US embassy cable - 05KINGSTON613

UNCLAS SECTION 01 OF 02 KINGSTON 000613 
 
SIPDIS 
 
STATE FOR WHA/CAR/ (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON, EFIN, JM 
SUBJECT: JAMAICAN ECONOMY DIPS IN FOURTH QUARTER OF 2004 
 
 
1.  Summary:  Data published by the Planning Institute of 
Jamaica (PIOJ) in February 2005 showed that Hurricane Ivan 
dealt a serious blow to economic performance.  Real Gross 
Domestic Product (GDP) dropped by 1.8 percent as 
agriculture continued to suffer from the effects of the 
hurricane.  The resulting higher food prices led to a 
further acceleration in inflation.  The government's 
fiscal deficit was also above target, but the foreign 
exchange market remained stable.  Economic activity is set 
to rebound during the first quarter of 2005, with the PIOJ 
forecasting GDP growth of one percent due to robust 
tourism and construction performance.  Inflation is 
expected to decline and the foreign exchange market should 
remain stable.  While the fiscal deterioration has slowed 
significantly, the GOJ could be hard pressed to meet its 
fiscal deficit target of four percent of GDP for the full 
fiscal year.  End Summary. 
 
2.  Economic performance was negatively affected by the 
damage to infrastructure and productive assets caused by 
Hurricane Ivan in September 2004.  Real GDP declined by an 
estimated 1.8 percent from October to December, the first 
quarterly decline since June 2002, when flooding stymied 
economic activity.  The result for the December quarter 
brought GDP for 2004 to 1.0 percent, well below the 2.5 
percent target.  Declining output was largely attributed 
to a 4.8 percent drop in the goods-producing sectors 
reflecting the impact of the hurricane on all areas of 
agriculture (down 32.8 percent).  Manufacturing also fell 
by 1.0 percent due to lower levels of production at the 
local petroleum refinery following a fire.  However, 
buoyed by rehabilitation work and increased residential 
and commercial activity, construction jumped by 4.4 
percent.  Services declined by 0.2 percent due to the lag 
effect of the hurricane on communications, distribution, 
and miscellaneous services, including tourism. 
 
3.  The GOJ's operations generated a fiscal deficit of USD 
133 million in the December quarter, only USD 16.4 million 
more than forecast.  This represents a significant slowing 
in the deficit relative to target, suggesting that 
normality has returned to revenue collections since the 
hurricane.  The deviations resulted from expenditures of 
USD 834.4 million, being USD 8.2 million above target, as 
well as a USD 8.2 million shortfall in revenues (USD 701.6 
million).  Due to increased food prices and energy costs, 
inflation soared by 6.4 percent from October to December, 
the highest quarterly increase in a decade.  The result 
also brought annual inflation for 2004 to 13.7, the second 
consecutive year of double-digit inflation. 
 
4.  Despite the downturn in most areas of the economy, the 
foreign exchange market remained stable throughout the 
quarter.  The exchange rate appreciated by 0.4 percent, 
reflecting strong foreign exchange inflows from tourism, 
remittances, mining and goods exports.  The high foreign 
exchange flows led to a build-up in the stock of Net 
Investment Revenue (NIR), which stood at USD 1.9 billion 
at the end of 2004. 
 
5.  Comment:  Despite the shock to the economy following 
Hurricane Ivan, the short-term prospects for the economy 
remain positive.  This outlook is based on declining 
interest rates, normalization of activities in mining, 
tourism and distribution and continued moderation in the 
fiscal deficit and inflation.  Construction activity is 
also expected to remain healthy as hurricane related work 
and hotel construction continues.  As such, GDP is 
expected to grow by one percent during the first quarter 
of 2005.  Price increases are expected to slow 
considerably, given that domestic food supplies have 
returned to normal and oil prices have been stable. 
Inflation for January 2005 was zero percent.  While the 
GOJ will be hard pressed to meet its fiscal deficit target 
of four percent of GDP, the result should not exceed five 
percent, as revenue collections have returned to pre- 
hurricane levels.  With the economy expected to benefit 
from significant foreign exchange inflows from tourism and 
mining, the foreign exchange market should remain stable 
for the first half of 2005.  This, combined with the 
general improvement in the economy, has prompted the Bank 
of Jamaica (BOJ) to reduce interest rates to their lowest 
levels in over a decade.  The Bank has also reduced the 
"Special Deposit" requirement of commercial banks and 
licensed institutions by two percentage points to three 
percent.  End Comment. 
 
TIGHE