Economic Analysis Of The Jamaican Economy Economics Essay

Economic growth is a term generally measured by the amount of production in a country or region over a certain period of time. It can also be described as the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in real GDP. Economic growth is primarily driven by improvements in productivity, which involves producing more goods and services with the same inputs of labour, capital, energy and materials. For the purpose of this project we will be concentrating on economic growth in the long run FY 2012-2014.

Jamaica’s economy faces major long-term problems: a significant merchandise trade (imports and exports) deficit, large-scale unemployment and underemployment, and a public debt-to-Gross Domestic Product (GDP) ratio of almost 130 per cent. Jamaica’s onerous public debt burden – the fourth highest per capita is the result of government bailouts to ailing sectors of its economy, most notably the financial sector in the mid-to-late 1990s, and hinders government spending on infrastructure and facilities and social programs as public debt servicing accounts for nearly half of government costs.

Inflation rates rose noticeably in 2008 and have kept on increasing as a result of high prices or pricing for imported food stuffs and oil and gas. High unemployment continues to aggravate the major problem of crime and violence, which includes the gang violence that is fuelled by the drug trade (imports and exports). The Golding led government faces the difficult prospect of having to achieve financial discipline in order to sustain public debt repayments while simultaneously attacking a major and expanding crime problem that is hampering growth of the economy. 

The Jamaican Economy has faced many economic challenges over the pass years especially during the recent recession period. The economy is still recovering from the direct hit which the country sustained in 2009 where exports and capital inflows weakened leading to negative growth. A steep depreciation of the nominal exchange rate has raised the cost of servicing variable rate debt, as well as the cost of rolling over existing loans. Amid volatility, macroeconomic policy remained tight despite the downturn. For the Bank of Jamaica (BOJ), defending the currency had to take precedence over inflation targeting and stimulating GDP growth. Such global crisis has also negatively affected the fiscal accounts, with lower revenue and a significantly higher interest bill.

The government implemented a new Debt Management Initiative, the Jamaica Debt Exchange (JDX) on January 14, 2010 to control future economic downturns, which they had experienced in past years (2007 to 2009), which had resulted in a negative growth period for the country. The initiative would see holders of Government of Jamaica (GOJ) bonds returning the high interest earning instruments for bonds with lower yields and longer maturities. The offer was taken up by over 95% of local financial institutions and was deemed a success by the government.

The economic situation of Jamaica has worsened considerably, with the ongoing world financial crisis which has had devastating effects on the economy. The mining sector has been the hardest hit, while tourism and remittances flows have been on the decline. Most foreign exchange comes from remittances, tourism, and bauxite. Remittances account for nearly 20% of GDP – roughly equivalent to tourism revenues. Three of Jamaica’s four bauxite firms suspended operations in 2009 due to falling demand amid the global economic downturn. The country will continue to lose valuable resources from its exports in 2012-2014 while these firms are out of operation. This decline in remittances, and a contraction of consumer demand led to a deep recession with stubbornly high unemployment and underemployment. With such hardship the government of Jamaica had no choice but to turn to the International Monetary Fund (IMF), a multilateral lending agency. The government of Jamaica, with help from multilateral bodies, is resolved to addressing the nation’s challenges more effectively, thereby creating a sustainable growth path for increased foreign investments in the new decade. On the 4th of February 2010 the International Monetary Fund (IMF) approved a US$1.27 billion Stand-By Facility loan agreement for a period of 3 years to underpin structural reforms and help Jamaica to withstand spill-overs of global financial storms that impacted main revenue streams. The IMF noted: “The government has successfully completed a domestic debt exchange operation, which has contributed to a more equitable sharing of the burden of the overall fiscal adjustment. The exchange has also struck an appropriate balance in terms of delivering necessary cash flow savings while taking appropriate account of the need to ensure financial sector stability which should continue for the FY2012-2014.” With such great assistance from the IMF, the government believes “The upgrade sends a significant signal to international and local investors and will help in reinforcing confidence in the market for Jamaica’s debt. This first step in the recovery of Jamaica’s ratings reflects the government’s aggressive policy actions as put forward in the economic programme, and the positive impact and success of the JDX.”

