News Release
25 March 1999
Governor's Quarterly Press Briefing
Derick Latibeaudiere
Recent Developments and Perspectives on Growth
Macroeconomic Overview
Developments in the international market, as well as the uncertainty about the impact on the domestic market in 1998, made the year another challenging experience for monetary policy.
The international community has continued to grapple with the financial crisis that surfaced in the emerging economies and was further exacerbated by developments in Russia and Brazil. In the domestic market, sporadic expectations of a devaluation in the currency placed unwarranted pressure on the exchange rate. This was compounded by the public's perception of difficulties in the fiscal accounts with the consequent uncertainties. The Central Bank in response to these developments continued to pursue restrictive monetary policy in order to achieve low and stable prices and to maintain order in the money and foreign exchange markets.
Throughout the year the implementation of monetary policy was effected through the daily management of the Bank's monetary base. This action along with the ongoing restructuring in the financial sector, the containment of wage demands in the labour market and a gradual rebound in agricultural production had the effect of maintaining prices within the anticipated level. Unfortunately, while the Bank commenced the announced phased reduction of the cash reserves, the expected path for the lowering of interest rates was somewhat delayed.
The inflation rate as measured by the Consumer Price Index (CPI) increased by 0.8 percent for the quarter ended December 1998. This was the lowest quarterly result that we have obtained in ten years. Consequent on this favourable out-turn, the inflation rate for 1998 was 7.9 percent, while the fiscal year to end December was 6.2 percent. With January's rate of 0.4 percent, and no anticipation of shocks to the CPI, we are on track to be below the fiscal year ceiling of 8.0 percent. This is indeed encouraging, as it points to a lowering of inflationary expectations. The containment of wage demands in the labour market has also been instrumental in the lowering of inflationary trends.
Core inflation has been falling in line with policy objectives. For the December quarter core inflation was 0.6 percent resulting in a twelve months rate of 4.0 percent. The rate for the fiscal year to end December was 2.8 percent, in line with expectations given the continued tight monetary stance. January's core inflation was 0.3 percent, still within the anticipated level. The Bank was able to contain demand pressures by restricting growth in the monetary aggregates.
For the fiscal year to end December base money growth was contained to 3.6 percent. Private sector credit has continued to reflect sluggish growth associated with the ongoing restructuring in the financial system, as well as the slow recovery in the real sector.
Indeed, it was anticipated that there would have been a greater rebound in the real sector than is actually being indicated by the Bank's preliminary assessment. Unfortunately, flood conditions in certain agricultural belts adversely affected the production of some crops, while the sugar and banana industries are undergoing significant changes to meet the challenges of a more competitive international market. While production in our mining sector improved with stable labour conditions and increased capacity, the oversupply on the international commodities market has been adversely affecting our prices. The tourism sector while showing some growth continues to be hampered by social and infra-structural problems.
Turning to the external accounts, the current account recorded a deficit of US$288.8million for the fiscal period to end December 1998 relative to US$438.4million for the similar period of the previous fiscal year. Developments on the current accounts were mainly influenced by the performance of the trade and income accounts. The deficit on the trade account narrowed by US$62.8million dominated by a decline of US$153.9million in expenditure on imports, while a contraction of US$90.5 million in the deficit on the income account was largely reflected in lower investment income outflow.
Export earnings have been adversely affected by the fall-out in the Asian and Russian economies contributing to depressed prices in the world aluminium market. Consequently there was a significant decline of US$60.7million in earnings from alumina in spite of the increase in the volume that was exported. Income from banana and coffee was also down, associated with industry restructuring, poor weather conditions and lower international prices.
Expenditure on imports was lower largely because of the non-repetition of importation of aeroplanes as had occurred in the corresponding period of the previous year. Savings were also realized on our fuel bill in the review period, caused by depressed prices resulting from an over-supply of this commodity on the world market. In addition, the change in policy regarding used car imports contributed to a marked reduction in the importation of motor vehicles.
The services account was less buoyant in April to December 1998 than the previous year due mainly to a decline of US$25.0million on the travel account. This decline stemmed from an increase in expenditure of Jamaicans travelling abroad.
At the end of December 1998 the net international reserves was US$582.0 million. Gross reserves of US$706.5million represented approximately twelve (12) weeks of imports. At 19 March the net international reserves was at the end December's stock in spite of the Bank's intervention in the market.
