than was programmed and led to a decrease in the Capital Budget. This simultaneously contributed to real interest rates being higher than we planned and needed investments being postponed. The bottom line was that the rate at which we planned for interest rates to be reduced and the corresponding expected up-turn in investment, did not occur. Are we disappointed at the results? Of course we are. Is there a basis for confidence that growth can be resumed? Yes there is. What are these factors which would lead to the confidence? There are several. The first is that specific gains on the macro economic front have been consolidated. Contrary to the predictions of many analysts, the economy did not unravel following the problems in the financial sector and the Government was able to deal with attacks on the foreign exchange system and the exchange rate. Despite the overall negative impact of the global economic crisis, there was no capital outflow and the external accounts improved. As I will discuss shortly, significant gains have been made in healing the financial sector and the next phase - that of divestment is now well underway. Furthermore, the regulatory and legislative framework has been strengthened. Significant assistance and incentives have been put in place to aid various sectors of the economy - the export sector, sugar, coffee, citrus, garment and Air Jamaica. While I freely admit that we underestimated the size and the impact of the financial fall out, we are confident that the worst is behind us. There are also positive signs on the labour front with the level of wage demands having dropped significantly. Furthermore, many private sector firms have responded by retooling and restructuring. Inflation Having discussed the major negatives, let me turn to the positive which is at the heart of the macro economic model which we are pursuing, that is, the control of inflation. Inflation for the calendar year 1998 was 7.9% down from 9.2% in 1997. However, more significant is that inflation for fiscal year 1998/99 will be in the region of 6% which is at the bottom of the 6-8% range which we projected a year ago. There are several important aspects of this low rate of inflation. To begin, Food and Drink which for years was the category which drove inflation is now increasing at rates equivalent to those which obtain in developed countries. Inflation in 98/99 was driven by transport costs and miscellaneous items. However, the most critical benefit from the reduced level of inflation is a return to sanity in macro economic decision making. Already the signs are there on the labour front, and it provides the basis for the sustained reduction in interest rates which we all agree is necessary to facilitate higher levels of investment. There is the additional social benefit in that persons with fixed income and pensioners can have greater confidence in the value of their hard earned savings for the future, thus restoring credibility to a sector such as the insurance industry which had stepped out of their natural areas of operation primarily because it had become virtually impossible to have anyone committing resources for the long term. The achievement of single digit inflation for 98/99 represents the first time in 30 years that there have been three consecutive fiscal years with single digit inflation. This is no mean achievement and as I have said before, it is at the heart of the macro economic programme which we are implementing. However, let me warn the country that this achievement must not be taken for granted. Maintenance of the low inflation model and attainment of even lower levels still requires tight fiscal policy and sanity on the labour front, as well as increased vigilance on the part of consumers to ensure that competition in the market place keeps prices as low as possible. Hence, unlike the opinion I have heard ventured on various occasions, we cannot simply proclaim that the inflation battle is over, so let us move on. It is a never ending struggle and vigilance must continue. || Previous | Table of Contents | Next ||
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