Economic outlook

The launch of the Jamaica Debt Exchange Offer (JDX) in early 2010 has been seen as a positive step in the right direction, and the appreciation of the Jamaican dollar since it hit a low of J$89.73 in February 2010 has been slight but steady.

The government has begun implementing much needed structural reforms, which should improve the fiscal balance by over 5% of GDP in FY 2010-2014 and onwards. Among them, a debt-swapping plan aimed at achieving interest savings of about 3% of GDP and two-thirds reduction in the amount of maturing debt over the next three years has been successfully implemented, with an acceptance level of almost 97% of bondholders.

Governor of the Bank of Jamaica, Wynter B. (2010), stated that “The exceptionally high participation rate in the exchange makes the Jamaica Debt Exchange one of the most successful debt exchanges in the world.” The JDX replaces 350 high priced government domestic bonds with 24 new bonds, priced at a lower (12.5%) interest rate with longer maturities, providing annual savings of J$40bn. The Governor further stated that “Additionally, the magnitude of maturing debt is expected to decline by 65 percent over the next three years, and the significant reduction in the government’s refinancing needs will ease the crowding-out effect of the government debt and the upward pressure that this would have placed on domestic rates.”

Jamaica’s four-year programme for the financial year 2010-2014 focuses on four key objectives:

To strengthen government finances by reforming public enterprises and passing a new fiscal responsibility law.

Reforms of the financial sector to reduce systemic risks and enhance the country’s capacity to better withstand external shocks.

A pro-active debt management strategy to eliminate ‘debt overhang’ and reduce debt servicing costs. Jamaica spends J$182bn (US$2.1bn) on annual interest payments, which in turn, crowd out capital expenditures.

Make the tax structure more efficient, whilst improving tax collection and administration. That would increase resources for targeted social projects.

Despite the launch of the Jamaica Debt Exchange Offer (JDX), this has been seen by analysis’s’ as a positive step in the right direction, and with the marginal appreciation of the Jamaican dollar in February 2010.

The tourism sector, which comprises a sizable chunk of Jamaica’s economy, was badly hit by the global economic crisis, but a marginally more favourable crime rate as well as new marketing strategies being developed by the Jamaica Ministry of Tourism and their counterpart throughout the Caribbean region bodes well for the industry’s slow recovery over next five years. “The IMF however is saying that they don’t foresee Jamaica changing its growth patterns in the near future,” stated Charles Ross. The debt has itself become an obstacle for growth because the country has to allocate so much of government resources into servicing the debt that very little is left for public investment in infrastructure that would facilitate growth.

The island of Jamaica however has proven itself resilient by surviving the steepest contraction in world trade since the 1930s, and its macroeconomic fundamentals are slowly but surely improving. The government of Jamaica, with help from multilateral bodies, is resolved to addressing the nation’s challenges more effectively, thereby creating a sustainable growth path for increased foreign investments in the new decade.

The 2010/11 budget provides for increased social spending while reducing recurrent expenditures.

Fitch, the European rating agency, upgraded Jamaica’s long-term local and foreign currency Issuer Default ratings to B- (with stable outlook). Also, Standard & Poor’s and Moody’s have upgraded Jamaica’s sovereign ratings, reflecting strong commitment to tackling fiscal imbalance and the successful outcome of the Debt Exchange (JDX) programme. The government believes “The upgrade sends a significant signal to international and local investors and will help in reinforcing confidence in the market for Jamaica’s debt. This first step in the recovery of Jamaica’s ratings reflects the government’s aggressive policy actions as put forward in the economic programme, and the positive impact and success of the JDX.”

Economic theory suggests that sustainable increases in real income must be based on increases in productivity. Productivity may be defined as the amount of output produced (in terms of goods or services) per unit input used. Commonly applied measures include labour productivity as output per worker or output per labour-hour, and total productivity as output relative to all inputs used. Both measures have been used in recent years to explore the dynamics of Jamaica’s economic performance.

Jamaica continues to rank favourably on a number of indices of competitiveness and business climate. The 2010 Index of Economic Freedom, published by the Heritage Foundation (US), ranks it the 57th freest market of 179 countries, surpassing established EU members such as Portugal, France, Poland, Greece and Italy. The country has a track record of implementing micro-reforms that help encourage private enterprise and foreign direct investment (FDI).

