November 18, 2021
In the decade preceding the pandemic, Jamaica, aided by the IMF financial support, made good progress in restoring macroeconomic and financial stability through hard-won fiscal discipline through a Fiscal Responsibility Law. Notably these reforms are continuous, and the improvements allowed Jamaica to implement a strong policy response when it was hit hard by the Covid-19 pandemic, which severely impacted the economy. To counter the effects of the pandemic, the government suspended the fiscal rule for one year and temporarily reduced the primary balance target from 6½ to 3½ percent of GDP, increased spending on health and social protection and reduced the GCT rate. Simultaneously, the central bank injected liquidity and encouraged banks to put in place loan moratoria to provide temporary support to the private sector.
Notwithstanding, the economy is now recovering, tourism has rebounded to near 70 percent of pre-crisis levels and other sectors have improved as well. Real GDP in 2021Q2 was 14.2 percent higher than the same quarter a year earlier. The IMF project growth of 8¼ percent in FY2021/22, moderating to 3½ percent in FY2022/23. However, risks to the outlook are significant. New Covid-19 waves in Jamaica or overseas could lead to a more prolonged disruption of tourism, trade, and capital flows. Another risk is posed by the uncertain duration of global inflationary pressures. The sharp rise in world food and energy prices has helped boost year-on-year inflation to 8.2 percent in September, well above the central bank’s target range of 4-6 percent. Natural disasters continue to be an ever-present risk. As the crisis recedes and the recovery advances Jamaica should restart debt reduction and rebuild buffers, given high susceptibility to external shocks and risks to debt sustainability.
According to the IMF, the government’s goal to reduce debt to 60 percent of GDP by 2027/28 is appropriate. Especially because public debt has increased to 109 percent of GDP as a result of the global pandemic. The IMF believes the publication of a fiscal framework for a longer-term period that shows how the debt reduction will be achieved would further increase the credibility of the government’s target.
The IMF fears that a rise in the wage bill will risk crowding out other expenditures. It will further add to the wage bill, which is already one of the highest in the region. At the same time, more resources are needed for infrastructure (disaster resilience, crime-fighting and health care) and other growth-enhancing expenditures that would help boost private sector growth. The IMF lamented that lowering the wage bill could free up scarce resources for spending in growth critical areas. Revenues could be raised by reducing exemptions, additionally, lower debt and interest payments would create significant scope to scale up social spending in health and education.
As it relates to monetary policies, the IMF expect inflation to increase to 8.8 percent at end-2021 and then recede to 6.7 percent at end-2022, but there are significant risks that inflation may be higher, Global inflationary pressures may last longer and be more intense than is currently expected. The IMF acknowledged that though The BOJ has raised policy rates by 100 bp to 150 bp effective October 1, depending on inflation developments, further tightening may be needed to firmly anchor inflation expectations, underline the central bank’s commitment to its inflation goal, and bring inflation to within the target range by end-2023.
The IMF acknowledged that the financial stability indicators reveal that the financial system is well-capitalized and liquid. Deposit taking institutions balance sheets have been helped by regulatory forbearance and liquidity support by the BOJ. However, it believes the supervision of financial conglomerates needs to be strengthened. Strong efforts are needed to finalize the adoption of a legislative framework for the special resolution regime for the orderly resolution of distressed financial institutions and group-wide supervision and continue advancement with data gathering and analytics particularly of inter-institution linkages and cross-border exposures.
The IMF suggests removing supply-side constraints to boost growth, as even before the pandemic growth in Jamaica has been anemic. Average growth in 2010-19 was only 0.6 percent, barely keeping pace with population growth. Real GDP per capita is at the same level as in 1970. Low growth was partly due to repeated crises, but growth has also been low during expansions, and in the last 25 years, growth has exceeded 2 percent only twice. From a growth-accounting perspective, low growth is not the result of low investment or low employment growth, but of declining productivity. It believes the low growth can partly be explained by the decline of Jamaica’s traditional export industries. But growth has also been held back by supply-side constraints hence removing supply side constraints to growth should be among the central policy priorities in the coming years.
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