Keith Duncan | Addressing challenges of Jamaican economy

Jamaica’s growth projections have been reduced from 1.8 per cent to a range of -1.0 per cent to 0.5 per cent for FY2024/25

The global economy, despite relatively high interest rates, remains resilient with growth holding steady and projected at 3.2 per cent for 2024 and 3.3 per cent for 2025.

Globally inflation is trending lower as central banks, including the Bank of Canada and the European Central Bank, have begun easing their policy rates. It is expected that central banks globally will continue to ease monetary policy in the short term, driven by incoming data.

The US Federal Reserve boldly reduced interest rates by 50 basis points while signalling further rate cuts before year end with more to come in 2025 subject to incoming data. This should reinforce the BOJ’s recent monetary policy direction and therefore, it is expected that the Bank of Jamaica (BOJ) will continue easing monetary policy including further reduction in interest rates.

BOJ’S MONETARY POLICY

Inflation, as expected driven primarily by increases in food and electricity rose to 6.5 per cent due to the impact of Hurricane Beryl in the month of August. The BOJ had already projected for inflation to move out of the target range of four to six per cent in August and to remain out of the target range up until December 2024. There has been a sustained downward trend in Jamaica’s inflation rate into the four to six per cent target range, demonstrating the effectiveness of the BOJ’s monetary policy actions in recent years.

This achievement, consistent with the BOJ’s inflation targeting mandate was to reduce domestic demand and economic activity, has led to lower growth in loans to businesses and reduced economic activity, as reflected in the Planning Institute of Jamaica Q1 GDP growth estimate of a flat 0.1 per cent.

BALANCING INFLATION AND GROWTH

The BOJ will have to now balance the transitionary inflation with the risk of Jamaica moving into negative growth and a possible recession as the economy recovers from Hurricane Beryl. Jamaica has very little margin for the erosion of growth, as the economy normalises in its long-term growth rate of one to two per cent.

RISKS TO GROWTH SIGNIFICANT

Consistent with PIOJ growth projection of 0.1 per cent for April to June 2024 the services sector is projected to grow 0.1 per cent. Tourism classified as hotels and restaurants has been the star performer in this sector and has been a primary driver of the recovery of the economy post the COVID-19 pandemic would have flattened out with growth levels of 0.1 per cent projected for April to June. This slowdown came on the back of the US travel advisory which is now compounded by the impact of Beryl with the impact of Beryl along with reduced airlift. Members of the sector are hopeful that airlift can be restored and forward bookings will improve.

In the goods-producing sector, mining and quarrying continues on a recovery path with 6.2 per cent projected while construction continues to underperform with negative growth of –2.4 per cent.

Agriculture was showing steady growth with a projection of 2.7 per cent but Beryl would have pushed this sector into negative territory. Manufacturing is projected by the PIOJ to be flat for April to June 2024.

In aggregate the goods producing industry is projected by the PIOJ to grow 0.7 per cent for the quarter one of the fiscal year.

The economy, therefore, as the PIOJ projects flattened out and showed weakness prior to the impact of Beryl in July and therefore looking ahead, the risks to the domestic GDP forecast are skewed to the downside over the short to medium term.

MONETARY POLICY RESPONSE

As the BOJ Monetary Policy Committee meets to make a decision on interest rates to be announced tomorrow (September 30) the downside risks to growth can be minimised through the continued easing of monetary policy but the pace and quantum of reduction of interest rates will be a critical factor in driving domestic demand along with lowering the cost of financing for businesses which have had margins and profits somewhat eroded and may have put investments on hold awaiting a more favourable environment.

It is widely expected the BOJ will move in line with the Fed with a 50 basis point reduction from 6.75 per cent to 6.25 per cent. However, the BOJ could as in the past get ahead of the Fed and move 75 basis points to 6 per cent!!

This move by the BOJ could send a powerful signal to the financial sector, the underperforming stock market, businesses and consumers that we may begin to turn the corner.

TAX REVENUES AT RISK

In the 2024/25 budget tabled by the minister of finance, the GDP growth target was 1.8 per cent. Considering the estimated slowing of the economy for the April to June 2024 quarter and the impact of Hurricane Beryl, the growth projections have been reduced to negative 1.0 per cent to 0.5 per cent for FY2024/25.

With the estimated reduction in economic activity, tax revenues are highly like to be negatively impacted and we are likely to see this reflected in the upcoming supplemental budget to be presented by Nigel Clarke which is likely to be his last.

WORRISOME GROWTH IN PUBLIC SECTOR WAGES

As GDP moderates and slows, wages and salaries, which were projected to be 12.6 per cent of GDP, could increase in relation to GDP. With wages and salaries being already high and consuming approximately 44 per cent of total tax revenues, Jamaica could continue to see this ratio moving higher, as economic activity slows along with growth in tax revenues.

These ratios are extremely worrisome as the wages and salaries reduces fiscal flexibility and, if not controlled, could crowd out other areas of expenditure including capital expenditure and services to the Jamaican public including the social safety net which support the vulnerable.

As the GOJ goes into a new round of wage negotiations in the upcoming 2025/26 fiscal year, it is important that the growth in wages and salaries be kept lower or in line with the nominal growth in GDP to ensure that productivity levels are increased or maintained.

The nine per cent wages to GDP fiscal rule was removed as the public sector compensation restructuring was introduced. This ratio is projected to be in the 12 per cent to 13 per cent range over the medium term, which brings consequential risks for Jamaica’s fiscal profile.

This slowdown in the economy brings along with it, the attendant risks of lower than budgeted growth in tax revenues along with increased expenditures in the Public Sector wages and salaries currently consuming an oversized share of GDP and tax revenues. The fiscal risks loom large.

Achieving the fiscal balance targets and the debt reduction strategies will become challenging and will require significant political will to maintain Jamaica’s impressive fiscal performance.

OPTIMISING MONETARY AND FISCAL POLICY

As we move into the second half of the 2024/25 fiscal year the GOJ and the BOJ will need to optimise the fiscal and monetary policy mix. These may require some fiscal adjustments accompanied by more aggressive easing of monetary policy and interest rate reductions in order to maintain macro fiscal stability and to proactively move Jamaica back into the medium-term growth range of one to two per cent at a minimum.

Keith Duncan is chairman of EPOC and CEO of JMMB Group. Send feedback to columns@gleanerjm.com