While both the IMF and the Planning Institute of Jamaica (PIOJ) estimate that Jamaica’s economy will grow by two-four per cent next year, both a rapid surge in the Omicron variant and galloping local and global inflation threatens to undermine progress.

Speaking at an Economic Programme Oversight Committee (EPOC) press briefing at the Private Sector Organisation of Jamaica’s (PSOJ) Kingston headquarters yesterday (December 14), Chairman Keith Duncan cautioned on what could lie ahead.

“What are the threats that we see I this point in time? It would be inflation and the COVID-19 risks which remain significant and high. We met on December 3rd, and, in reviewing the macro and fiscal performance, we see where inflationary expectations continue to increase as inflation continues to breach the target of 4 to 6 per cent range, coming in at over eight per cent at the end of October.

“The BOJ projects inflation to peak at eight to nine per cent over the next ten months before settling back into the target range. It is signalling the strong possibility of further policy rate increases going forward and that looms very large for us,” said Duncan.

Adding to this grim outlook, revenues and grants for April to October 2021 performed lower than the First Supplementary target, with total receipts of J$375 billion, falling short of budget by $2.8 billion. Tax revenue was the main contributor to the underperformance. Non-tax revenue and grants also under-performed.

As of October 2021, the Government’s fiscal targets are marginally behind due to missed revenue targets primarily due to COVID containment measures.

A threat to economic growth in Jamaica’s low vaccination rate and with the current sluggish uptake, it seems unlikely that the country will get to 70 per cent of the population inoculated by the end of March.

This was not lost on Duncan who commented, “Jamaica’s vaccination levels continue to be under 20 per cent and are low as Jamaica prepares for the fourth wave of COVID-19 infections.”

Total expenditure was slightly above budget coming in at $393.9 billion, $929.1 million more than budgeted for. The April to October 2021 period saw total expenditure $23.1 billion (6.2 per cent) higher than the same period for 2020/21 and $43.2 billion (12.3 per cent) higher than the same period for 2019/20 due mainly to higher recurrent spending which was significantly driven by the Government’s response to the COVID pandemic.

There was a fiscal deficit of $18.9 billion which is higher than the programmed $15.2 billion. The primary balance was at $59.2 billion, approximately $3 billion behind budget. What must be borne in mind here is the surplus which takes down the debt to GDP numbers.

Tax revenues have not recovered to the pre-COVID levels of 2019. At the same time expenditure was $43 billion more than the $350 billion spent in 2019 which means that this year the government is expending more money-driven by the COVID response, inflation, recurrent expenditure and increases in the public sector. Capital expenditure was marginally lower than 2019/2020.

What has to be noted here is the fiscal deficit of $18.9 billion as against the fiscal surplus of 2019/2020 of $8 billion which means Jamaica is $26 billion worse off in this period.

A supplementary budget is expected very soon.

“Interest costs were also above budget and are set to increase in a rising interest rate environment. Interest payments amounted to $78.4 billion for the period, above budget by $802 million and higher than last year’s payments by $2.7 billion,” said Duncan.

“As the BOJ seeks to tighten monetary policy and with it increasing its policy interest rates, we see the rates on GOJ Treasury Bills steadily increasing with the benchmark 180-day Treasury Bill increasing from 1.66 per cent at the end of September 2021 to 3.92 per cent in November 2021. This has significant implications for the carrying cost of the Government’s debt and will have to be programmed for in the future as interest rates continue to increase,” he added.

The EPOC boss believes it is on the monetary side, that attention must be paid to as rising inflation impacts businesses in addition to movements in the exchange rate.

Addressing the menacing ogre that is inflation, the EPOC chair honed in on point-to-point 12-month inflation which has accelerated to 8.5 per cent in October 2021, moving up from 8.2 per cent in September and 5 per cent in October 2020.

Core inflation measured as the change in price excluding agricultural commodities and fuels stood at 7.7 per cent as at October 2021, compared to 3.6 per cent in October 2020.

“So, therefore, inflation really is a factor as we go forward. The BOJ has indicated that these elevated inflation rates are influenced by international commodity and shipping prices which continue to impact domestic transport-related costs and processed food prices and utility costs. The Central Bank further noted that, while it has no control over these external prices, it has some control over the second-round effects of these increases and has taken strong monetary actions,” Duncan remarked.

“Our independent Central Bank is working hard. The BOJ has increased its policy interest rate in an effort to steer inflation back to the target range by the second half of 2022. The BOJ continues to tighten monetary policy. While not targeting any specific level of the exchange rate, the BOJ indicated that it will continue to ensure that movements in the exchange rate do not threaten the inflation target,” he said.

“The BOJ has indicated that it is considering further increases in the policy rate, noting the decision to tighten monetary accommodation is to raise market-based interest rates that will make the returns on Jamaican dollar assets more attractive relative to foreign currency assets so people are more incentivised to put their money in Jamaican dollars. It will make savings in Jamaican dollars more attractive and borrowing in Jamaican dollars more expensive, so the borrowing costs will go up. This will temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate. It will also reduce demand in the economy. The thinking here is reducing demand in the economy will reduce economic activities and reduce growth levels,” Duncan asserted.

The economy is expected to return to pre-COVID levels by the end of financial year 2022/23.

The IMF has validated that it expects growth in Jamaica of 8.2 per cent in 2021/22 and 3.5 per cent in 2022/23. Mind you, this is just a projection.

The way EPOC sees it, Jamaica has done more than a credible job in managing macro-fiscal and balancing the opening of the economy with the risks of the COVID virus.

Duncan added,  “This effective management has seen Jamaica experiencing fairly robust recovery in growth levels year-over-year, quarter-over-quarter. However, the COVID-19 and the rising inflation and inflationary expectations globally and locally create uncertainty and risks to the continued pace of recovery into the medium term.”

“While Jamaica is experiencing relatively low new cases of the COVID-19 virus and positivity rates are in the single digits, Jamaica has low vaccination rates. With the inevitable arrival of the Omicron variant of the virus, along with increased travel by Jamaicans and tourists, and increased movement with the Christmas festivities, we could see the anticipated fourth wave of COVID-19 impact,” the EPOC chair contended.

“Efforts to contain the spread locally and internationally could see restrictions on economic activities in the domestic and international markets, which could lead to a slowdown in travel and disruptions in production and distribution. Jamaica now faces a complex set of macro-fiscal scenarios in the delicate balancing of living with COVID-19 along with the knock-on effects of inflation over the next year,” Duncan argued further.