VZCZCXRO1397
RR RUEHGR
DE RUEHKG #1122/01 1582040
ZNR UUUUU ZZH
R 072040Z JUN 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 2975
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1824
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 KINGSTON 001122 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
E.O. 12958: NA 
TAGS: ECON EFIN JM
SUBJECT: JAMAICAN ECONOMIC PERFORMANCE IN 2005: A YEAR OF 
MISSED TARGETS 
 
Ref: A.) Kingston 555 
 
     B.) Kingston 748 
 
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SUMMARY 
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¶1. Data published by the Planning Institute of Jamaica at 
the end of April shows that the country missed its main 
economic targets during 2005.  Real GDP growth of 1.4 
percent was below the original target of 3.6 percent, due 
to weather-related and oil price shocks.  These 
contributed to rising prices, leading to inflation of 12.9 
percent, above the GOJ target of 9.0 percent.  The ensuing 
economic fallout impacted central government's operations, 
which generated a fiscal deficit of USD 444 million. 
However, the foreign exchange market remained relatively 
stable, underpinned by robust international reserves. 
Economic performance improved during the first calendar 
quarter of 2006, with output expanding by 1.4 percent, 
despite a cement crisis (ref. A).  Inflation slowed to 0.1 
percent and the foreign exchange market maintained 
stability, setting the stage for a reduction in interest 
rates.  Nevertheless, the country will have a difficult 
time achieving its economic targets during 2006 due to the 
cement fiasco, high oil prices, and a hurricane season 
that is forecast to be damaging.  End summary. 
 
--------------------------------------- 
Output Stagnates Amidst High Inflation 
--------------------------------------- 
 
¶2. Data published by the Planning Institute of Jamaica on 
April 27 shows that the Jamaican economy recorded marginal 
growth of 1.4 percent during 2005. Construction, tourism 
and mining provided the major thrust for growth.   While 
this was the seventh consecutive year of growth, the 
figure was well below the GOJ target of 3.6 percent due to 
various shocks related to weather conditions and high oil 
prices.  These, combined with a number of policy-induced 
shocks (such as increases in the minimum wage and the 
general consumption tax (GCT)), provided significant 
impetus for prices, which rose by 12.9 percent during 
¶2005.  While this result is lower than the 13.7 percent 
increase recorded in 2004, it exceeded the 9.0 percent 
target, suggesting that the GOJ has yet to stem the upward 
trend in inflation observed since 2003. 
 
---------------------------- 
Fiscal Position Deteriorates 
---------------------------- 
 
¶3. The weak economic performance also impacted the 
country's fiscal accounts, with central government 
operations generating a deficit of USD 444 million or 3.1 
percent of GDP.  The GOJ had programmed a balanced budget 
for fiscal year 2005/06, but with two hurricanes and a 
deficit of USD 443 million for the first nine months the 
target was revised to two percent of GDP.  The revision 
was largely due to a falloff in revenues - despite the 1.5 
percentage points increase in GCT - suggesting either 
increased tax evasion, a reduction in consumption, or a 
combination of both factors.  Revenues were also 
predicated on more buoyant economic growth and the 
relatively poor performance therefore affected 
collections.  Expenditure for the fiscal year was 2.4 
percent below projections, as the GOJ made adjustments to 
compensate for the revenue shortfall.  While these fiscal 
adjustments appeased the capital markets, they made a 
further dent into the already limited capital budget 
required for social and physical infrastructure. 
 
--------------------------------- 
.... But Monetary Policy on Track 
--------------------------------- 
 
¶4. After years of high interest rates to contain demand 
impulses, rates continued to decline, with the average 
benchmark and loan rates falling to 13.4 and 17.3 percent, 
respectively, at the end of 2005.  The foreign exchange 
market also remained stable, supported by Jamaica's 
healthy NIR (USD 2.1 billion) during the year. The rate 
moved from JMD 61.85 per USD 1.00 at the end of 2004 to 
JMD 64.67 per USD 1.00 at the end of 2005.  This 
represented a nominal depreciation of 4.6 percent, but an 
appreciation of about 8.3 percent in real terms after 
 
KINGSTON 00001122  002 OF 002 
 
 
accounting for inflation, suggesting that the country 
continues to lose competitiveness.  If Jamaica's inflation 
remains above that of its international trading partners, 
there could be a major correction in the exchange rate in 
the short to medium term. 
 
---------------------------- 
First Quarter Growth Stalled 
---------------------------- 
 
¶5. There was a brief recovery in economic performance 
during the first quarter of 2006, with GDP increasing by 
1.4 percent, reflecting robust agriculture and tourism 
sector growth.  Agriculture surged by 24.7 percent due to 
favorable weather conditions, while stop-over arrivals 
jumped by 10.8 percent following another record winter 
tourist season.  Output growth would have been more 
significant were it not for a spate of industrial disputes 
(ref. B), some leading to work stoppages at the country's 
four bauxite companies.  These contributed to a 2.2 
percent decline in mining output, a sector which has grown 
by double digits in the last two years.  Even more 
significant, however, was the continued cement debacle 
(ref. A), which has crippled the fast-growing construction 
industry, leading to a 6.3 percent drop in the sector. 
 
¶6. Despite the chronic cement shortage and high oil 
prices, inflation moderated to a respectable 0.1 percent 
during January to March 2006.  Inflationary impulses were 
tamed by an increase in domestic food supplies and a 
relative stability in oil prices.  The lower inflation 
figure allowed the economy to recover some lost 
competitiveness during the period, as the exchange rate 
depreciated by 2.5 percent in real terms.  At the same 
time, private investment inflows increased and the stock 
of NIR climbed to USD 2.2 billion.  These improved 
economic fundamentals set the stage for the monetary 
authorities to reduce benchmark interest rates to 12.8 
percent as well as remove the one percent special deposit 
imposed on commercial banks in 2003 to stabilize the 
financial sector.  (Note: The special deposit was 
initially set at five percent, but was reduced to one 
percent in two steps between February and May 2005.  End 
note.) 
 
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COMMENT 
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¶7. Economic growth will likely remain sluggish during 
April to June, as the cement crisis drags on.  Realizing 
the three percent growth target for 2006 will therefore 
depend on a speedy resolution to the cement saga to kick- 
start the construction sector.  Growth will also depend 
the industrial relations climate in the private sector. 
However, mining and tourism activities should contribute 
handsomely, as both have already posted increases during 
April.  Inflationary impulses emerged for the first time 
in April, with inflation rising by 1.1 percent due to 
higher oil and food prices.  Inflation is predicted at 10 
percent this year, but achieving this target will hinge on 
stable domestic food and oil prices.  The foreign exchange 
market should continue to benefit from relatively buoyant 
inflows from tourism, remittances and private investment 
receipts.  Therefore, in the absence of shocks, the 
exchange rate is expected to continue depreciating in an 
orderly manner during the year.  However, this managed 
depreciation might not be sufficient to recover the 
competitiveness lost during 2005.  End comment. 
 
JOHNSON