The GOJ continued its trend in solid fiscal performance over the review period meeting all its fiscal quantitative and indicative performance criteria as at end May 2018. Tax revenue continues to be robust at $78.7b just ahead of the budget target of $77.7b, buoyed by strong compliance. The Committee noted that, total expenditures were below budget by $1.383b.
This outturn of Tax Revenues and Expenditures contributed to a Primary Balance Surplus of $15.8b which exceeded the GOJ target of $14.2b. It is likely that the IMF SBA programme fiscal targets will be met for end June 2018.
MONETARY PERFORMANCE – ‘Monetary Policy Consultation Clause triggered.’
Monetary quantitative performance continued to show mixed results at end June 2018, which is the date for which the IMF will complete the next review of the Programme targets. The most recent results at end of June shows inflation at 2.8%, which is a deepening out-of-target performance, below the BOJ’s target of 4.0% to 6.0%.
The BOJ has indicated that inflation fell outside the target range due to a stronger than anticipated recovery in agricultural supplies in the March 2018 quarter, as well as lower than forecasted imported inflation associated with a strengthening currency and a reduction of the pass through of oil prices to inflation. The BOJ further indicated that the low inflation outturn was influenced by weak domestic demand conditions.
Most importantly, the Committee noted that the first quarter IMF SBA Quantitative Performance Criteria (QPC) for inflation has been breached and will trigger the Monetary Policy Consultation Clause (MPCC) which requires the BOJ to consult with the IMF’s Executive Board on the reasons for the deviation and the proposed policy response.
On a positive note, Non-Borrowed Reserves at US$2.484b has exceeded the SBA target of $2.073b at end June 2018.
BOJ Lower Interest rates – ‘Push Aggregate Demand’
On June 28, 2018 the Bank of Jamaica aggressively lowered its policy rates by 50 basis points to 2.00 percent. As indicated in the last EPOC communique, this was done in response to their projections that inflation will remain below its targeted 4-6 percent up to end December 2018. The BOJ has indicated that the decision to loosen the policy stance is aimed at fostering greater credit expansion, stimulate aggregate demand, increase the growth rate of GDP which will support inflation returning to the target of 4.0 percent to 6.0 percent.
EPOC continues to support the decision to lower policy rates and believes over the medium term it should stimulate credit expansion and economic growth.
Trends in the Exchange Rate
EPOC has taken note of the recent trend in the depreciation of the Jamaican dollar by 6.4% for the financial year to date. On July 24, 2018 the dollar depreciated to a record low of $134.05 to US$1.00, reflecting a deprecation of 2.81% or $3.66 for the month to date. According to the BOJ, the devaluation was influenced by strong end-user and portfolio related demand as well as a tightening of US dollar liquidity.
While EPOC understands and expects there to be inevitable movements in the exchange rate under a floating exchange rate regime, many have linked exchange rate stability to macro-economic stability, and therefore we believe the transition from a managed float to a free float should be managed to preserve the confidence in the macro-economic stability that stakeholders have gained over the past 5 years.
Independence of the BOJ
The Minister of Finance and the Public Service, Hon. Dr. Nigel Clarke, has indicated that he will be tabling in Parliament by October 2018, amendments to the Bank of Jamaica’s Banking Services Act, and the Public Bodies Management and Accountability Act, which will strengthen the operations of the BOJ.
These amendments will enhance BOJ’s governance structure and independence which are crucial to pursuing an effective inflation rate targeting policy. This involves establishment of a clear and prioritized mandate of price stability as the goal of monetary policy.
EPOC notes the benefits of inflation targeting in creating an environment of price stability and the stable environment that is created to give individuals and businesses the ability plan for the medium to long term.
However, as the GOJ and the BOJ move towards a focus on inflation targeting and away from the movements in the value of the Jamaican dollar in relation to the US dollar, EPOC believes it is critical that through education, credibility be built in the inflation measurement as there exists scepticism around the inflation numbers relative to the price movements that Jamaicans feel they experience.
EPOC, Co-chair, Keith Duncan, in underscoring the Committee’s stance on an Independent Central Bank said, “We welcome the movement towards an Independent Central Bank and inflation targeting as the primary monetary policy focus as an important foundation for financial and economic stability.”
He added, “However, we caution the GOJ that the transition should be carefully managed and supported by appropriate and effective sensitization, communication and education to the financial markets and the general Jamaican population to minimize uncertainty and anxiety.”
IMF PROGRAMME RISKS
The wage negotiations between the GOJ and the Public Sector workers continue quietly and remain an outstanding item in the new Financial Year 2018-19. EPOC continues to be hopeful that an agreement will be concluded with all the remaining stakeholders, including the Police and Nurses, in keeping with Jamaica’s legislated 9 percent wage to GDP Fiscal Rule for 2018-19.
Inflation below targets- ‘Fiscal targets at Risk’
EPOC reiterates that a low inflation out-turn can be received as positive, but it does have implications for Programme targets, specifically fiscal targets, including Tax Revenues and those linked to Nominal GDP – such as the Debt to GDP targets and 9 percent Wage to GDP Fiscal Rule (2018/19)
Increasing Current Account Deficit
While not a clear and present risk with the continued increase in Oil and Natural Gas Prices, the Current Account deficit could possibly widen further and therefore EPOC will be paying close attention to the Movement in the Non Borrowed reserves Quantitative Performance Criteria.
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