Jamaica today is experiencing an economic rebound and stabilizing currency after the economy stagnated significantly from the New York related terror attacks on September 11, 2001 in the United States. At present, the Jamaican tourism industry has improved even at a period of time in history for Jamaica where the country is plagued with one of the world’s highest murder rates, an informal drug economy that plays an active role in the global trade of cocaine and illegal marijuana production, etc .Economic deficiencies have included a stagnant economy resulting in high unemployment for its 2.7 million citizens, high debt loads, trade deficit shortfalls. The overall picture for Jamaica is that of an improving situation although risks remain.
POLITICS: Prime Minister P.J. Patterson was elected to his 3rd term in October 2002 representing the Ruling People’s National Party. The main opposition party is the Jamaica Labor Party. Jamaica is a former British Colony obtaining independence in August 1962 from the United Kingdom. The country’s publicly funded social net is in place but its overall impact has been questioned since 20 percent of the population still live below the poverty line.
ECONOMICS: small open economy with a narrow productive base. Economic restructuring of the economy began in 1995-96 with privatization programs and external tariff reduction. Historically, Jamaica’s leaders have made unfortunate decisions that have greatly impacted the economy to great detriment. During the 1970’s, the economy was nationalized following flawed socialist ideas. The result was a very weak economy whereby tens of thousands of Jamaicans emigrated to New York, Toronto and the United Kingdom. Conversely today, Jamaica receives large capital inflows from these cities in the form of remittances from Jamaican relatives living abroad. Remittances form an important part of the Jamaican economy.
Industry groups include bauxite, sugar cane, rum, textiles, bananas - agriculture, tourism and mining. Bauxite & alumina operations are a large an important industry group within Jamaica. At present, Jamaica exports 40,000 tonnes per year of bananas to the European Union and the much anticipated new tariff regime with the EU is ready to be finalized. The tourism industry is valued at $1.3 billion USD per year and is rebounding from the 2001-02 global lows. Tourism for Jamaica is a very important cash flow generator as it brings in 50 percent of foreign exchange income. Overall, the industry is vibrant with new hotels including the Ritz Carlton in Montego Bay which opened in 2000, Jamaica’s only AAA Five Diamond rating luxurious hotel.
Economic Risks
As of year 2003, national debt ballooned to 152 percent of GDP requiring 65 percent of the budget for debt servicing. High debt loads increase the nation’s vulnerability to interest rate and potential default risk? On the plus side for Jamaica, much of the debt is well distributed over many years. Current risk is evident with rising inflation levels from single to double digit levels. Hurricane risk can greatly impact economic output? Hurricane Ivan was a category five which brought destruction valued at $100 million USD to Jamaica’s agricultural sector.
Economic Statistics
Market GDP is measured at approximately $8 billion USD with corresponding GDP/Capita at $3,000. As measured by purchasing power parity, GDP stood at $10.6 billion USD (2003) with GDP/Capita at $3,900 (2003). GDP growth for 2004 at 1.6 percent of GDP, year 2005 is projected at 1.6 percent. Year 2003 GDP growth was low at 1.9 percent, year 2002 at 1.0 percent, 2001 at 1.1 percent. Inflation figures have year-end 2004 moving higher towards 10 percent with the average rate at 7 to 8 percent, year 2005 is forecasted at 7 percent. Monthly inflation figures currently have a range of 0.5 to 1.5 percent, large spread. Other inflation figures consist of year 1995-96 at 31 percent, years 1998-2003 in the 6 to 8 percent range. Fiscal deficit for year 2002-03 came in at 7.7 percent of GDP which is quite high, current shortfalls remain in the 7 percent range. Current account deficit for 2004 at 11 percent of GDP, year 2003 recorded a very large 15 percent shortfall, year 2000 at 4.5 percent and year 2002 only 2 percent deficit. Public debt to GDP is at 145 percent of GDP (2004), external debt was measured at $5 billion USD (2003). Official unemployment in year 2003 stood at 15.9 percent. Services account for 70 percent of GDP. Export partners include United States, United Kingdom and Canada while imports include United States, Trinidad & Tobago (petroleum) and Germany.
