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Despite weak demand in the global and domestic economies and uncertainty in the financial markets about a loan from the International Monetary Fund (IMF), the Jamaican economy remained relatively stable during October-December, 2009.
However contraction in the domestic economy was estimated at between two and three per cent, during the review quarter, and is projected to decline in the range of 1.0 to 2.0 per cent during the March, 2010 quarter.
This was revealed at Wednesday’s (February 10) press briefing by the Governor of the Bank of Jamaica, Bryan Wynter, to review the performance of the economy during the period, and to outline the Bank’s outlook for the current quarter. The briefing took place at the Bank’s Auditorium.
Industries which recorded declines in the last quarter included mining and quarrying, transport, storage and communications and manufacturing. However, it is estimated that there was strong growth in Agriculture, Forestry and Fishing.
According to Mr. Wynter, the report coincides with the commencement of the Government’s economic programme, which was built on a series of far-reaching policy initiatives aimed at refocusing the economy towards growth and development.
Mr. Wynter highlighted two recent developments, which he described as “highly challenging elements” of the programme – the Jamaica Debt Exchange programme (JDX) and approval by the Board of the International Monetary Fund (IMF) of Jamaica’s application for a loan of US$1.27 billion.
The JDX, with acceptance now at 97% of the bonds eligible for exchange, is expected to yield interest savings of as much as $40 billion, while the first tranche of the IMF loan, a sum of US$640 million, has already been disbursed and is now in the Bank of Jamaica’s accounts, Mr. Wynter informed .
In this regard, the Net International Reserves (NIR), which declined during the last quarter by about US$204 million to US$1,729.3 million, has now increased to US$2.2 billion.
With respect to inflation, one of the critical targets going forward and the prime focus of monetary policy, the central bank governor reported that headline inflation was 2.8 per cent for the quarter, a decline relative to the 3.1 per cent recorded in the September 2009 quarter.
This out-turn, he observed, was within the range forecasted by the Bank of Jamaica and was below the five-year average of 3.1 per cent for a December quarter.
He pointed out that the annual point-to-point inflation at December 2009 was 10.2 per cent, a marked reduction from the 16.8 per cent recorded at December 2008. Similarly, for the fiscal-year-to-December, inflation fell to 8.8 per cent from approximately 11.0 per cent for the corresponding period of fiscal year 2008/09.
Mr. Wynter attributed the decline in inflation for the quarter mainly to increased supplies of some domestic agricultural items, weak domestic demand and a stable foreign exchange rate. He noted that these factors partly negated the impact on the general price level of higher energy related costs, and increased costs of some short-term agriculture products and some household services.
The BOJ Governor was less optimistic about the inflation turn-out for the March 2010 quarter, with the Bank forecasting an increase in headline inflation. However, he expects this spike to be temporary.
“Inflation is expected to be in the range of 3.5 to 4.5 per cent for the quarter. The forecast for a higher level of inflation, relative to the December quarter, is based on the expected impact of Government’s revenue measures and the pass-through of higher imported prices, mainly oil related,” he said.
“At the same time, weak domestic demand, continued stability in the exchange rate and lower prices for domestic agricultural commodities are expected to moderate the general rate of consumer price inflation,” he emphasized.
For the fiscal year, the BOJ expects inflation to be in the range of 11.5 to 13.5 per cent, with risks to the inflation target resulting from the second-round effects of the Government’s recent tax measures, stronger than expected increases in international oil prices and adverse weather conditions. This, the Bank admits could be balanced by a greater than anticipated contraction in demand, due to the reduction in real incomes.
The Monetary Policy Report indicated that during the review quarter, the foreign exchange market was relatively stable. The BOJ Governor explained that this was reflected in the marginal depreciation of 0.58 per cent in the weighted average selling rate of the US dollar.
He attributed most of the depreciation which occurred in November (0.39 per cent) to increased demand to meet current account transactions, an increase in margin calls on certain financial institutions and net private capital outflows.
However, direct sales of US$115 million (net) by the Bank, restrained trading activity by financial institutions, and the retention of the foreign exchange facility for public entities helped to maintain stability in the market.
“In the context of these developments, the level of the Net International Reserves (NIR) was US$1,729 million at the end of December, 2009, a decline of approximately US$204 million relative to the end of September, 2009,” the BOJ Governor said.
He explained, however, that notwithstanding the decline in the NIR, gross reserves represented 13.4 weeks of projected goods and service imports, which was still above the international benchmark of 12 weeks. With the receipt of US$640 million from the IMF, gross reserves at the close of business on February 8, were US$2,390 million, or 16.9 weeks of imports.
With respect to monetary policy, the report reflected the reduction of interest rates payable across the spectrum of the Bank’s open market instruments by 200 basis points on December 18, 2009.
Governor Wynter explained that the decision to reduce interest rates was taken in the context of favourable trends in some macroeconomic indicators, such as inflation, the exchange rate and the current account of the balance of payments. It was also supported by the prospects of an early conclusion to the IMF loan negotiations.
On January 12, the BOJ removed all tenors over 30 days from its open market operations, a move related to the outcome of the Jamaica Debt Exchange.
“This is a temporary action which should allow the market to establish a new yield curve in the post-JDX environment that is consistent with the expected improvement in the Government’s fiscal and debt profiles,” he explained.
The Governor noted that the recently adjusted 30-day rate of 10 per cent was consistent with the rates offered on the JDX bonds. Further adjustments are contingent on continued improvements in macroeconomic fundamentals and investor confidence.