JAMAICAN ECONOMIC PERFORMANCE IN 2005: A YEAR OF

UNCLAS SECTION 01 OF 02 KINGSTON 001122

SIPDIS

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICAN ECONOMIC PERFORMANCE IN 2005: A YEAR OF
MISSED TARGETS

Ref: A.) Kingston 555

B.) Kingston 748

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SUMMARY
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1. Data published by the Planning Institute of Jamaica at
the end of April shows that the country missed its main
economic targets during 2005. Real GDP growth of 1.4
percent was below the original target of 3.6 percent, due
to weather-related and oil price shocks. These
contributed to rising prices, leading to inflation of 12.9
percent, above the GOJ target of 9.0 percent. The ensuing
economic fallout impacted central government's operations,
which generated a fiscal deficit of USD 444 million.
However, the foreign exchange market remained relatively
stable, underpinned by robust international reserves.
Economic performance improved during the first calendar
quarter of 2006, with output expanding by 1.4 percent,
despite a cement crisis (ref. A). Inflation slowed to 0.1
percent and the foreign exchange market maintained
stability, setting the stage for a reduction in interest
rates. Nevertheless, the country will have a difficult
time achieving its economic targets during 2006 due to the
cement fiasco, high oil prices, and a hurricane season
that is forecast to be damaging. End summary.

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Output Stagnates Amidst High Inflation
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2. Data published by the Planning Institute of Jamaica on
April 27 shows that the Jamaican economy recorded marginal
growth of 1.4 percent during 2005. Construction, tourism
and mining provided the major thrust for growth. While
this was the seventh consecutive year of growth, the
figure was well below the GOJ target of 3.6 percent due to
various shocks related to weather conditions and high oil
prices. These, combined with a number of policy-induced
shocks (such as increases in the minimum wage and the
general consumption tax (GCT)),provided significant
impetus for prices, which rose by 12.9 percent during

2005. While this result is lower than the 13.7 percent
increase recorded in 2004, it exceeded the 9.0 percent
target, suggesting that the GOJ has yet to stem the upward
trend in inflation observed since 2003.

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Fiscal Position Deteriorates
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3. The weak economic performance also impacted the
country's fiscal accounts, with central government
operations generating a deficit of USD 444 million or 3.1
percent of GDP. The GOJ had programmed a balanced budget
for fiscal year 2005/06, but with two hurricanes and a
deficit of USD 443 million for the first nine months the
target was revised to two percent of GDP. The revision
was largely due to a falloff in revenues - despite the 1.5
percentage points increase in GCT - suggesting either
increased tax evasion, a reduction in consumption, or a
combination of both factors. Revenues were also
predicated on more buoyant economic growth and the
relatively poor performance therefore affected
collections. Expenditure for the fiscal year was 2.4
percent below projections, as the GOJ made adjustments to
compensate for the revenue shortfall. While these fiscal
adjustments appeased the capital markets, they made a
further dent into the already limited capital budget
required for social and physical infrastructure.

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.... But Monetary Policy on Track
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4. After years of high interest rates to contain demand
impulses, rates continued to decline, with the average
benchmark and loan rates falling to 13.4 and 17.3 percent,
respectively, at the end of 2005. The foreign exchange
market also remained stable, supported by Jamaica's
healthy NIR (USD 2.1 billion) during the year. The rate
moved from JMD 61.85 per USD 1.00 at the end of 2004 to
JMD 64.67 per USD 1.00 at the end of 2005. This
represented a nominal depreciation of 4.6 percent, but an
appreciation of about 8.3 percent in real terms after

KINGSTON 00001122 002 OF 002


accounting for inflation, suggesting that the country
continues to lose competitiveness. If Jamaica's inflation
remains above that of its international trading partners,
there could be a major correction in the exchange rate in
the short to medium term.

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First Quarter Growth Stalled
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5. There was a brief recovery in economic performance
during the first quarter of 2006, with GDP increasing by
1.4 percent, reflecting robust agriculture and tourism
sector growth. Agriculture surged by 24.7 percent due to
favorable weather conditions, while stop-over arrivals
jumped by 10.8 percent following another record winter
tourist season. Output growth would have been more
significant were it not for a spate of industrial disputes
(ref. B),some leading to work stoppages at the country's
four bauxite companies. These contributed to a 2.2
percent decline in mining output, a sector which has grown
by double digits in the last two years. Even more
significant, however, was the continued cement debacle
(ref. A),which has crippled the fast-growing construction
industry, leading to a 6.3 percent drop in the sector.


6. Despite the chronic cement shortage and high oil
prices, inflation moderated to a respectable 0.1 percent
during January to March 2006. Inflationary impulses were
tamed by an increase in domestic food supplies and a
relative stability in oil prices. The lower inflation
figure allowed the economy to recover some lost
competitiveness during the period, as the exchange rate
depreciated by 2.5 percent in real terms. At the same
time, private investment inflows increased and the stock
of NIR climbed to USD 2.2 billion. These improved
economic fundamentals set the stage for the monetary
authorities to reduce benchmark interest rates to 12.8
percent as well as remove the one percent special deposit
imposed on commercial banks in 2003 to stabilize the
financial sector. (Note: The special deposit was
initially set at five percent, but was reduced to one
percent in two steps between February and May 2005. End
note.)

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COMMENT
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7. Economic growth will likely remain sluggish during
April to June, as the cement crisis drags on. Realizing
the three percent growth target for 2006 will therefore
depend on a speedy resolution to the cement saga to kick-
start the construction sector. Growth will also depend
the industrial relations climate in the private sector.
However, mining and tourism activities should contribute
handsomely, as both have already posted increases during
April. Inflationary impulses emerged for the first time
in April, with inflation rising by 1.1 percent due to
higher oil and food prices. Inflation is predicted at 10
percent this year, but achieving this target will hinge on
stable domestic food and oil prices. The foreign exchange
market should continue to benefit from relatively buoyant
inflows from tourism, remittances and private investment
receipts. Therefore, in the absence of shocks, the
exchange rate is expected to continue depreciating in an
orderly manner during the year. However, this managed
depreciation might not be sufficient to recover the
competitiveness lost during 2005. End comment.

JOHNSON