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Dated: 1 November 2002
There was mixed performance in the domestic economy in the September quarter, according to the latest available official figures. The rate of inflation for the quarter was 2.4 per cent, well within the projected range of 2.3 per cent to 2.9 per cent.
The net international reserves (NIR) was US$1.687 billion at the end of September, meeting the target under the Staff Monitored Programme (SMP) in spite of the challenges that were faced during the quarter.
In addition, the Bank’s estimates indicate that there was economic growth in the quarter, notwithstanding the adverse impact of poor weather conditions on the agriculture sector and sluggish recovery in the tourism industry.
There were a number of external and domestic factors, which influenced the economic performance in the September quarter. Among the domestic factors were, adverse weather conditions, uncertainties regarding the General Elections and the perception of weak foreign exchange earnings.
At the international level, continued uncertainty regarding the pace of recovery of the world economy, in particular weaker than forecasted economic growth in Jamaica’s main trading partner, the USA, and the threat of war between Iraq and western nations served to dampen the prospects for the mining and tourism sectors.
In the context of these developments, the fiscal deficit was larger than programmed. Financing for the deficit came mainly from borrowing on the domestic market and a draw-down in Government’s balances in the Central Bank. Consequently, the bank’s net domestic assets (NDA) were more expansionary than programmed.
The ensuing build-up of domestic balances in the system fueled the demand for foreign exchange, thus leading to sharp movements in the exchange rate. In spite of the Bank of Jamaica selling funds to the market to augment supplies, the rate continued to move at an accelerated pace. Consequently, on 9 September, the Bank increased rates on two of its shorter-term tenures, which induced a shift to domestic assets. This action was temporary, as the bank remained committed to the gradual lowering of interest rates.
In spite of the threats to price stability, the inflation rate for the September quarter was 2.4 per cent, relative to the bank’s forecast in the range of 2.3 per cent to 2.9 per cent. On a monthly basis, the Consumer Price Index (CPI) increased by 1.5 per cent in July and by 0 .4 per cent in August and September. The out-turn for the quarter brings the inflation rate to 4.1 per cent for the first half of the fiscal year, 1.7 percentage points below the rate for the corresponding period of F/Y 2001/02. For the calendar year to end September the inflation rate was 4.6 per cent, relative to 7.2 per cent for the same period of 2001.
A decomposition of headline inflation for the quarter indicates that, approximately 67.0 per cent of the out turn was due to non-monetary factors, in particular, seasonal increases in the prices of agricultural products. These increases were reflected in the strongly weighted Food and Drink group, which accounted for 51.0 per cent of the out turn in the quarter.
The other major contributor to inflation in the review period was the increase in school-related expenses associated with the start of the new school year. Core inflation was estimated to have fallen to 0.76 per cent from 0.86 per cent that was estimated for the June quarter.
The instability in the foreign exchange market that characterised the June quarter, continued into the September quarter. The weighted average selling rate depreciated by 1.5 per cent, compared with 1.9 per cent in the June quarter. Most of this depreciation took place in August and September, in the context of heightened uncertainty surrounding the General Elections, higher than programmed Jamaica Dollar liquidity and the seasonal demand by end-users to meet payments for imports.
In response to the pressures in the market the central bank initially sold foreign exchange to augment the available supplies. Despite this, there was the continuation of sharp movements in the exchange rate, particularly towards the end of the quarter. The bank therefore adopted a two-pronged approach, selling foreign exchange as well as increasing interest rates. The rates on the 90-day and 120-day tenors of the Bank’s open market instruments were raised to 17.25 per cent and 17.05 per cent, respectively, on 9 September.
Subsequently, the rates were increased on the same instruments on 9 October to 19.25 percent and 19.4 per cent, respectively, but on the 28 October, it reduced these rates by 100 basis points. The market-determined interest rates on Government instruments also shifted upwards during the period. However, in the auctions held recently, there were reductions in the rates on these instruments as well.
Consistent with the bank’s active presence in the foreign exchange market, to maintain orderly adjustments in the exchange rate, the net international reserves (NIR) declined by US$95.0 million in the quarter. Despite this decline the target under the Staff Monitored Programme was met, with the NIR at the end of September 2002, amounting to US$1.687 billion. Gross reserves amounted to US$1 738.6 million, representing 19.4 weeks of imports of goods and services, compared with the international benchmark of 12 weeks.
In spite of the adverse developments in the quarter, the economy is estimated to have recorded growth, engendered by the reductions in interest rates earlier in the year and manifested in an increase in commercial bank credit to the private sector. Growth was estimated to expand in both the goods producing and the services sectors.
For the goods sector, there was estimated expansion in manufacturing and construction, while agriculture and mining were estimated to have declined.
The estimated growth in the services sector resulted from continued expansion in basic services. Within the basic services sectors, communications, electricity, water and transport were the major drivers. The estimate of growth in these sectors is reinforced by the recorded expansion of commercial bank loans by 4.1 per cent and 27.1 per cent to transport, storage and communication and electricity, respectively, over the quarter.
The improvement in real sector activities was reflected in the performance of the stock exchange, which has continued to record strong growth, with many companies registering growth in profitability. The buoyancy in the market at the beginning of the quarter was however, moderated in September, consequent on the Central Bank increasing interest rates on two tenors of its open market instruments. The last quarter has seen improvements, which at December 13, gave the JSE Index a gain for the year amounting to 10,938.35 points or 33.04%.
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