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Wayne-RobinsonAN ENTRENCHED LOWER-INFLATION ENVIRONMENT
By Snr. Deputy Governor Wayne Robinson, December 2020

2020 has been, to put it mildly, a very difficult year, and some of the challenges that we have had to contend with this year may still be with us as we continue the recovery process in 2021.  Hope springs with the availability of vaccines but for now we still need to observe the health protocols – wear your mask and maintain the physical distance!

I will leave the epidemiology to those who are qualified and remain in my lane, which happens to be the economy.

The economy and our livelihood have been hit hard by the pandemic, but there are some silver linings in the clouds which tell me that we do have a foundation from which we can rebound if we are diligent and disciplined.  Four things stand out on the macro front:

  1. A fallout in foreign currency earnings would logically be expected to create a constant one-way surge in the foreign exchange rate, and yet, thanks largely to a 30 per cent year-on-year growth in remittances and Bank of Jamaica’s (BOJ’s) proactive response, this did not happen. Even in such abnormal economic conditions, we continue to see normal daily trading volumes in the market, with ebb and flow, of course. We therefore continue to see 2-way movement in the nominal exchange rate. Yes, the exchange rate has depreciated overall but this is what a flexible exchange rate should do in the face of a shock so as to moderate the fallout in the real economy. In light of this, the real exchange rate, that is the nominal exchange rate adjusted for the relative prices in Jamaica and our trading partners, at this point remains competitive, or put another way, it currently favours export and import substitution activities. Export data for August 2020 showed some green shoots with non-traditional exports growing by 19 per cent relative to August 2019.
  2. Despite BOJ proactively providing some US$1 billion in liquidity support to the market over the past nine months, our net international reserves remain at a healthy level of just about US$3 billion.
  3. The Government was able to implement a fiscal stimulus package of J$25 billion, or 1.3 per cent of GDP.  It’s a modest sum by global standards, but the fact that the Government was able to use countercyclical expansionary fiscal policy in response to a crisis is a sign of remarkable progress in Jamaica, made possible since we were disciplined enough to generate fiscal surpluses. This is, indeed, “big people tings.”  What is interesting, and indeed reassuring, is that although tax revenues are lower than last year, they are slightly ahead of expectations and the Government is containing its expenditure within budget. It is therefore no surprise that the prices of GOJ global bonds have been recovering and S & P just reaffirmed the country’s sovereign ratings.     
  4. It is also remarkable in Jamaica’s historical context that monetary policy could be expansionary during a crisis. In previous crises monetary policy had to adopt a conservative posture. Along with a historic low policy rate of 0.5 per cent, BOJ injected just under J$80 billion into the system – an extraordinary monetary stimulus in Jamaica’s context. This is possible as inflation, which is measured every month by the Statistical Institute of Jamaica, remains under control. Suffice to say that apart from a single, small, temporary spike, in June, inflation has remained comfortably within the four to six per cent target range since the crisis began, all despite adverse weather conditions on top of complications from the pandemic. In fact, over the past three years, inflation has exceeded 6 per cent only 2 times, yes only 2 times and for a brief moment! Although the weather, administrative prices and possibly imported oil prices will give us some bumps along the way, we expect this encouraging inflation performance to continue.

It is not by sheer luck or accident that the Government was in a position to respond as they have to such a major crisis and that the macroeconomic environment remains relatively stable. We are in this fortunate situation because of the very ambitious ongoing economic reform programme that we have all sacrificed and worked hard to implement, across political administrations, and with the help of our multilateral partners.

As the late great Miss Lou would say, “Clap yuhself!”

We still have much more to do.  Jamaica’s productivity is low and we are still highly vulnerable to shocks. On the latter, as we all know, there is never a dull moment in Jamaica, so in a sharp swing of nature’s pendulum this year, a prolonged drought was immediately followed by weeks of island-wide heavy rains and flooding. In addition to the dislocation to many lives and the huge repair bill, these flood rains have also inflicted significant damage to our agricultural crops, which in turn has ominous implications for inflation going into the Christmas season and the early New Year.

In the spirit of Christmas, however, I bring you reassuring tidings about inflation.

Yes, it is very likely that by the end of this year and early next year, the impact of flood rains on agricultural prices will prompt a spike in overall inflation.

The good news, however, is that, barring some other major and unexpected shock, the spike in inflation won’t last. Jamaica has now successfully cultivated a lower-inflation environment, and if the spike does occur, then just as happened in June this year and in previous episodes, inflation will revert to the target range soon thereafter. Consumers and businesses, in planning for 2021, should therefore continue making plans on the basis of inflation that is low, stable, and predictable, just like the song says.

So stay safe, remain hopeful, and have a wonderful Christmas and a much better New Year. Working together, the Jamaican economy will bounce back. As Henry Ford once said, “Coming together is a beginning. Keeping together is progress. Working together is success.”

 

 


Dr. Wayne Robinson

Snr. Deputy Governor, Bank of Jamaica

Editorial note: This article was published in the Jamaica Observer: https://bit.ly/2R4PbAZ

Post Author: Editorial Team