Editorial | Stable economic indicators, modest growth

Both the Planning Institute of Jamaica and the Bank of Jamaica (BOJ) have recently given broadly positive first-quarter 2019 reports on the economy. The Economic Programme Oversight Committee has also given a similarly favourable update on the implementation of the current programme with the International Monetary Fund (IMF).

The stable macroeconomic environment, with gross domestic product (GDP) growth estimated at 1.5 per cent during the quarter, is in line with most analysts’ expectation. The continued slow improvement in Jamaica’s economic fortunes, shown by the significant reduction in the public debt to below 100 per cent of GDP, has allowed an easing of constraints on private-sector investors. The minister of finance, Dr Nigel Clarke, having endorsed the BOJ’s easing of monetary policy, following his own easing of fiscal policy in his 2018-19 Budget, seems very satisfied with the current trends.

The only area of worry seems to be the fluctuation of the Jamaican dollar against the US greenback. The recent sharp depreciation of the Jamaican dollar, which caused an outcry from the Private Sector Organisation of Jamaica, and which forced the BOJ to intervene in the foreign-exchange market, is a reminder that economic management cannot be put on automatic control.

The depreciation of the Jamaican dollar must be seen in the context of the overall economic strategy of the Government of Jamaica (GOJ). The easing of both monetary and fiscal policies – reduction in BOJ policy rate, easing of reserve requirement, the tax giveback, and reduced borrowing by the GOJ – is aimed at stimulating the local economy. Jamaica, being an open economy operating in a globalised world, cannot increase growth on a sustained basis without increasing the demand for US dollars, at least in the short run. Further, the easing of monetary policy has made the returns on Jamaican saving instruments less attractive. Investors are, therefore, likely to shift portfolios into US equities and Eurobonds. Such a change will put increasing strain on the exchange rate. In a liberalised economy, easing monetary and fiscal policies simultaneously without enough domestic investment opportunities will likely put pressure on the exchange rate.

It could, therefore, be considered unreasonable for various sector leaders and individuals to praise the easing of fiscal and monetary policies and then criticise the effects of that easing on the exchange rate. Economics is largely about trade-offs.

The Government may be generally satisfied with current economic indicators; there is, however, a desire to move beyond the average 1.5 per cent GDP growth being recorded. While this is an improvement on the one per cent average annual rate for the last decade, it is nowhere near the heralded five per cent annual rate hoped for in the famous ‘five in four’ strategy of the Government. The expectation was that keeping the macroeconomy stable, reducing bureaucracy, controlling crime and violence, and speeding up the various infrastructural road projects would be enough to spur private-sector growth beyond the current rate. The time frame for this objective now looks ambitious.

ACCELERATE GDP GROWTH

The transformational investments needed in new industries geared to export, and using newer technologies and higher levels of human capital, have not been forthcoming on the scale needed for five per cent growth. Large infrastructure investments, while being necessary to raise efficiency and to boost short-term employment, are not by themselves sufficient to drive long-term growth without additional investment from the private sector in export-oriented industries. The development of the much-heralded agro-parks and the logistics hub were expected to be well advanced by now to take advantage of the infrastructure investments. The minister of investment, commerce, agriculture, and fisheries, in his recent sectoral speech, did not give much detail on developments in these critical areas of his portfolio. Now would be a good time to hear from Minister Shaw on these important areas of the government’s growth strategy.

As Minister Shaw would have known from his time as minister of finance, monetary and fiscal policies alone are not enough to drive growth, regardless of how benign. The current, favourable macroeconomic conditions will not last forever and so urgency is needed. Already, thoughts are being turned to the post-IMF period coming in November this year and which could lead to greater uncertainty about economic management; such uncertainty will not enhance growth and investment prospects.

It is very important that the current, favourable macroeconomic environment and high investor sentiments are used as launching pads for faster growth.