US embassy cable - 05KINGSTON1406

UNCLAS SECTION 01 OF 02 KINGSTON 001406 
 
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 ECONOMIC GROWTH REMAINS SLUGGISH 
 
Ref: KINGSTON 1319 
 
1. Summary: Data published by the Planning Institute of 
Jamaica (PIOJ) in May 2005 showed that the economy 
continued to suffer from the residual effects of Hurricane 
Ivan as well as prolonged drought conditions.  The 
unfavorable weather conditions stymied agricultural 
production, fueling an increase in prices.  The GOJ's 
fiscal balance, while positive, also fell below 
expectations.  However, the Bank of Jamaica continued to 
maintain order in the foreign exchange market.  Economic 
performance is expected to recover during the second 
quarter, with the PIOJ forecasting increased GDP growth on 
the back of robust tourism, construction and electricity 
production.  Inflationary pressures are expected to 
emanate from higher food prices and the new tax package, 
but the increased taxes should help the GOJ to achieve its 
fiscal target.  The foreign exchange market should remain 
stable given the recent jump in the stock of Net 
International Reserves (NIR).  End Summary. 
 
2.  Data published by the PIOJ in May showed that the 
Jamaican economy has started to recover from the effects 
of Hurricane Ivan, with real GDP growing by 0.6 percent 
during the quarter ending March 2005.  However, this was 
lower than the one percent projected for the quarter, 
reflecting the residual impacts of the hurricane and the 
prolonged drought that led to an outbreak of bush fires 
(reftel).  These conditions combined to put a damper on 
agriculture, resulting in a 23.8 percent drop in 
production compared to the previous year.  All other areas 
of the economy registered growth during the period.  In 
the goods-producing sector, construction output jumped by 
5.5 percent as the sector continued to benefit from post- 
Ivan rehabilitation activities.  Although the petroleum 
refinery remained closed, GDP in manufacturing rose by 2.1 
percent, reflecting buoyant cement production and higher 
beverage output.  Growth of two percent in the services 
sector was primarily the result of a 2.9 percent rise in 
transport and communications and a 6.5 percent jump in 
miscellaneous services (including tourism). 
 
3.  GOJ operations generated a fiscal surplus of USD 43.3 
million during the quarter.  While this was the only 
surplus recorded for the fiscal year, it was USD 75 
million less than programmed.  The lower surplus arose 
from higher than budgeted expenditures of USD 70 million 
and a USD 5 million revenue shortfall.  Higher program and 
wage costs, along with new capital projects, were the 
major contributors to the spike in expenditures.  The 
surge in recurrent programs and capital projects was 
offset by reduced interest payments, reflecting the 
consistent decline in interest rates.  Inflation also 
deviated from expectations during the period.  Prices 
actually moderated during the first two months of the 
quarter, but a one percent jump in March pushed prices for 
the quarter up to 1.4 percent.  Inflationary pressures 
emanated from the drop in agricultural output, which 
fueled an increase in domestic food, meat and poultry 
prices.  Increases in the cost of fuels and household 
supplies also contributed to inflation. 
 
4.  While most areas of macroeconomic management were 
challenging, the foreign exchange market remained stable 
during the review quarter.  The nominal exchange rate 
depreciated by 0.3 percent, a one percent appreciation in 
real terms.  The favorable conditions were underpinned by 
strong foreign exchange inflows from tourism, mining, 
remittances and goods exports.  The BOJ also reported that 
growing investor confidence resulted in higher net capital 
inflows, as demonstrated by the increased sale of foreign 
exchange by commercial banks to the bank. The buoyant 
flows led to a further build-up in the Net International 
Reserves (NIR), which stood at USD 1.9 billion or 17.2 
weeks of goods and services imports at the end of March 
2005.  This allowed the bank to reduce interest rates on 
two occasions in the quarter, resulting in the lowest 
rates since August 2002.  The bank also reduced the 
special deposit requirement for deposit taking 
institutions from five to three percent. 
 
5. Comment: The PIOJ is forecasting growth of 1.6 percent 
during the June quarter of 2005.  This growth forecast is 
predicated on expanded output in construction, tourism, 
transport and communications.  The GOJ should also meet 
its fiscal targets for the first quarter of 2005/06, now 
that most reconstruction related expenses are out of the 
way.  Revenue collection has also returned to normal 
levels.  This, combined with increased tax collection, 
should provide a boost to revenues.  However, the new 
revenue measures will provide some impetus for inflation 
in upcoming months.  With the onset of the rainy season, 
drought conditions have given way to flooding and 
landslides in agricultural areas, leading to further 
increases in domestic food prices.  Volatile oil prices 
will also fuel further inflation and inflationary 
expectations. 
 
6.  Comment (cont'd): The BOJ expects foreign exchange 
flows to remain buoyant for 2005.  The bank has, 
therefore, announced its intention to purchase excess 
supplies in order to smooth conditions in the market; 
ensure a stable and orderly system of payments in the 
medium term; and protect the economy from shocks.  This 
policy is already being executed, and the stock of NIR has 
increased by USD 108.8 million in April to reach USD two 
billion, the highest amount in over a decade.  If the 
economic fundamentals and investor confidence continue to 
improve, the bank could reduce interest rates even further 
in upcoming months.  This could start a virtuous cycle in 
which declining interest costs will impact the fiscal 
balance and eventually result in an improvement of the 
country's credit ratings.  End Comment. 
 
ROBINSON