Reforms of trade regime and tax administration for the upcoming period 2011- 2014 should improve Jamaica’s global ranking in the future business indicators. This reform is aimed at reducing tariffs, import fees and some import/export bans and the latter is geared toward simplifying tax payment procedures. Jamaica’s relatively flexible labour regulations could be further improved to increase job creation and productivity growth in coming years Dr Williams D. (2010) of the University of the West Indies.

The government aims to boost the export sector’s contribution to GDP from its current one-fifth to one-third by 2013 through expanding volumes and higher value addition in priority sectors as well as seeking new markets, thereby reducing over-reliance on North America, which in 2008 accounted for 50% of Jamaica’s exports.

The latest projections by international financial institutions (IFIs) show the economy stabilizing in FY 2010/11 and thereafter (2012-2014). Output is expected to grow at 2%, with inflation abating to 6%. Higher Foreign Direct Investment (FDI) in mining, tourism and other sectors will increase imports. However, continued FDI and gradually rising foreign exchange reserves (forex reserves) should offset the impact of current account deficit on the balance of payments. The IMF envisages the external deficit falling to 5% of GDP over the medium-term. The currency’s depreciation in real effective terms has improved the competitiveness of exports both visible and invisible (i.e. services). The government aims to cut the budget deficit by half by 2014/15, whilst reducing the net public debt to GDP ratio. In short, Jamaica is putting its house in order.

The country’s first long-term development plan ‘Vision 2030 Jamaica’ (launched in 2008) inspires to attain developed country status by focusing on four core areas: a vibrant macro-economy; effective governance; world class education and training (especially science/technology); and greater security and safety. Jamaica has a realistic chance of achieving its national goals by 2030. However for the period 2012-2014 the three industries which are expected to perform well are the financial sector, the tourism industry and the Manufacturing industry.

Industry Analysis

Financial Sector

The financial services industry in Jamaica consists of commercial banks, merchant and trust banks, credit unions, building societies and licensees under the Financial Institutions Act as well as non-deposit taking institutions including insurance companies, development banks and securities dealers. In 2008 there were 129 licensed financial institutions in Jamaica including 7 commercial banks, 46 credit unions, 17 insurance companies and 48 securities dealers, as well as 4 building societies, 3 FIA institutions and 4 development banks. Consistent with the current trend in developing countries, there are also a large number of foreign exchange Cambios, remittance and money transfer companies and bill payment companies that facilitate transactions between the domestic and international markets.

There has been a reduction in the total number of institutions operating in the financial sector over the past decade, from 189 in 1996 to 129 in 2008. The lower numbers reflect closures, mergers and downsizing, with the effect of the most efficient institutions emerging. Commercial banks are the largest sub-group within the financial sector. In 2008, assets of commercial banks accounted for approximately 76.0 per cent of total assets of the financial system, with Building Societies at 19.0 per cent and FIAs at 5.0 per cent.

The Financial Services Commission (FSC) was established in 2001 and there were several substantial amendments to the Bank of Jamaica Act, Banking Act, Money Laundering Act and Financial Institutions Act. The regulatory framework for the supervision of pension funds and credit unions also has been strengthened. The Jamaica Deposit Insurance Corporation (JDIC) was incorporated in August 1998 to provide insurance against the risk of loss of deposits held in insured financial institutions. The JDIC receives premiums from insured financial institutions at a rate of 0.15% of their total insurable deposits and the funds are invested to build the Deposit Insurance Fund.

After such severe restructuring the financial sector regained some buoyancy which has seen its share of GDP climb to 10.8% to GDP in 2008 and the total assets of deposit-taking institutions in the financial sector increase from J$238.9 billion in 1999 to J$715.8 billion in 2008. However, much of this financial activity has been fuelled by the explosion of domestic debt, which also has seen the increased growth of the Jamaican money market as an intermediary between individual holders of capital and the government securities market (approximately half of the dealers’ funds under management are with retail clients). This has reduced the ability of the sector to provide the capital needed by the private sector for productive investments. As the sector restructures and the market becomes more competitive, financial institutions continue to refocus their attention to their core functions, as evidenced by increased loans to the productive sectors.

