ANALYSIS - Putting the squeeze on Jamaica - Impact of external slowdowns, credit crunches

Published: Friday October 24, 2008

One of the critical issues facing Jamaica is the extent to which the recent financial crisis in the United States and the subsequent global financial meltdown will impact the economy.

There has been a great deal of discussion in the media on the subject, but very little empirical research available to provide insights on possible outcomes.

An exception, however, is the country report entitled 'Jamaica: Selected Issues' published June 2008 by the International Monetary Fund (IMF), as part of the background documentation for the Article IV Consultation with the Government of Jamaica.

The two chapters of the report examined the question of how exogenous shocks such as natural disasters and other unanticipated developments, such as expenditures which were not adequately provided for in the approved budget, can affect economic outcome.

First chapter

The first chapter used statistical modelling and historical data to evaluate the possible impact of economic slowdowns and credit crunches in the United States on Jamaica; the second analysed the relationship between the fiscal effort and debt reduction.

The IMF staff found that: "The impact of US macroeconomic stress is small on Jamaica's GDP but larger on the budget, exports and capital flows."

In essence, an examination of historical data showed that regardless of where the initial shock occurs - whether starting with a credit crunch or with a slowdown in US economic growth - negative shocks have had limited impact on growth in the Jamaican economy.

However, they have tended to be associated with a worsening of the fiscal balance. This deterioration in the primary balance is due to a great extent to lower revenues.

Impact differed

It should be noted that the magnitude of the impact on the Jamaican economy differed from shock to shock. A decline in credit in the US economy, or a reduction in US wages have had a "significantly negative impact on Jamaica", the report said.

The shocks in the past have resulted in reduced export receipts as well as remittances, but imports were also reduced, thereby limiting the overall impact on the current account deficit.

In essence, tourism receipts, revenue from bauxite exports and customs receipts would be adversely affected by a US slowdown.


Source: Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20081024/business/business10.html