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Duncan: High interest rates and wages potential threats to economic targets

Higher interest rates and recent wage spikes could adversely affect economic targets, said the chair of EPOC, even while asserting that the salary increase for the political director was overdue.

“We have to pay close attention so that our growth targets are not impacted,” said Keith Duncan, chairman of the Economic Programme Oversight Committee at a press briefing on Thursday. “I am not calling — as the chairman of EPOC — for the immediate loosening of policy. I am merely signalling that [there’s] a balancing act,” he said.

EPOC was established in 2013 to track Jamaica’s economic reform measures under its agreement with the International Monetary Fund. The committee comprises 11 persons from the private and public sectors and civil society.

The Government is projecting that the Jamaican economy will grow within a range of one to two per cent for year ending March 2024. The growth is much slower than the 4.3 per cent in 2022, which was underpinned by recovery from the pandemic economic fallout. Now that the country has returned to pre-pandemic GDP output, the authorities expect a return to low growth.

Duncan however cautioned that high interest rates, a form of monetary tightening, could lead the country to miss even that low estimate.

“I am merely saying that’s a risk that we face,” added Duncan. “We would like the economy to outperform these numbers, but the risk is the slowdown in private credit and the tight monetary policy,” he added.

The Bank of Jamaica, BOJ, started increasing interest rates in October 2021 from 0.5 to its current level of 7.0 per cent as a means of curbing inflation, which, at one point, was headed towards 12 per cent. Higher interest rates makes it more attractive to save which, in turn, would reduce spending. But a high interest rate environment can also retard economic activity as it’s more expensive to finance business activity and general lending.

The inflation rate is currently back down to 6.1 per cent, just outside of the target range of 4 to 6 per cent. The central previously indicated that its main inflation target concerns relate to agricultural prices, household labour, and communication costs. The EPOC chair added wages to the list as an area of concern on Thursday.

“Increased wages and salaries will lead to greater demand and may push prices also,” said Duncan.

The Government’s wages and salaries bill totalled $318 billion in the first quarter of the current fiscal year, April to June, and was generally in line with budgeted targets, but the amount still represented an increase of $95.2 billion relative to a year ago.

In May, politicians gave themselves a 200 per cent raise in pay pegged to the salaries of permanent secretaries. Public sector workers were offered increases ranging from 20 to 120 per cent. And the national minimum wage was increased 44 per cent to $13,000 for a 40-hour work week.

Despite increased spending by the Jamaican Government, the overall debt levels as a proportion of output GDP stood at 77.1 per cent, or better than the target of 79.7 per cent. That debt ratio was 106 per cent in 2020. High debt levels result in debt repayment taking precedence over capital spending.

In March, the International Monetary Fund approved a 24-month precautionary and liquidity line and resilience and sustainability facility for Jamaica, which will enable the country to access a combined US$1.7 billion in funding. A team from the IMF visited in mid-June under the first review of the new programme and issued a positive outlook on Jamaica despite global challenges. It is based on the country consistently outperforming its targets.

“The authorities have made good progress in implementing their policy agenda under the precautionary and liquidity line. They overperformed on indicative targets and met structural benchmarks,” the IMF said.

The IMF highlighted global risks related to tighter-than-expected global financial conditions, higher-than-expected global energy, and food prices and violent climate events.

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