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The Commodity Price Bomb and Jamaica
John W. Robinson
Bank of Jamaica
Key Issues
• Vulnerabilities
• Impact of Commodity Prices
• Monetary framework and response
• Complementary Measures
• Outlook
Vulnerabilities- Openness
• Heavily dependent on trade and consequently on world market conditions
• Exports typically amount to 45% of GDP
• Imports normally amount to 60% of GDP
• C/A gap reduced by remittances to ~5%
• Pvt capital + Official borrowing allow for reserve accumulation
Energy Dependence2006 2007 Change %Change 2006 2007
CONSUMER GOODS 1430.2 1837.1 406.9 28.4 25.3 28.4
FOOD 471.5 587.6 116.1 24.6 8.3 9.1 OTHER NON DUR. 426.2 502.1 75.9 17.8 7.5 7.8 DURABLES 532.5 747.4 214.8 40.3 9.4 11.6
of which motor car 111.4 147.3 35.9 32.2 2.0 2.3
RAW MATERIALS 3386.6 3775.4 388.8 11.5 59.9 58.4
FUEL 1760.1 2014.0 254.0 14.4 31.1 31.2 FOOD 199.1 225.7 26.6 13.4 3.5 3.5 OTHER RAW MATS 1427.4 1535.7 108.2 7.6 25.3 23.8
CAPITAL GOODS 833.6 846.8 13.2 1.6 14.8 13.1
* TRANSPORT 161.2 195.1 34.0 21.1 2.9 3.0 CONSTRUCTION 196.3 207.6 11.3 5.8 3.5 3.2 OTH. MACH 471.3 434.3 -37.0 -7.9 8.3 6.7 OTH. CAPITAL 4.9 9.7 4.9 100.2 0.1 0.2
*of which motor cars 46.0 42.0 -3.9 -8.5 0.8 0.7STATIN'S TOTAL 5650.4 6459.3 808.8 14.3 100.0 100.0
US$MN % of Total IMPORTS BY END-USE
Major Commodity PricesMajor Commodity Prices
Years
FY2006/07 FY2007/08 FY2008/09
Oil (WTI) /bbl 64.77 82.27 98.31
% change 8.17 27.02 19.49
HRW Wheat 189.08 309.33 481.67
% change 23.70 63.60 55.71
SRW Wheat 159.05 298.28 499.58
22.38 87.54 67.49
Corn /mt 121.21 176.65 240.15
% change 36.71 45.74 35.95
Soybeans 266.68 447.11 609.62
% change 3.94 67.66 36.35
Rice 303.72 359.38 536.97
% change 6.68 18.32 49.42
Aluminium /mt 2664.92 2623.55 2670.28
% change 31.36 -1.55 1.78
Exports
2006/07 2007/08 Change %
Change 2006/07 2007/08
Bauxite 115.2 115.5 0.3 0.2 5.6 5.2
Alumina 1081.9 1221.2 139.3 12.9 52.5 54.8
Sugar 90.4 91.2 0.8 0.9 4.4 4.1
Bananas 13.3 6.4 -6.9 -52.2 0.6 0.3
Other Traditional Exports 78.5 75.9 -2.6 -3.3 3.8 3.4
Non-Traditional Exports 644.0 658.1 14.1 2.2 31.2 29.5
Re-Exports 38.0 60.2 22.2 58.5 1.8 2.7
Total 2061.3 2228.5 167.2 8.1 100.0 100.0
% of TotalUS$MN
EXPORTS
Relief Valves
• Petrocaribe
• Remittances
• FDI
• Reserves
Financial Flows
Q1 Q2 Q3 Q4 2006/07 Q1 Q2 Q3 Q4 2007/08
2. Capital & Financial Account 214.8 405.0 283.7 316.9 1220.4 370.8 542.7 572.8 538.9 2025.29
A. Capital Account 1.4 0.7 0.4 -1.7 0.8 -1.4 -1.3 -0.2 -1.7 -4.65
B. Financial Account 213.4 404.3 283.2 318.6 1219.6 372.3 544.0 573.0 540.7 2029.95
Other Private Investment (including Errors + Omissions) 52.9 459.6 -22.0 155.6 646.2 106.9 110.8 354.0 736.3 1307.98
o.w. Direct Investment 187.4 192.9 237.9 157.9 776.1 227.1 229.4 217.9 1187.9 1862.31
Other Official Investment 192.4 176.7 280.8 174.8 824.7 174.9 110.5 180.5 10.1 475.92
Change in Reserves (- = Increase) -31.9 -232.0 24.5 -11.8 -251.2 90.5 322.7 38.6 -205.7 246.05
Memorandum Item(s)
NIR Stock 2110.0 2342.0 2317.5 2329.3 2329.3 2238.9 1916.2 1877.6 2083.3 2083.29
JAMAICA: BALANCE OF PAYMENTS
FIFTH EDITION
(IN MILLIONS OF US DOLLARS)
Vulnerability – Debt Overhang
0
20
40
60
80
100
120
140
160
Dom Debt/GDP
Ext Debt/GDP
Monetary Policy Framework
• Base money targets
• Exchange rate channel dominant
• Joint use of open market operations and forex market intervention to meet targets
• Supported by well developed securities market
• Transitioning to IT lite
Inflation Path
Headline Inflation
02468
1012141618
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Inflation Target Missed
FY2007/08: Projected 19.9
FY2007/08: Programmed 7.5
Variance 12.4
of which:
Exchange Rate 1.4
Crude Oil 2.8
Adverse Weather 3.4
Grains 2.6
Miscellaneous (expectations, etc) 2.2
Variance in Inflation between Programme and CurrentProjection for FY2007/08
Monetary Response
• Special instruments to tighten liquidity
• Allow controlled depreciation to temper demand
• As TOT continues to deteriorate, signal further tightening to contain second round impact
• Communicate expectations
Monetary Response
6-mth BOJ
10.511
11.512
12.513
13.514
14.5
Jun-0
5
Aug-0
5
Oct-
05
Dec-0
5
Feb-0
6
Apr-
06
Jun-0
6
Aug-0
6
Oct-
06
Dec-0
6
Feb-0
7
Apr-
07
Jun-0
7
Aug-0
7
Oct-
07
Dec-0
7
Feb-0
8
Competitiveness maintained
REER
80.0
85.0
90.0
95.0
100.0
105.0
110.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
REER
Other Responses
• Welfare support via initial subsidization of basic foods
• Targeted income support of most vulnerable
• Strong Government support of expansion of domestic food supply
• Energy conservation and diversification
• Focus on expanding earnings from tourism
Lessons
• Need to reduce vulnerability to external shocks generally
• Food security a real issue
• Monetary policy will be a costly substitute where structural reforms are the real solution.