Commenting on economic issues, verbally or through the written word, is risky business. People will hear what they want to hear, and others will twist words to suit their varied agendas.
In an environment where ‘rain a fall but dutty tough’, there will be visceral reactions to any comment from an official which appears to further erode the ability of people to put food on their tables, clothes on their backs, and textbooks in the bags of their children.
The Bank of Jamaica, BOJ, is less powerful than we realise.
Approximately two weeks ago, it was BOJ Governor Richard Byles’ turn to face the heat. Mr Byles was carrying out his mandate which is written into the laws of Jamaica. That mandate is to deliver low, stable, and predictable inflation.
What must be recognised, however, is that the Bank of Jamaica is not as powerful in the fight against inflation as many believe. Yes, the inflation rate has fallen continuously over the last year, notwithstanding the recent uptick. However, not because ‘A’ (higher policy interest rate) comes before ‘B’ (lower inflation rate) means that A caused B. Further, are we to ascribe much credence to the story of higher interest rates causing Jamaicans to save more, reducing demand for goods and services in the process, and ultimately bringing the rate of inflation down to target?
The commercial banks, their flaws notwithstanding, seem well attuned to the plight of their customers and have not increased their interest rates on deposits in a significant way. Indeed, most of the increases are on time deposits. This reticence to increase interest rates on deposits is balanced out by the fact that increases in the interest rates on loans have been tempered.
A year ago, Mr Byles was encouraging the commercial banks to increase interest rates so that the ordinary depositor could get a greater return. The question is, who are the Jamaicans who can materially increase their savings in an environment where they must find more money to purchase goods and services?
The Jamaicans who have benefited from the rate increases are those who already have sufficient wealth, or earn sufficient disposable incomes to save and invest and are able to rearrange their portfolios to take advantage of higher interest rates. Indeed, the local stock market has been underperforming, and those who have made millions by betting against the Jamaican dollar have seen that avenue to easy money dry up, due to a relatively stable Jamaican dollar.
In response to these comments, some will argue that without higher interest rates there would have been a flight of funds to US assets. The concomitant increase in the demand for US dollars would in turn put pressure on the exchange rate, which could fuel inflation if depreciation of the Jamaican dollar occurs at a material pace.
I have no qualms with this line of reasoning, but what it underscores is that the story of inflation targeting in Jamaica is really a story about exchange rate stability.
Further, we hear very little of the other measures which have been used to prevent capital flight. For example, when the BOJ sells foreign exchange through its ‘flash intervention’ facility, it explicitly states the following: “Re-sale recipients are limited to end-users as defined by the Bank of Jamaica. End-users are non-financial commercial entities that are funding obligations for essential goods and services.”
The excellent inflationary numbers in the years prior to 2020 were largely a result of low global inflation and a highly constrained domestic fiscal agenda occasioned by the focus on bringing the debt-to-GDP ratio down to ‘manageable’ levels. Inflation in developing countries, it can be argued, is very often a fiscal problem; a problem of taxation and government spending, and how best to bridge the budget deficit.
According to a 1998 study, Labour Market and Price Behaviour in Jamaica by Wayne Robinson, the current senior deputy governor of the BOJ, a 10 per cent increase in the total cost of labour results in a 4.5 per cent to 6.0 per cent increase in the prices for goods and services. This suggests that the total cost of labour accounts for between 45 to 60 per cent of overall production costs. Without knowledge of recent labour costs in relation to overall production costs, we can take a conservative approach and assume that labour accounts for 45 per cent of the total cost of production.
In an August 25 Gleaner article, ‘Seaga Labels Byles Wage Stance Insensitive’, it is noted that public-sector salaries have increased by about 30 per cent on the average. This is after adjusting for the removal of allowances. If the private sector also increases wages by 30 per cent, then a rough estimate suggests that inflation will be in the region of 13.5 per cent (30 multiplied by 0.45), assuming, of course, that the prices for raw materials and other inputs remain unchanged. This is not an estimate of where inflation is likely to be, it is a simple illustration.
An increase in productivity has been suggested as one scenario where large wage increases can be justified. However, can we realistically expect a significant increase in productivity in the coming months?
Without any prompting from Mr Byles, some firms have already made moves to increase their efficiency. Efficiency and productivity are often conflated but are conceptually different. Productivity is about producing more output with the same amount of input. Efficiency is about producing at the same level but with fewer inputs, and this is what some firms have done when it comes to security guards. The remuneration packages of guards have been rightly increased, but in reaction to that fiscal decision some private firms have increased their efficiency by simply hiring fewer guards.
Surely, this is not the approach we would want on a mass scale. The increases in productivity which Jamaica needs will take years to be achieved; for example, changes in attitudes and the education system will take years.
The inflation horse has already bolted.
In the year 2022, Jamaica’s inflation rate was driven largely by external factors: the persistence of supply chain disruptions, increased demand for goods and services due to fiscal stimulus in the rich world, and war in the Ukraine.
The next domestic inflationary phase, which has already started, will be driven largely by domestic factors, especially fiscal decisions such as increases in public-sector wages, within the framework of the compensation review process, and the increase in the minimum wage. These direct wage measures can have indirect consequences.
To be sure, private-sector workers will also demand higher wages, and with historically low unemployment, coupled with the difficulty of retaining staff, firms will face greater pressures to offer higher wages; how high those increases are likely to be is unclear to me. Additionally, the increase in the minimum wage is likely to have a knock-on effect on the wages of private-sector workers higher up the wage scale.
One stark example of the indirect impact of increased public-sector wages is on prep school tuition fees. To retain their teachers, administrators of private institutions have been forced to offer better remuneration to their teachers. The result is higher tuition fees; fees that make up a noticeable share of total household expenditure for those families with children attending prep school.
According to the July 2023 BOJ survey of firms, the point-to-point, or annual, inflation for December 2023 is expected to be 8.3 per cent, while the expected inflation 12 months ahead, that is, July 2023 to July 2024, stands at 8.8 per cent.
The inflation horse has already bolted away from the target range and there is little the BOJ can do, save for keeping the Jamaican dollar stable, as they have rightly been doing. For the period August 24-28, there were three ‘flash intervention’ in the foreign exchange market by the central bank. This is not surprising, as there has been increased focus on exchange rate stability dating back two years ago.
The recent statements from Byles and other BOJ personnel remind me of Shaggy’s famous line: “It wasn’t me.” The BOJ has claimed victory over inflation and is now preparing us for another round of above-target inflation, and they want us to know that it is not their fault. Higher policy rates are on the horizon.
Dr Samuel Braithwaite is a lecturer in the Department of Economics, University of the West Indies, Mona. He is also a technical consultant at Growth Perspectives Limited.firstname.lastname@example.org