POSITIVE: large number of cruise ship visitors, Jamaica is focusing in on increasing foreign direct investment. CONCERN: crime is a problem as it is hampering economic growth, police killings of suspected criminals is high by world standards, year 2001 recorded 1138 murders on a population of 2.6 million, young median age of only 27 years, decline in textile production, no oil production, active labor unions which may propel inflation.
BANKING SYSTEM: international reserves held at the nation’s central bank ‘Bank of Jamaica’ as of February 2005 stood at $1.831 billion USD, down from $2 billion USD equivalent in 2002. In the late 1990’s, several bank insolvencies were prevalent within Jamaica. Interest rates remain high although lower from the late 1990 levels with the 180 day BOJ CD rate (2004) averaging 16 percent. Commercial savings rate pay on average 6.5 percent while lending rates can be upwards of 25 percent. During the late 1990’s, Jamaica implemented a tight monetary policy to combat inflation resulting in weaker economic growth. In 1997, legislation was also introduced to strengthen the financial sector. In 1998, deposit insurance was implemented.
REGIONAL ANALYSIS: Caribbean
Much of the region has had years of stagnant economic growth although many islands are now doing well as diversification into financial services coupled with improved infrastructure for tourism arrivals is providing for greater economic revenues. Similar to Jamaica, many Caribbean CARICOM countries are deeply in debt. Perhaps in the long term, CARICOM countries will unify to become a stronger economic bloc and adopt a single unified currency in similar concept to the European Union home to one currency, the euro.
KNOWLEDGE: Drugs and Crime
Crime within Jamaica is a problem although concentrated to few specific groups such as young members of the population associated with gangs and the drug trade. The crime wave for most part is in and around the capital of Kingston. Gang violence has been plaguing Jamaica for decades as the majority of the crime is drug related. The lucrative drug trade provides for an informal economic subsidy to Jamaica including domestic production of marijuana. Historical ties with the two main political parties and gangs within Jamaica go back to the 1970-80’s. These two main political parties used gangs as a vehicle to drum up political support using terror and crime. The net result was a society engrained with violence, crime and terror. The impact of crime on tourism is negligible as the main resorts such as Montego Bay are far away from Kingston and have their own major airports nearby. Jamaica is a major transshipment centre for Colombian cocaine to markets in the United States and Britain via the use of drug mules (smugglers planting cocaine inside their bodies for transport). Jamaica does not want to be the next Haiti of the Caribbean with civil disobedience coupled with a declining standard of living.
CURRENCY: ISO Symbol ‘JMD’, Jamaican dollar. At time of review on March 16, 2005, the Jamaican dollar had an exchange value of 61.66 JMD to the US-dollar (USD).
The exchange rate regime follows that of a float. As measured by purchasing power parity, the JMD was approximately 35 percent undervalued to the USD as of May 2004 and close to par in April 2002 as measured by PPP. In 2003, the JMD declined by 16 percent to a weighted average of major currencies, year 2004 experienced only a 1.6 percent decline. As of February 2004, the JMD was actually appreciating for its first time since 1998.
CURRENCY HISTORY: historical exchange quotes include: year 1993 at 24.94 JMD to the USD, November 1995 at 36.04, year 1994 at 33.08, 1995 at 35.14, January 1997 at 34.02, January 1999 at 37.6, January 2000 at 40.79, January 2001 at 44.96, January 2002 at 47.1, January 2003 at 50.81, May 2003 at 60.10, January 2004 at 60.34, January 2005 at 61.6.
CURRENCY FORECAST: if a currency crisis envelopes, then it may be possible that an alternative currency arrangement takes hold such as a currency board or outright dollarization. But the current monetary policy framework governed by Jamaica’s central bank is the correct policy route unless economic catastrophe occurs within Jamaica such as a devastating hurricane seriously damaging the country or for example an escalation in civil conflict which impedes the economy. The Jamaican dollar is currently performing better as this is noticed by the market funding Jamaica with a successful sovereign bond issue in the amount of 150 million EUR in QTR1 2005. Going forward, higher commodity prices for bauxite, sugar, remittances from abroad and increased tourist visits (ie. cruise ship arrivals) will help to maintain economic stability. In BankINTRO.com’s view, the Jamaican dollar at times remains vulnerable and warrants a higher currency risk ranking category.
UPDATED: March 16, 2005
