LOCAL IMF representative Dr Gene Leon, in a presentation to the Jamaica Chamber of Commerce (JCC) last week, stated that whilst he did not want to pre-empt his colleagues, recent improving macroeconomic data suggests that Jamaica is likely to pass the upcoming IMF test (an IMF team will come to the island in August.)

Leon observed that the overall fiscal deficit is smaller than projected in the budget, inflation is going down, interest rates are trending downwards (he emphasised that this will help us to meet the expenditure targets), and Net International Reserves are also looking positive.

Addressing concerns about the effect on competitiveness of the revaluation of the Jamaican dollar in the second quarter from Jamaican $89 to $86 to one US dollar, he argued that it looks like it has stabilised. He added that no one had quarrelled with the sharp depreciation of 20 per cent to almost $90, almost all of which had occurred between the last quarter of 2008, and the first quarter of 2009. The recent revaluation could be regarded simply as a reversal of the original “overshoot”, “if for the sake of argument $85” was the correct rate.

His view is supported by the IMF’s own comment on page 18 of the IMF’s Staff Report for the 2009 Article IV consultation, which supported Jamaica’s request for an 820.5 million SDR Stand — By Arrangement (SBA). The report states that using the IMF’s preferred method of taking a simple average of the three different approaches (mentioned below), the Jamaican dollar is undervalued by 9.9 per cent.

According to the IMF report, under the macro economic balance (current account) approach, Jamaica enjoys a small competitive advantage of around 8 per cent, whilst the external sustainability approach (a sustainable external position) gives a competitive advantage about three times as large. On the other hand, the equilibrium exchange (real effective exchange rate) approach indicates a small overvaluation.

Dr Leon argued that, currently, one method had the dollar overvalued and another undervalued. This implication is that the recent revaluation would have eliminated most of the undervaluation reported under the macro economic balance approach, making it correctly valued.

This is supported by his comment that “The Fund doesn’t use these methods in a slavish way” and that “broadly speaking” the exchange rate was about right.

Single digit interest rates are sustainable

Dr Leon also argued that an analysis of international inflationary expectations suggested that there was no expectation of an international inflationary shock due to excess demand, with the US Federal Reserve indicating that current excess capacity meant inflation risks were “to the downside”.

If locally there is no excess demand for debt financing from the government, and demand for loans from the private sector is also weak (as is the case), there is no reason for Jamaican dollar interest rates to rise in the short term.

The area which Dr Leon was “a little bit concerned about” was the “cost of capital”, referring to the slow pace at which the commercial banks were passing through interest rate cuts. It is therefore encouraging that on Friday, July 23rd , National Commercial Bank (NCB) announced that effective August 1, it will reduce its base lending rates by three per cent, from 20.75 per cent, to 17.75 per cent. Justifying the cut, Managing Director Patrick Hylton confirmed Leon’s observation that “There is very limited appetite in the market for loans.” Simultaneously, NCB’s main competitor Scotiabank, who had led the market in dropping rates on June 1 by over 200 basis points from 19.875 per cent to 17.75 per cent, announced an unheard of “negotiated loan sale” on car, education, business, vacation, and medical loans at its main King Street Branch.

First quarterly current account surplus in six years

The first focus of any IMF programme is always to correct a fundamental balance of payments problem. It is therefore very encouraging that the first quarter (January to March 2010) current account saw a surplus of just over US$1 million, Jamaica’s first current account surplus for six years. The last surplus in the first quarter of 2004 was a similarly tiny US$1.4 million.

At US$393 million for the first quarter, goods exports are slightly below the comparable first quarter in 2004 of US$416 million, and have fallen by more than 50 per cent from first quarter 2008 total of US$778.9 million. The combination of the reopening of Windalco bauxite plant, the recovery in bauxite prices, and the recently announced sale of the remaining government-owned sugar estates to the Chinese, suggests that the recent marginal recovery in exports will accelerate as volumes (and hopefully prices) improve in the current fiscal year.

After recording a surplus of US$10.8 million for the period January to February 2010, a massive improvement of US$190.5 million relative to the comparable period in 2009, the current account deteriorated in March 2010.

The current account deficit of US$8.8 million was also a deterioration of US$23.8 million relative to the corresponding month in 2009, when a US$15.1-million surplus was recorded. This deterioration was driven by the goods balance, which recorded a deficit of US$276.2 million, a deterioration of US$57.5 million, driven by a US$56.5-million increase in imports and a US$1 million decline in exports.

Over half of the increase in imports was mineral fuel (US$17.4 million) and food (US$13 million). The decline in exports reflected a US$15.8-million decline in sugar exports, partially offset by a US$9-million increase in bauxite exports.

The surplus on services improved by US$14.7 million to US$116.2 million, March 2010 compared with March 2009, primarily as a result of improvements in estimated tourist expenditure. Current transfers increased by US$191.4 million, driven by an increase of US$26.7 million in net private transfers (basically remittances from the diaspora).

On the capital account side, official flows in March of US$243 million more than offset negative private investment flows of US$39.1 million, allowing an increase in Net International Reserves (NIR) of US$192.2 to US$1751.9 million. As of end June 2010, the NIR had increased to US$1,795.8 million, equivalent to 18.5 weeks of estimated Goods and Services Imports for fiscal year 2010/2011.

As a percentage of GDP, the calendar year current account deficit has fallen from an unsustainable 19.4 per cent in 2008 (US$2,793.3 million) to only 7.5 per cent in 2009 (US$924.9 million).

For the 2009/2010 fiscal year (April to March), there was a marked improvement in the current account deficit to US$759.2 million, an improvement of US$1,686.5 million compared with the previous fiscal year. This mainly reflected an improvement in the goods account, which improved by US$1,406.3 million relative to the previous year, driven by a reduction of US$2,314.2 million in imports, partially offset by a decline of US$907.9 million in exports.

The decline in imports was driven primarily by a US$1,340.9-million reduction in mineral fuel (primarily Jamaica’s oil bill), whilst the reduction in exports was primarily due to a reduction in alumina exports of U.S$706.2 million. Oil is such a large part of our merchandise trade (and current account deficit) that the impact of weakness in the world economy on our main foreign exchange earners – bauxite, tourism and remittances — was far outweighed by the impact of the reversal in the rise of the price of oil in 2009.

Services

The increase in the surplus on the services sub account of US$323.3 million for fiscal year 2009/2010 was due largely to the reduced freight costs associated with lower levels of imports. Transportation outflows fell by US$238.2 million to US$807.6 million, whilst inflows remained stable.

Tourism

The all-important travel inflows (mainly tourism) increased slightly by US$24.9 million to US$1,964.4 million for fiscal year 2009/2010, reflecting a much stronger winter tourism season than in 2008/2009.

There was a sharp decline in room occupancies, and a collapse in the key forward booking metric in May due to the events in Tivoli being transmitted around the world. Encouragingly, at a recent Private Sector Organisation of Jamaica seminar, Tourism Minister Ed Bartlett announced that the summer is holding up well, and that occupancies have largely recovered, to the extent that July is level-pegging with July last year.

Apart from extremely vigorous promotional efforts (damage control) by the local industry, including bringing thousands of travel agents and tour operators to Jamaica, Bartlett attributes the recovery to, firstly, the perception internationally that Jamaica had taken an extremely bold and serious step to deal with its crime problem, secondly, Jamaica’s very strong tourism products, and finally, Jamaica being the Caribbean’s most connected destination in terms of airlift, with “not a single flight cancelled”, and new capacity coming in from Westjet and Jet Blue.