Latin America Advisor
A Publication of The Dialogue
What Will It Take to Grow Jamaica’s Economy?Jun 11 2018
- Earl Jarrett
- Vangie Bhagoo-Ramrattan
- Charles Seville
Jamaica’s economy expanded 1.2 percent in the year’s first quarter, with the mining industry driving growth, the Planning Institute of Jamaica announced May 22. However, the country’s growth rate expanded just 0.8 percent in the 2017-2018 fiscal year, the institute said. Will the country’s mining sector continue to be the largest contributor to growth this year? What headwinds is Jamaica’s economy facing? How well are the policies of Prime Minister Andrew Holness aiding economic growth and strengthening businesses in the Caribbean nation?
Earl Jarrett, chief executive officer of The Jamaica National Group Limited: “Jamaica has worked hard to achieve economic stability supported by sound fiscal management practices. However, the country has suffered low growth rates over the past 30 years, making it one of the slowest growing developing countries worldwide. The mining sector’s contribution to growth in the economy was evidenced by the reopening of the Alpart mining plant by the Chinese company JISCO in mid-2017; and, the firm has long-range plans to expand into other areas, such as aluminum smelting and LNG energy. It is not anticipated that the mining sector will continue to be the driver of economic growth, however. The achievement of economic stability has been influenced by the successful implementation of the International Monetary Fund’s Extended Fund Facility program, which comes to an end in 2019. There are also other key areas that are expected to positively influence the growth agenda, such as: significant investment in Jamaica, primarily by Chinese entities involved in infrastructure and construction projects; and growth in business process outsourcing, or call center operations, where American firms have outsourced customer service calls to Jamaica. These growth options come against the backdrop of a decrease in unemployment rates to 9.6 percent, down from 10.4 percent; and a 12.1 percent increase in annual tourism inflows, with visitor arrivals at a record 4.2 million at the end of 2017. However, despite this growth and improvement projection, the economy is still somewhat fragile and is subject to external shocks, such as: increases in oil prices; the hike in interest rates in the United States; and, of course, natural disasters, including hurricanes. It seems obvious that the policies of the Jamaican government are in fact strengthening and promoting economic growth, as the administration strives to create an enabling environment for businesses to be bolstered by local and international investment.”
Vangie Bhagoo-Ramrattan, head of research at First Citizens Investment Services in Trinidad and Tobago: “While considerable progress has been made on the macroeconomic front in Jamaica, growth remains anemic. Five years into the economic adjustment program, economic growth has averaged just around 0.9 percent. The Bank of Jamaica has indicated that the projected growth in GDP is reflective of strong foreign demand. So far in 2018, however, growth has performed above the five-year average. The mining sector is expected to continue to perform well, given that the Alpart alumina and bauxite facility has restarted production under new Chinese ownership. After operations resumed in June 2017, the first shipment of alumina was sent at the end of 2017. Investments worth $2 billion in upgrades are also expected in the coming years, which should further boost capacity utilization in the mining sector. Given Jamaica’s high dependence on imported fuel, a major risk to the recovery is higher energy prices, which will increase the country’s fuel import bill. Though an improvement in export earnings from the mining sector and tourism are likely to partly offset the higher fuel bill, the external current account is expected to post a wider deficit in 2018. Nevertheless, from an external stability perspective, Jamaica has been able to build tremendous resilience through the healthy accumulation of foreign exchange reserves as well as support from the IMF Stand-By Arrangement. Another risk that the economy faces is the ongoing fiscal consolidation efforts, which may stymie economic growth. Moreover, the fairly high debt service bill will continue to be a drag on overall economic activity. Structural impediments, such as bureaucracy and crime will also hinder productivity and growth. For these reasons, while real GDP is expected to expand, it is likely to remain below potential in the short to medium term.”
Charles Seville, senior director for North America sovereign ratings at Fitch Ratings: “Jamaica’s economy continues to grow slowly relative to the region and to countries at a similar income level. The recent growth data contrasts with sustained and robust employment growth, with business process outsourcing an eye-catching example, and greater business optimism and confidence in the policy framework. The Holness government and its predecessor have stuck to a tough primary fiscal target of 7 percent of GDP, leading to a fall in public debt-to-GDP ratio—one factor behind our decision to revise the outlook on Jamaica’s ‘B’ rating to positive in January—while the Bank of Jamaica has led a transition to a more flexible exchange rate and accumulated reserves, with IMF backing. This has led to a more stable Jamaican dollar, falling interest rates and a revival in credit. Global growth has picked up, and both tourism and remittances are performing relatively strongly. There are several explanations for the underperformance: tight fiscal policy included a freeze on civil service wages, and public investment halved in GDP terms between 2008 and 2015 but has started to recover as the government seeks to re-allocate resources away from wages and consumption and rationalize the public sector—a challenging task. Other factors are structural and will take longer to improve. Agriculture is a key sector, and weather shocks increase economic volatility. The private sector cited crime as a major concern. There are skills mismatches, and emigration has depleted human capital. Bauxite output has recovered in the wake of recent investment, but short-term prospects are marred by uncertainty over mining operations owned by Rusal, which has been affected by U.S. sanctions. Over the medium term, recent infrastructure investments should favor higher growth in areas such as logistics.”
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