Mr. Speaker,1. The intensification of the global financial crisis since September has underscored Jamaica’s vulnerability to changes in the external economic environment. The country faces an up-hill challenge if it is to maintain domestic stability in FY 2009/10 and restore the conditions that can support recovery and sustainable growth into the medium-term.
2. The recession in the global economy is expected to persist throughout this fiscal year. In particular, the US economy is projected to contract by 2.0 to 3.0 per cent in FY 2009/10, relative to growth of 1.1 per cent in FY2008/09. In the context of the continued weakness in the global economy, international commodity prices are expected to decline while the international capital markets are not expected to re-open to Jamaica until 2010. Against this background, the domestic economy will be adversely affected by a decline in exports, particularly bauxite/alumina, and a reduction in capital inflows.
3. The immediate challenges that we face are the financing gaps in the fiscal and external accounts. The revenue targets for FY2009/10 are going to be difficult to attain in the context of a shrinking economy while the achievement of the expenditure targets depends crucially on a reduction in debt service costs. Furthermore, any additional domestic borrowing arising from a slippage in either revenue or expenditure will place upward pressure on interest rates. The current situation points to the need for some alteration to the fiscal programme as well as an urgent infusion of foreign capital.
4. The technical analysis by GOJ officials (and supported by the IMF staff in their Article IV discussions with us) is that unless there is this influx of new capital, Jamaica’s ability to remain current on its international obligations will deteriorate sharply this year. Also, without the assurance that these resources offer, the improvement in investor confidence that is necessary to underpin a reduction in interest rates will not occur. Maintaining order in the foreign exchange market and reducing borrowing costs are both crucial elements in building a stable environment that is friendly to investment, job creation and growth.
5. In the external accounts, the main challenges for this year arise from the sharp fall in inflows of approximately US$1.0 billion related to bauxite/alumina exports, tourism and remittances. The impact of this fallout will be felt right across the economy. The reduction in mining activity will be especially hard on Government revenue. In the first quarter of this fiscal year, the contribution to Government revenue from mining activity was some 97% less than it was a year ago. Over the next few years, the reduction in export earnings will be compounded by proposed changes to the Petrocaribe agreement which are likely to result in reduced credit for fuel imports, more difficulty in funding development projects and could deprive Jamaica of US$100 m to US$150 m per annum in official credit.
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