Jamaica has considerably strengthened financial system oversight following a costly financial crisis in 1996-97. The financial system is deep and well-developed, the regulatory framework has in many respects been brought into line with best international practices, and supervision appears to be implemented in a systematic and professional manner. Remaining regulatory gaps and weaknesses in the financial infrastructure are well recognized by the authorities, who have implemented important reforms. Regulatory capital has also increased in most financial institutions to levels that permit a reasonable degree of resilience against macroeconomic shocks. However, data limitations prevented a full system-wide quantitative analysis of risks.

During 2000-2008 the total stock of loans and advances increased by 587 percent and 308 percent, for commercial banks and FIA institutions, respectively. However, the volume of government debt held by these institutions decreased. The Bank of Jamaica and the Financial Services Commission continued to strengthen their respective regulatory framework in order to maintain stability within the industry and to conform to new developments in international standards. As at 31 March 2009, the seven commercial banks and two merchant banks (at the time) had total assets of J$582,515,204 billion with liabilities of J$516,216,670 billion resulting in total capital of J$35.649 billion.

Manufacturing Sector

The Manufacturing Sector represents a critical component of the economies of many developing countries including Jamaica. Jamaica’s manufacturing sector is diverse and modern. Products encapsulated under this sector’s activities are: beverages, processed foods, chemicals, plastics, cosmetics, pharmaceuticals, nutraceuticals and apparel. The island also produces spices and condiments, canned ackee and callaloo, as well as natural juices, soft drinks, beer, wines, spirits, and liqueurs.

The manufacturing sector accounts for 12.8% of GDP per annum, employs approximately 7% of the labour force and is second in terms of sector contribution to real GDP. Jamaica’s manufacturing sector grew during 2007 and contributed approximately 12.6% to total GDP, with total revenues exceeding US$700mn. Manufactured exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products; and total investment in the manufacturing sector facilitated by Jamaica Trade and Invest amounted to J$3.6 billion during 2007. These investments spanned several sub-sectors including agro-processing, plastics, petrochemicals and cement. The petrochemical sub-sector was positively impacted by the development of an ethanol dehydration facility at Port Esquivel, St. Catherine. Further expansion also took place in the plastics sub-sector and in the cement sub-sector through modernization and upgrading of clinker and cement production facilities. However, this overall picture of growth during 2007 was complemented by the Government’s focus on increasing productivity in order to impact growth. Government implemented programmes that facilitated international competitiveness included worker skills training, technology upgrading, research and development, the Private Sector Development Programme (PSDP) and the Quality Jamaica Project, which includes training in Hazard Analysis Critical Control Point (HACCP). Manufactured exports represent approximately 12.6% of GDP in 2007, while the sector employs about 6.1% of the total labour force. Exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products.

The global economic crisis in the last quarter of 2008, spurred by the financial collapse in the United States emerged, which had implications for the productive sector. Devaluation of the dollar, high interest rates, reduced domestic and export sales, credit crunch, high inflation, soaring oil prices, and skyrocketing input costs of raw material were some of the challenges experienced in the face of the world financial crisis.

For the year 2008, the Jamaican economy contracted by an estimated 0.6%. Real Gross Domestic Product (GDP) for the Goods Producing Sectors contracted by 3.0%, while the Services Sectors grew by 0.3%. The performance of the economy was adversely affected by the sharp rise in commodity prices, the subsequent decrease in commodity prices due to the global financial crisis, decline in external demand for Jamaican goods and services, sharp decline in the availability of capital for fiscal budgetary support and private sector investment as well as the lingering effects of hurricane Dean and tropical storm Gustav.

The sector contributed 8.5% to GDP and the total employed labour force grew by 3.5% to 80,100 persons. For the period, total manufactured exports also increased amounting to US$1,224.75 million, an increase of 37.5%. This was attributable mainly to increased export earnings from Non-traditional Exports of US$1,094.7 million. However, the sector declined by 1.2% due to a challenging environment and the global financial crisis which contracted the performance of the Food, Beverage and Tobacco and Other Manufacturing components of the industry by 2.4% and 0.2%, respectively.