At the end of December the exchange rate was US$1.00 = J$37.29 a marginal depreciation of 1.7 per cent from the US$1.00 = J$36.67 at the end of September. For the fiscal year to December 1998, the exchange rate depreciated by 1.2 per cent. Between end December and 19 March, the exchange rate has depreciated by 2.7 per cent to US$1.00 = J$38.30. Notably, most of this sharp movement has been occurring since late February 1999. In properly functioning markets where all participants are privy to adequate information and the economic fundamentals are in place, it is expected that moderate fluctuations will occur within a particular band.
Continued pressure on the foreign exchange market which from all indications does not stem from a shortage of supply, but rather from speculative interests, is of concern to the Central Bank.
This demand pressure contradicts the stability that has been exhibited on the domestic money market where rates have been falling. There has also been abatement in inflationary expectations as reflecting the monthly inflation rates, which have contributed to the continued existence of relatively high real rates
What then is the basis for the pressure?. Restructuring in the financial sector is continuing, and from comparisons with developments in other parts of the world, Jamaica has done well in averting a systemic crisis. Therefore, any concerns about the security of domestic savings can be dismissed. Market intelligence suggests that there are concerns regarding the government's debt raising strategy as well as the fiscal deficit. While the government has incurred significant expenditure in rehabilitating the financial system there has never been any default on its debt. It has also been suggested that institutions are reacting to the government's intention to collect withholding tax on securities, and hence the conversion to foreign currency.
This is indeed ironic, since one would assume that responsible investors having due regard for law were in fact making timely tax returns. The collection at source should therefore merely shift the responsibility of who makes the return.
In analysing the source of this pressure, the Bank has observed consistent aggressive behaviour from a few specific financial institutions. This behaviour is disconcerting, especially where there are breaches in relationship to established market protocols, and the ground hysteria that it creates. In view of recent experiences in the financial system the Central Bank is using this opportunity to remind shareholders, directors and managers of financial institutions of their responsibility to maintain standards of good practice.
The Bank has always asserted that while we have a flexible exchange rate regime there will not be any precipitous movement in the exchange rate. The Central Bank maintains the right to intervene in the market to ensure the orderly adjustment in the exchange rate. This intervention may take the form of purchasing foreign exchange from the market to avoid a sharp appreciation in the currency as we have done in the past. The Bank also sells to the market to ease supply conditions, contrived or genuine to avert any free fall in the value of the currency. Consequently, the Bank has been selling foreign exchange in the market and will continue to do so until order is returned.
Our commitment to low and stable inflation, which is conditional on order in the foreign exchange
and money markets, is unchanged. Until market participants recognize and accept that this is an
uncompromising position we are prepared to take whatever actions are deemed to be necessary.
In fulfilling our mandate to maintain orderly conditions in the market, it is only fair that we share with you that we are not tightly constrained in our access to the required foreign exchange resources. So far we have, in the main sold from funds purchased from usual and extraordinary sources. In this context, we have kept our reserves at the approximate equivalent of twelve weeks of imports. For the foreseeable future, our position relative to the market will only gain strength as a substantial acceleration of resource availability from the Government's divestment programme is imminent. Accordingly, we ask financial intermediaries and investors to weigh again the relative returns from Jamaican dollar instruments against US$ instruments at much lower interest rates, in an environment of relative exchange rate stability.
Macroeconomic Policy and Growth
The Jamaican economy has grown at an average rate of about 2% per year over the last 30 years.
Raising that growth performance in a more competitive world will require macroeconomic policies
that support that objective. Equally required, in our view, is a change in people's approach to planning their own future, both at the corporate and personal levels.
Macroeconomic policies and the environment in which they are applied explain most of the differences in economic performance across a wide range of countries. Different approaches to fiscal policy, trade policy, financial sector policies, institutional and administrative arrangements and how human capital is developed and organised all affect decisions about savings and investment. Those decisions, in turn, determine the rate of growth of productivity, the capital intensity of production, the quality of output and labour market participation.
Jamaica has come a long way in reforming economic policy and has brought its approach to economic management broadly in line with best practices worldwide. We rely on market-determined prices in both goods and financial markets to guide resource allocation. There is free and open trade, unrestricted capital flows and a market determined exchange rate. It is clear, however, that the process is not complete. Further adjustments are needed in fiscal and institutional arrangements and in the approach by the private sector towards saving and investment.
