AS THE Government goes for growth, one of the cornerstones of its economic policy has been the control of inflation at single digit levels. For the last seven years this objective has been met. Some economists have argued convincingly that the tight reining in of inflation by controlling money supply through a high interest rate policy has been inimical to growth.
Last week the leadership of the two most powerful public sector bodies for economic policy, the Planning Institute of Jamaica and the Bank of Jamaica, made separate projections on the state of the economy. Dr. Wesley Hughes, the PIOJ's Director-General, said the economy should grow by around 3 per cent over the current quarter of July - September. This anticipated growth follows from that of the first quarter of the fiscal year, April to June, when real GDP grew by an estimated 3.1 per cent.
At the same time, Derick Latibeaudiere, Governor of the Bank of Jamaica, in a prepared statement, said the inflation rate is likely to reach as high as 13 per cent during the 2003/2004 fiscal year. According to the Governor, the likely jump in inflation to double digits is the result of price increases from the depreciation in the foreign exchange rate, the effects of fiscal measures announced by the Minister of Finance and Planning, as well as increases in transportation costs.
Interestingly, the PIOJ sees the depreciation in the value of the Jamaican dollar as having made some positive contribution to growth since "one of the positives [of devaluation] is that sectors that are involved in exports are now more competitive." Growth is expected from all sectors.
Further price increases are expected in utility rates as well as in labour costs from an increased minimum wage. The trade unions have already responded to the prospect of a near doubling of the inflation rate. One of the real benefits of low and regulated rates of inflation over the last several years was the greater predictability of the spending power of negotiated salary increases which dampened demand for massive increases.
Higher prices driven by depreciation and increased costs of utilities as production inputs, coupled with a higher inflation rate, are likely to precipitate labour demands for substantially higher wages and therefore trigger a return to the cycle of the past of higher nominal wages with reduced purchasing power and no growth.
The economy remains as fragile as ever. The control of inflation through draconian fiscal measures has not been without significant pain, and the gains can easily be wiped out. This is a time for wise and cautious management and for restraint by all stakeholders in the economy which binds our interests together.
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