Tourism Industry

Jamaica’s economy relies heavily on tourism, which has become the country’s largest source of foreign exchange. Most tourists remain on the island for several days or weeks, although increasing numbers disembark only briefly from cruise ships at Ocho Rios, Montego Bay and the newly renovated and opened Falmouth Pier. These and other towns on the northern coast, as well as Kingston, are the tourist sector’s main bases of activity. Jamaica is famous for its pleasant climate, fine beaches, and superb scenery, including the waters of Montego Bay and the majestic Blue Mountains.

Industry Performance

The tourism industry has shown strong and sustained growth since Independence. The total number of visitor arrivals to Jamaica has grown from some 271,692 in 1962 and 670,202 visitor arrivals in 1982 to a total of 2,860,544 visitor arrivals in 2008, an annual increase of 5.3% over the 46 year period. The island saw a record 3,016,898 visitors in 2006. The island’s tourism accommodation stock increased from 10,327 rooms in 1982 to

29,794 rooms in 2008, while total receipts from tourists grew from US$337.8 million in 1982 to US$1,975.5 million in 2008. The development of the tourism sector over this period has seen an increase in the relative importance of cruise passenger arrivals which grew from 29% of total visitor arrivals in 1982 to 38 % of total arrivals in 2008. There also has been the emergence of globally competitive Jamaican-owned all inclusive hotel chains such as Sandals, SuperClubs and Couples, and the diversification of tourism markets including growth in arrivals from the United Kingdom, Europe and

the Caribbean in addition to the traditional North American markets.

As one of the best-known island destinations, Jamaica enjoys significant competitive advantages in Tourism and Travel Services. Based on its strong brand image, an appealing natural environment and human and cultural assets, the Jamaican Tourism industry has been identified as one of the key industrial clusters deemed capable of driving sustainable economic growth in the long term. Jamaica has had a long experience as a tourist destination, being a favoured retreat for travelers from Europe since the eighteenth century. The tourism industry, however, started in earnest in the late nineteenth to early twentieth century, with the first systematic efforts by Government to promote the industry, and by private investors to establish large hotels. The emergence of the industry coincided with the rapid economic growth of the United States, which has remained the main source of visitors up to the present.

Jamaica has been one of the best-known resort vacation destinations in the world for decades. Originally known for its stunning physical beauty and as a playground for the rich and famous, the island has since seen its tourism industry experience significant growth and diversification. Jamaica currently boasts one of the most diverse visitor accommodation sectors in the Caribbean, including world-famous all-inclusive resorts, upscale hotels and villas, and a range of distinctive tourist accommodations and attractions.

While the tourism sector is a major earner of foreign exchange there is a relatively high leakage of these benefits through imports of goods and services and payments of interest and investment income to overseas providers of capital. In order to retain more of the value added by the tourism sector linkages between the tourism and the other sectors of the economy, including agriculture, manufacturing and services need to be enhanced.

In-depth analysis of the manufacturing industry

Manufacturing Sector

The Manufacturing Sector represents a critical component of the economies of many developing countries including Jamaica. Jamaica’s manufacturing sector is diverse and modern. Products encapsulated under this sector’s activities are: beverages, processed foods, chemicals, plastics, cosmetics, pharmaceuticals, nutraceuticals and apparel. The island also produces spices and condiments, canned ackee and callaloo, as well as natural juices, soft drinks, beer, wines, spirits, and liqueurs.

The manufacturing sector accounts for 12.8% of GDP per annum, employs approximately 7% of the labour force and is second in terms of sector contribution to real GDP. Jamaica’s manufacturing sector grew during 2007 and contributed approximately 12.6% to total GDP, with total revenues exceeding US$700mn. Manufactured exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products; and total investment in the manufacturing sector facilitated by Jamaica Trade and Invest amounted to J$3.6 billion during 2007. These investments spanned several sub-sectors including agro-processing, plastics, petrochemicals and cement. The petrochemical sub-sector was positively impacted by the development of an ethanol dehydration facility at Port Esquivel, St. Catherine. Further expansion also took place in the plastics sub-sector and in the cement sub-sector through modernization and upgrading of clinker and cement production facilities. However, this overall picture of growth during 2007 was complemented by the Government’s focus on increasing productivity in order to impact growth. Government implemented programmes that facilitated international competitiveness included worker skills training, technology upgrading, research and development, the Private Sector Development Programme (PSDP) and the Quality Jamaica Project, which includes training in Hazard Analysis Critical Control Point (HACCP). Manufactured exports represent approximately 12.6% of GDP in 2007, while the sector employs about 6.1% of the total labour force. Exports grew by 7.3% in 2007 to US$705.8 million, a reflection of higher export earnings from both non-traditional and traditional manufactured products.

