On Wednesday, at its quarterly press briefing, the Bank of Jamaica (BOJ) projected flat to negative one per cent real GDP growth for the quarter ending in September, mainly due to the impact of the drought on agricultural crops and on the production of water. However, the bank argued that the economy would recover at an accelerating pace over the next four quarters, starting in December 2014.

Reflecting the anticipated contraction in the June to September quarter, the BOJ now projects lower than originally forecast growth for the calendar year and current fiscal year.

On further questioning, BOJ Governor Brian Wynter revealed that he was “bullish on growth”, as the BOJ projection for growth for the next fiscal year, 2015/2016, was still in the one to two per cent range. While the International Monetary Fund’s (IMF’s) current forecast of two per cent was effectively higher than the current BOJ forecast, the BOJ’s projection was conservative as it did not include activities related to the hotel sector, business process outsourcing, and agriculture that could start in the next few months. He did not, however, expect “robustness” in the manufacturing sector.

The reason for the BOJ’s conservative growth forecasts was, he explained, that megaprojects “move at a deliberate pace”, and the BOJ builds its forecasts on a quarterly basis based on its best assessment of what is happening, working closely with the Planning Institute of Jamaica (PIOJ).

In the case of hotel projects, the BOJ talks to JAMPRO, as well as follows the news, although it is still having problems in quantifying the large number of small projects that are too small to count individually.

The unemployment rate, which fell in July 2014 to 13.8 per cent from 15.4 per cent the year before, is also expected to continue to fall in tandem with the anticipated recovery.

Importantly, the balance of payments is expected to continue its improving trend. The current account deficit contracted by 2.4 percentage points of GDP to 8.4 per cent of GDP in fiscal year 2013/14, and is projected to decline further to 6.3 per cent of GDP this financial year, while gross foreign direct investment flows of 5.3 per cent of GDP last fiscal year — 2013/2014 (approximately double the two to three per cent of GDP average of the previous three years) — are expected to be “similarly strong in 2014/2015”, meaning over five per cent of GDP.

Preliminary data show that tourist arrivals for the fiscal year to end October rose by 5.3 per cent, stronger than the 3.2 per cent recorded for the corresponding period of FY2013/14, along with a strong recovery in net remittance flows, which grew by five per cent for the first four months of this fiscal year.

The fact that the current account deficit is now almost financed by foreign direct investment, and is more than fully covered, including official flows, combined with Jamaica’s strong reserve position, means that, according to the governor, there has been a significant “derisking of Jamaica’s economy”, which has also reduced the threat of exchange rate instability.

The governor advised that the Bank of Jamaica stands ready to maintain order in the foreign exchange market, but doesn’t “see instability as a threat today”. The flows have been more than adequate to meet demand over the last few months, and the normal “Christmas pressure” happened later than expected, and is moreover muted.

Inflation was nine per cent in the year to September, but encouragingly fell to 8.2 per cent in the year to October as the impact of drought on agricultural prices passes through. However, the governor advised, we want “to have an inflation rate no higher than that of Jamaica’s trading partners, in the region of three per cent to four per cent”, in the medium term.

Lowering inflation was key because “as long as domestic inflation remains much above that of Jamaica’s main trading partners, the exchange rate will continue to face pressure to depreciate. Without the depreciation, Jamaican firms and farms will struggle to remain competitive against foreign firms selling their goods and services to the domestic market and in our export markets.”

He added: “And yet, it is also true that adjusting the exchange rate itself creates challenges for all economic stakeholders, including many of the same firms facing the struggle to maintain competitiveness. Reconciling these factors represents a conundrum; but it is a conundrum with a sure and sustainable way out. The way out of the conundrum is to lower the rate of inflation and thereby remove this source of pressure on the exchange rate.”

Banking liquidity is improving, as stronger assurances were provided to deposit-taking institutions (DTIs) that liquidity will be made available when they want it. The bank refined its liquidity management framework during the quarter by removing limits on overnight funding available under the Standing Liquidity Facility, increasing the allocation at the Bi-monthly Repurchase Operations and streamlining the interest rates charged for these facilities.

Greater assurance on the part of DTIs about their liquidity is expected to translate into increased private sector credit, higher levels of investment and stronger growth in the economy. As an example, the governor advised that in the calendar year to September, the BOJ carried out special operations that added J$172 billion in “gross” direct injections of liquidity to DTIs.

However, the governor observed: “At this point, the results are not encouraging — it was too early to say disappointing — as private sector credit grew by only 4.8 per cent for the 12 months ending September 2014 and 0.9 per cent in the September quarter alone.”

Finally, on the fiscal side, in what he called a “non-response” to a question as to whether he supported “recent calls to renegotiate the primary surplus target with the IMF” to encourage faster growth, the governor observed that although Jamaica has made progress on the fiscal front “we still have work to do — we are not there yet”.

He added that Jamaica first needs “to run consistent fiscal surpluses” to pay down our debt. “You can’t start out saying you are going to do this, and then change your mind. As you get more growth, this changes the numbers. You can then have a conversation, eg about more capital investment, but first have to achieve greater fiscal surpluses to allow a more growth-orientated policy.”