US embassy cable - 05KINGSTON2052

UNCLAS SECTION 01 OF 02 KINGSTON 002052 
 
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:  HURRICANES STALL ECONOMIC PROGRESS IN JAMAICA 
 
REF:  KINGSTON 386 
 
1.  Summary:  Data published on August 15 by the Planning 
Institute of Jamaica showed that economic growth, for 
April to June 2005, continued to suffer from the lagged 
effects of Hurricane Ivan and drought conditions.  The 
adverse weather conditions wreaked havoc on the country's 
already ravaged agricultural sector, resulting in sluggish 
overall economic performance.  The resultant shortage in 
food supplies combined with higher energy prices fueled 
inflation during the quarter.  However, the foreign 
exchange market remained stable and the GOJ was able to 
better its fiscal target.  Economic performance is 
expected to remain sluggish in the last two quarters, 
highlighting the vulnerability of the Jamaican economy to 
shocks in general and natural disasters in particular. 
Barring shocks, the GOJ is expected to meet its fiscal 
targets, but the country will have to deal with the 
soaring inflation, which if not contained could disrupt 
macro-economic stability.  End summary. 
2.  Data published on August 15 by the Planning Institute 
of Jamaica (PIOJ) showed that the Jamaican economy fell by 
0.1 percent during the April quarter, bringing the decline 
for the six-month period to 0.2 percent.  The sluggish 
economic performance reflected the residual effects of 
Hurricane Ivan.  The PIOJ, which had forecast growth of 
1.6 percent for the quarter, admitted that it had actually 
underestimated the full impact of the event.  The lagged 
effects of Ivan combined with drought conditions 
devastated agricultural output (down 19 percent) during 
the review period.  Economic growth was also stymied by 
the downturn in manufacturing (down 3.3 percent) and 
miscellaneous production (down 1.4 percent), reflecting 
the lost production from the fire-induced closure of the 
petroleum refinery and the falloff in tourism arrivals. 
While most sectors of the economy remained stagnant, 
notable sources of growth stemmed from construction and 
electricity and water, due to rehabilitation efforts and 
continued buoyancy in residential construction. 
 
3.  The resultant shortage in domestic food supplies and 
higher international oil prices combined to provide 
significant inflationary impulses during the review 
quarter.  Inflation therefore jumped to 5.7 percent. 
Additional impulses also stemmed from the lagged effects 
of the April 2005 tax package and higher electricity and 
transportation costs.  In essence, most of the recent 
price increases have been attributable to supply and 
policy shocks, as the Bank of Jamaica managed core 
inflation (up 1.7 percent) by restraining money supply 
(SEPTEL). 
 
4.  In spite of the downturn in economic activity and 
renewed price instability, the GOJ was able to generate a 
lower than programmed deficit of USD 185 million during 
the quarter.  This was a continuation of the fiscal 
discipline observed since 2004 and augurs well for the 
GOJ's plan to balance the budget in 2006.  The better than 
expected deficit stemmed from the slowing in spending 
(down 2.9 percent to USD 870 million), as revenues fell 
short by USD 11.5 million.  The foreign exchange market 
also remained stable during the quarter (0.9 percent 
nominal depreciation) due largely to the build up in the 
stock of Net International Reserves (NIR) to USD 2.2 
billion.  The increasing stock of NIR was underpinned by 
buoyant remittances, the GOJ's borrowing of USD 300 
million from the external capital market and increased 
confidence in the BOJ's management of monetary policy. 
The GOJ loan was sourced at a coupon rate of nine percent, 
the lowest rate at which a Jamaican bond has been issued 
on the capital market, reinforcing the growing level of 
investor confidence externally during the period. 
Although the foreign exchange market remains solid, the 
Bank of Jamaica's(BOJ)interest rate reduction strategy was 
halted in May due to the inflationary spiral. 
 
5.  Despite the appearance of cracks in certain areas of 
the macro-economy, the PIOJ is forecasting a rebound in 
economic growth by 1.9 percent during the September 
quarter.  The relatively optimistic projection is based on 
the fiscal consolidation, higher international primary 
commodity prices and expected growth in demand from Asia 
and North America.  Influenced by an expected 17 percent 
rebound in the mining sector, the PIOJ is also projecting 
a 2.4 percent jump in the goods-producing sector. Services 
are expected to grow by 1.6 percent. 
 
6.  Comment:  Economic performance is expected to remain 
sluggish during the upcoming quarter given the impact of 
Hurricanes Emily and Dennis on economic activity in July. 
This highlights the vulnerability of the Jamaican economy 
to shocks in general and natural disasters in particular. 
While most areas of the economy suffered from the 
hurricanes, the damage to the agricultural sector was 
particularly pronounced.  Increasing oil prices are also 
beginning to affect investor confidence and will 
eventually affect production decisions.  Additional 
inflationary impulses are also expected from the increased 
prices of domestic food due to the shortage in supplies 
arising from the adverse weather conditions in July and 
the increased bus and taxi fares and utility rates.  The 
anticipated spike in inflation will limit the BOJ's 
flexibility in lowering interest rates to improve the 
fiscal position.  End comment. 
 
TIGHE