Jamaica’s economic trajectory
Tax revenues underperform, inflation moves within BOJ target range, NIR hits historic highs
THE FOLLOWING were key highlights noted by EPOC:
• End-March 2024 Tax revenues significantly underperformed budget
• Inflation of 5.6 per cent for March 2024 signals a return of the rate to the bank’s target range
• Net International Reserves (NIR) at historic levels of US$5.14B at end-March 2024
• All indicative targets and structural benchmarks under the IMF Precautionary and Liquidity Line (PLL) and the Resilience and Sustainability
Facility (RSF) at end-December 2023 were met.
OUTLOOK AND HIGHLIGHTS
Global economic recovery is sluggish with downside risks
Despite a decline in global inflation from its peak in mid-2022, economic growth remained steady, defying predictions of a global recession. Global growth, estimated at 3.2 per cent in 2023, is projected to continue at the same pace in 2024 and 2025.
Global inflation is forecast to decline steadily, from 6.8 per cent in 2023 to 5.9 per cent in 2024 and 4.5 per cent in 2025, however, the geopolitical tensions could cause worsening of supply-chain conditions, which could precipitate increases in shipping costs and higher oil prices.
Against this global background, the BOJ projects GDP growth of 1 per cent-2 per cent for FY2024-25, while the GOJ’s projections are at the top of the range at 1.8 per cent GDP growth. These GDP projected growth numbers could be at risk as the contractionary monetary policy continues in earnest.
The tight liquidity conditions and the elevated interest rates in the domestic market are adversely impacting businesses and consumers. This has begun to show visible signs as corporate income taxes have underperformed the GOJ budget targets and have remained flat year over year.
Financial services have been negatively impacted as they have
seen margin compression. Financial institutions have been unable or reluctant to pass on interest rate increases on loans to their clients as pointed out by the BOJ, where weighted average interest rates private-sector loans increased by just 40 basis points (0.4 per cent).
The knock-on effect of spread compression in the Financial Sector as the minister of finance and public service has pointed out, is that financial services profitability has fallen year over year, and lower taxes have been remitted.
INFLATION PROJECTIONS
The BOJ has highlighted that inflation is on a general downward trend. However, the bank, in communicating its policy decision to hold the policy rate at 7 per cent announcement on March 28, 2024, also projected inflation to exceed the target range of 4 per cent - 6 per cent until the September 2025 quarter.
However, with the postponement of the April 1, 2024, increase in PPV fares, it is expected that there could be some moderation in the BOJ projections for inflation over the next 18 months, and from recent statements from the Central Bank Governor, Jamaica could see possible interest rate reductions, which businesses and the consumers would welcome.
There however remain upside risks as supply chain conditions could deteriorate with the geopolitical risks along with adverse weather events.
FISCAL RISKS ARE ELEVATED
Tax revenues were significantly behind budgeted targets for the month of March 2024 by $28 billion (20 per cent) and only marginally ahead of the March 2023 outturn. There would be increased risks to the revenue targets outlined in the 2024-25 Budgets, as the tax revenues, while increasing by over 10 per cent year over year, missed the estimates in the fourth supplementary budget.
DEGREES OF FREEDOM ON EXPENDITURES ARE LIMITED
With these updated numbers, which were not available when the budget was crafted, it is expected that the MOF will need to factor this into their plans going forward, and revisions seem highly likely.
The GOJ has projected inflows of $45 billion from the securitisation of receivables in the 2024-25 Budget, which will fund the revenue measures and is included in the non-tax revenue line of the budget. These are one-off inflows for the year and are more than likely not repeatable as a funding source into the 25-26 financial year.
With significant increases in public-sector wages and salaries from $222 billion in 2021-22 or 9.6 per cent of GDP to $414 billion (12.6 per cent of GDP) in 2024-25 discretionary spending is limited, and this reduces the flexibility in expenditures.
With this unprecedented increase of approximately $200 billion over the past three fiscal years, it is important that productivity levels within the public service are increased. To this end, the MOF has committed resources to the design and implementation of a performance-management system, which should drive increased productivity and greater efficiency in delivery of services to the people of Jamaica.
OPTIMAL MONETARY POLICY MIX
As the macroeconomic variables continue to be stable with inflation trending downwards and Net International Reserves being at historic levels, there is a window of opportunity to optimise the monetary policy mix.
The BOJ has been proactive and ahead of the curve in targeting inflation but may need to, as the BOJ governor has indicated, look to ease interest rates armed with Jamaica’s healthy international reserves, which gives the BOJ the ability to continue its successful efforts in maintaining exchange-rate stability with minimal risks to the inflation targets.
Easing of monetary policy could change the market dynamics and bring some relief to businesses and consumers, who could begin to reposition for investments in the real economy.
As the GOJ has demonstrated, the political will to maintain fiscal responsibility and the BOJ as Jamaica’s independent central bank has been committed to inflation targeting, with some signs of weakness in tax revenues it seems apparent that there will have to be adjustments to the policy mix to ensure that Jamaica can continue to maintain its stellar record of macroeconomic stability and debt reduction.