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2005-06-02 14:58:00
Embassy Kingston
Cable title:  


Tags:   ECON  EFIN  JM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
						UNCLAS SECTION 01 OF 02 KINGSTON 001406 





E.O. 12958: NA

Ref: KINGSTON 1319

1. Summary: Data published by the Planning Institute of
Jamaica (PIOJ) in May 2005 showed that the economy
continued to suffer from the residual effects of Hurricane
Ivan as well as prolonged drought conditions. The
unfavorable weather conditions stymied agricultural
production, fueling an increase in prices. The GOJ's
fiscal balance, while positive, also fell below
expectations. However, the Bank of Jamaica continued to
maintain order in the foreign exchange market. Economic
performance is expected to recover during the second
quarter, with the PIOJ forecasting increased GDP growth on
the back of robust tourism, construction and electricity
production. Inflationary pressures are expected to
emanate from higher food prices and the new tax package,
but the increased taxes should help the GOJ to achieve its
fiscal target. The foreign exchange market should remain
stable given the recent jump in the stock of Net
International Reserves (NIR). End Summary.

2. Data published by the PIOJ in May showed that the
Jamaican economy has started to recover from the effects
of Hurricane Ivan, with real GDP growing by 0.6 percent
during the quarter ending March 2005. However, this was
lower than the one percent projected for the quarter,
reflecting the residual impacts of the hurricane and the
prolonged drought that led to an outbreak of bush fires
(reftel). These conditions combined to put a damper on
agriculture, resulting in a 23.8 percent drop in
production compared to the previous year. All other areas
of the economy registered growth during the period. In
the goods-producing sector, construction output jumped by
5.5 percent as the sector continued to benefit from post-
Ivan rehabilitation activities. Although the petroleum
refinery remained closed, GDP in manufacturing rose by 2.1
percent, reflecting buoyant cement production and higher
beverage output. Growth of two percent in the services
sector was primarily the result of a 2.9 percent rise in
transport and communications and a 6.5 percent jump in
miscellaneous services (including tourism).

3. GOJ operations generated a fiscal surplus of USD 43.3
million during the quarter. While this was the only
surplus recorded for the fiscal year, it was USD 75
million less than programmed. The lower surplus arose
from higher than budgeted expenditures of USD 70 million
and a USD 5 million revenue shortfall. Higher program and
wage costs, along with new capital projects, were the
major contributors to the spike in expenditures. The
surge in recurrent programs and capital projects was
offset by reduced interest payments, reflecting the
consistent decline in interest rates. Inflation also

deviated from expectations during the period. Prices
actually moderated during the first two months of the
quarter, but a one percent jump in March pushed prices for
the quarter up to 1.4 percent. Inflationary pressures
emanated from the drop in agricultural output, which
fueled an increase in domestic food, meat and poultry
prices. Increases in the cost of fuels and household
supplies also contributed to inflation.

4. While most areas of macroeconomic management were
challenging, the foreign exchange market remained stable
during the review quarter. The nominal exchange rate
depreciated by 0.3 percent, a one percent appreciation in
real terms. The favorable conditions were underpinned by
strong foreign exchange inflows from tourism, mining,
remittances and goods exports. The BOJ also reported that
growing investor confidence resulted in higher net capital
inflows, as demonstrated by the increased sale of foreign
exchange by commercial banks to the bank. The buoyant
flows led to a further build-up in the Net International
Reserves (NIR), which stood at USD 1.9 billion or 17.2
weeks of goods and services imports at the end of March

2005. This allowed the bank to reduce interest rates on
two occasions in the quarter, resulting in the lowest
rates since August 2002. The bank also reduced the
special deposit requirement for deposit taking
institutions from five to three percent.

5. Comment: The PIOJ is forecasting growth of 1.6 percent
during the June quarter of 2005. This growth forecast is
predicated on expanded output in construction, tourism,
transport and communications. The GOJ should also meet
its fiscal targets for the first quarter of 2005/06, now
that most reconstruction related expenses are out of the
way. Revenue collection has also returned to normal
levels. This, combined with increased tax collection,
should provide a boost to revenues. However, the new
revenue measures will provide some impetus for inflation
in upcoming months. With the onset of the rainy season,
drought conditions have given way to flooding and
landslides in agricultural areas, leading to further
increases in domestic food prices. Volatile oil prices
will also fuel further inflation and inflationary

6. Comment (cont'd): The BOJ expects foreign exchange
flows to remain buoyant for 2005. The bank has,
therefore, announced its intention to purchase excess
supplies in order to smooth conditions in the market;
ensure a stable and orderly system of payments in the
medium term; and protect the economy from shocks. This
policy is already being executed, and the stock of NIR has
increased by USD 108.8 million in April to reach USD two
billion, the highest amount in over a decade. If the
economic fundamentals and investor confidence continue to
improve, the bank could reduce interest rates even further
in upcoming months. This could start a virtuous cycle in
which declining interest costs will impact the fiscal
balance and eventually result in an improvement of the
country's credit ratings. End Comment.