Briefing | What to expect of Jamaica’s economy

The Jamaican dollar nominal exchange rate against the US dollar stood at approximately J$126 to US$1 as of Tuesday morning. Since mid-October 2017, this nominal appreciation, coming from approximately US$131 to J$1, shows signs that the currency might remain firm, displaying less depreciation towards the end of the year.

Inflation also appears to be fairly low, annual average inflation rate was estimated to be approximately 4.6 per cent as of September 2017, compared to 1.9 per cent as of September 2016 and 4.4 per cent in the June quarter of 2017. The relative increase from the previous quarter is due to many factors, including higher energy and transport prices, and as a result of increased oil prices, as well as increase in agricultural food products arising from the negative impact of flood rains in May.

What is the

inflation target?

The inflation rate is on track to meet the targeted four-six per cent for the year, according to the Bank of Jamaica's (BOJ) Quarterly Monetary Policy Report. The risks associated with achieving this inflation target are factors that may put upward pressure on prices, including worse-than-expected weather conditions, stronger-than-expected demand conditions and/or worse-than-expected increase in commodity prices, for example, oil.

Although not anticipated, if there should be a shock to oil prices, Jamaica will find itself in an adverse scenario, especially given that the country has not been employing fruitfully to a great extent the benefits that were to be derived from the low oil prices over the last couple of years.

What about

expected inflation?

The BOJ's Survey of Business Expectations of Inflation (IES) shows that inflation expectations for the next year have increased to 3.9 per cent in July, relative to 3.5 per cent in the June survey. According to the survey, respondents expect increases in the cost utilities (electricity, water and so on) as well as increase in the cost of stock replacement to contribute the most to increase in input prices over the next 12 months. Respondents' perception of current business conditions remained positive, showing signs of perceived improvements. However, there were signs that they were not so optimistic about future business conditions.

What initiatives has the bank implemented?

The Bank of Jamaica has implemented new initiatives to strengthen the monetary transmission mechanism from the policy rate to the retail lending and deposit rates. According to their quarterly monetary policy report, these initiatives include introducing an overnight rate as the signalling tool for monetary policy, instead of the usually employed 30-day rate.

In an effort to increase the availability of capital to the market, the bank has reduced the Treasury bill rate by approximately 25 basis points or 0.25 per cent, which they hope will transfer to the borrowing market in the form of cheaper loans to investors. The BOJ has also mathematically reduced the foreign currency surrender amount for institutions from 30 to 25 per cent, which has provided needed liquidity to the foreign exchange market, which might have also contributed to the appreciation of the nominal exchange rate.

What about the

terms of trade?

According to the BOJ's report, Jamaica Terms of trade decreased at a pace of 0.4 per cent for the September 2017. This reflects an increase in import prices by 4.3 per cent relative to an increase in export prices by 3.9 per cent. A country's Terms of Trade measures a country's export prices relative to its import prices. If the Terms of Trade is increasing, it means the country's exports can purchase more imports, and if the terms of trade is worsening, it means Jamaica exports can purchase less imports.

What about

economic growth?

According to the BOJ, Jamaica's economy expanded between 0.5 and 1.5 per cent for the September quarter 2017. Most industries experienced growth with the exception of agriculture, forestry and fisheries and producers of government services. Growth in the hotels and restaurants sectors has expanded beyond last year based on estimates while value added has also increased in transport, storage and communications sectors.

Fundamentally, if Jamaica wishes to grow beyond the regulated 1.5 to 2 per cent per annum it must begin to apply research and development to its infrastructure design as well as product development. Many Jamaicans continue to view buying and selling as the ultimate economic activity. The country must attempt to increase the value of its output in production processes to increase national earnings. Income distribution will play a crucial role if the country wishes to achieve economic growth inclusively.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com