Macroeconomic policy adjustments
Restarting and sustaining the growth process will require a shift in the fiscal stance. The adoption of responsibility for preserving the integrity of the financial system has added significantly to the debt and debt service burden in the public sector over the past two years.
These obligations will remain for some time and will tend to lead to increasing deficits unless offsetting adjustments are made elsewhere. Resources available to Government are finite and large deficits are inimical to macroeconomic stability and burdensome to future generations. We need as a country to understand the need for adjustment and prepare ourselves for the change that it will mean in the composition and delivery of Government services.
Citizens also need to reflect on the collective nature of the role of government and their own obligation to contribute their fair share. The quality of life in "advanced" countries relative to "developing" ones is clearly reflected in the level of public amenities such as roads, schools, public transportation, health services, and so on. The ability of the state to provide these services is a function of the income generated in these economies and the contribution of citizens to the public purse through taxation. It is virtually impossible for the society to move forward if those who are most able to pay contrive to escape their civic responsibility to pay taxes.
So far, the government's increased financing requirements have been met mostly from additional
domestic borrowing. Slowing down the rate of growth of domestic debt will unquestionably allow
for an easing of nominal interest rates. However, for this to happen there has to be another source of financing. Ideally, the collection of budgeted revenue will moderate the extent of demand on the domestic market.
It is agreed that positive but internationally competitive real interest rates will generate more (and usually more efficient) private investment. The prospect for higher long-term growth thus hinges on a reallocation of resources between the public and private sectors, a realignment of priorities within the government's expenditure policy and integrity and commitment of the private agents to the payment of taxes.
There are also other issues of governance to be tackled, both in the public and private sectors. Glaring examples of poor institutional and corporate management abound and appear against a background of a wider breakdown in the social order. More uncertainty is generated by a sense of randomness and unaccountability than that related to prices, interest rates and exchange rates.
One has to look no further than the collapse of ethical standards in the traditional professions. This need for order has to be tackled in a constitutional framework which enforces greater accountability at every level and which matches incentives and sanctions with desired outcomes.
This applies as much in government as it does to corporate boards, professionals, managers and
workers.
Private Initiative
However supportive macroeconomic policies may be, they are not sufficient to energise and transform our prospects. If individually and collectively we do not come to grips with the fact that success means performing better than our competitors in whatever field, then the very openness that creates opportunities for us will also act as a magnet for others to exploit.
Companies need to recognise that competitiveness is not only about the exchange rate but is more fundamentally about relative efficiency in producing similar goods and services. There are examples of firms that have come to grips with this reality - in distribution, poultry farming and light manufacturing - but these are too few. Organising for profitable growth requires investment in staff development through training and exposure to the standards of performance of our competitors.
One often hears the complaint that resources are not available for investment or that the cost is much too high. But is that really true? Funds available through development banks remain underused. Commercial funding at highly concessional rates have remained virtually untapped since August primarily because eligibility for loans requires that firms put their house in order and present transparent and verifiable accounts. Meanwhile, some $38 billion as of today are invested in short-term BOJ instruments and a similar amount is held in foreign exchange accounts.
Surely, this not a problem of the availability of resources. It is an issue of outlook. While wealth holders in the private sector engage in hedging and dodging, foreign investors are steadily buying assets with a view to implementing the kinds of changes that make businesses competitive in today's marketplace. There is nothing inherently uncompetitive about manufacturing in Jamaica - neither from a macroeconomic policy standpoint nor from the ability of the workforce. We need to come to grips with the management of our resources, our firms and our environment.
Tourism is another area where potential far exceeds performance. This can hardly be blamed on
macro-economic policy. The principal retardant to the growth of tourism is the state of the product and the way it is managed. At the micro level, attractions are allowed to deteriorate; taxi drivers squabble openly over passengers while there is a widespread culture of non-performance for money. These are not problems of interest rates and funding but of personal integrity, community pride and business organization. One does not need to go too far from here to see how the competition is shaping up to capture our markets. If service is the way to go, a little politeness is a small investment for the opportunities it opens.
Mining remains a bright spot on the horizon. In the mainstream areas of bauxite and alumina, there is a strong commitment by the existing companies to expand and modernise the mining, processing and shipping processes. Connected to this is the expansion of opportunities to establish linkages as in the case of limestone products and power generation. The labour-management agreement currently in place should foster a stable industrial relations climate and act as an example for enlightened management relations in other areas.