The global economic crisis in the last quarter of 2008, spurred by the financial collapse in the United States emerged, which had implications for the productive sector. Devaluation of the dollar, high interest rates, reduced domestic and export sales, credit crunch, high inflation, soaring oil prices, and skyrocketing input costs of raw material were some of the challenges experienced in the face of the world financial crisis.

For the year 2008, the Jamaican economy contracted by an estimated 0.6%. Real Gross Domestic Product (GDP) for the Goods Producing Sectors contracted by 3.0%, while the Services Sectors grew by 0.3%. The performance of the economy was adversely affected by the sharp rise in commodity prices, the subsequent decrease in commodity prices due to the global financial crisis, decline in external demand for Jamaican goods and services, sharp decline in the availability of capital for fiscal budgetary support and private sector investment as well as the lingering effects of hurricane Dean and tropical storm Gustav.

The sector contributed 8.5% to GDP and the total employed labour force grew by 3.5% to 80,100 persons. For the period, total manufactured exports also increased amounting to US$1,224.75 million, an increase of 37.5%. This was attributable mainly to increased export earnings from Non-traditional Exports of US$1,094.7 million. However, the sector declined by 1.2% due to a challenging environment and the global financial crisis which contracted the performance of the Food, Beverage and Tobacco and Other Manufacturing components of the industry by 2.4% and 0.2%, respectively.

Economic outlook for the Manufacturing sector

A more economic perspective for the Jamaican manufacturing is to see interest rates trending down, Banks beginning to make loans and sustained stability in the exchange rate. This sector is showing some renewed buoyancy and has shown significant growth over the last two quarters. Despite the tough economic conditions, manufacturing is predicted to contribute positively as this area will be a focal part for the government as this area should harness more growth and development. The government expects to boost this sector to create employment through the money it receives from the International Monetary Fund (IMF). We expect that this will continue, as this is a very important sector representing a large chunk of overall GDP. So whatever happens to manufacturing will have an overall impact on the economy. These are some very good investment opportunities for the manufacturing sector for the coming years.

Agro- processing: Canned vegetables and canned fruit present good opportunities for investment in the food processing sector.

Chemicals and chemical products: Reference is being made particularly to aluminium sulphate, detergents and paints, which showed steady growth in 2007. This is expected to continue as the construction industry is projected to grow by 4.5 percent in 2008 which will be facilitated by the growth in Non-residential and hotel sectors as well as expansion of the sea and airports.

Bio- technology: Jamaica is blessed with a number of indigenous herbs which can be used in the promotion of health and wellness.

Food processing, Beverages and Tobacco: The food processing sector grew by 3.3 per cent in 2007, while growth in the beverages and tobacco sun-sectors stood at 1.8 per cent. These sectors are expected to grow due to the anticipated increase in the food production.

For the Manufacturing Sector in Jamaica the identification of strengths and weaknesses represents the internal assessment of the sector while the consideration of opportunities and threats represents the analysis of the external environment for the sector.

STRENGTHS

Sourcing and Procurement

Current availability of high quality raw Jamaican materials (including agricultural products, limestone, cement)

Strong international supply relationships

Reduction of duties on imported raw materials

Production

Largest contributor to GDP of all goods-producing sectors

World-class enterprises in several manufacturing subsectors and industries (including food processing and beverage industries, paint, plastic containers)

Ability to make high quality products

Numerous small and diverse production facilities allowing for a range of focused niche markets and products

Environment

Availability of some ‘green’ raw materials

Limited use of environmentally friendly/clean production technologies

Finance

Downward trend in deposit interest rates making equity investments in manufacturing relatively more attractive

Human Resources

Large employer of labour

Pool of trainable workforce

Innovativene