By Lavern Clarke, Staff ReporterTHE BIGGEST challenge facing the Government in managing the Jamaican economy, outside of social factors, is how to substantially reverse the fiscal deficit, Bank of Jamaica governor, Derick Latibeaudiere, said Tuesday.
Now running above projections, the central Government operations has propelled the deficit to $9.4 billion or 2.3 per cent of gross domestic product - relative to the $2.3 billion or 0.57 per cent target set by the International Monetary Fund Staff Monitored Programme.
"A reduced deficit means that of the resources that are available, more `will be available to the private sector, and it will mean that the interest rate parity can actually come down," said Latibeaudiere.
"I think that is the major issue, but it is easier said than done," he told journalists Tuesday at the final in his quarterly press briefings for the calendar year.
The debt, he noted is perhaps the key factor in managing the deficit, adding that one of the best ways of reversing both the external and domestic debt was to curtail borrowing.
Finance Minister Omar Davies has already said he would not consider that option now, as he said he had salaries to pay. Minister Davies is currently off the island seeking additional funding, say Ministry sources.
The Ministry's current strategy is to seek out cheaper funds to pay down the country's high cost debt.
On the monetary side, inflation of 2.4 per cent for the quarter and the Net International Reserves, down to US$1.69 billion, were within projections, Latibeaudiere told journalists Tuesday as he reviewed monetary performance and the economy over the July-September quarter. The nine month inflation was 4.6 per cent.
Noting that during the quarter there had been growth in both goods and services sectors - based on the 7.5 per cent increase in commercial bank credit to the private sector which surpassed the target of 3 per cent, and expansion in manufacturing and construction, and in communications, water, transport and electricity. He said the performance was positive despite the adverse impact from the rains. Not surprisingly, agriculture did poorly.
He projects that the December quarter will be even more robust, helped in part by tourism inflows, but said that near-term performance was dependent on stability in the foreign exchange market and contained spending.
The economy dipped 0.1 per cent in the first six months, according to Statistical Institute figures. Latbeaudiere said it was not surprising that the performance was essentially flat, given the compounding effects of September 11. Asked to for his projections, the governor said the economy would show "reasonable growth" of 1.5 to 2 per cent for the year.
Meantime, he has refused to accept that a change in the monetary policy to allow the market to determine the value of the dollar will bring more robust growth. The emphasis of the bank, he said, is to maintain macro-economic stability, adding that growth was as much a function of the private sector as well as public sector activity.
"I think we have a very narrow range of options," he said, having noted that any move to significantly adjust the exchange rate could send the wrong signals.
"I genuinely believe that the approach we are taking is the correct approach. You know that any perception of erratic behaviour, one bad expectation builds on the other and then the system disintegrates."
In his review on the impact of the fiscal operations on monetary policy, he said it turned to interest rates as an added strategy to stem the dollar's depreciation after Government borrowing on the domestic market and draw-downs on its deposits at the central bank boosted liquidity in the system.
The bank upped interest rates temporarily to give investors an alternative to the foreign exchange market, in a bid to ease the demand and stem the "sharp movements" in the foreign exchange rate after its intervention in the market failed to halt the slide. Over the quarter the NIR was depleted by US$95 million.
Latibeaudiere said the bank was forced to act, in order to protect the annual inflation rate target of 7 per cent.
