The Commodity Price Bomb and Jamaica

John W. Robinson

Bank of Jamaica

Key Issues

• Vulnerabilities

• Impact of Commodity Prices

• Monetary framework and response

• Complementary Measures

• Outlook

Vulnerabilities- Openness

• Heavily dependent on trade and consequently on world market conditions

• Exports typically amount to 45% of GDP

• Imports normally amount to 60% of GDP

• C/A gap reduced by remittances to ~5%

• Pvt capital + Official borrowing allow for reserve accumulation

Energy Dependence2006 2007 Change %Change 2006 2007

CONSUMER GOODS 1430.2 1837.1 406.9 28.4 25.3 28.4

FOOD 471.5 587.6 116.1 24.6 8.3 9.1 OTHER NON DUR. 426.2 502.1 75.9 17.8 7.5 7.8 DURABLES 532.5 747.4 214.8 40.3 9.4 11.6

of which motor car 111.4 147.3 35.9 32.2 2.0 2.3

RAW MATERIALS 3386.6 3775.4 388.8 11.5 59.9 58.4

FUEL 1760.1 2014.0 254.0 14.4 31.1 31.2 FOOD 199.1 225.7 26.6 13.4 3.5 3.5 OTHER RAW MATS 1427.4 1535.7 108.2 7.6 25.3 23.8

CAPITAL GOODS 833.6 846.8 13.2 1.6 14.8 13.1

* TRANSPORT 161.2 195.1 34.0 21.1 2.9 3.0 CONSTRUCTION 196.3 207.6 11.3 5.8 3.5 3.2 OTH. MACH 471.3 434.3 -37.0 -7.9 8.3 6.7 OTH. CAPITAL 4.9 9.7 4.9 100.2 0.1 0.2

*of which motor cars 46.0 42.0 -3.9 -8.5 0.8 0.7STATIN'S TOTAL 5650.4 6459.3 808.8 14.3 100.0 100.0

US$MN % of Total IMPORTS BY END-USE

Major Commodity PricesMajor Commodity Prices

  Years

  FY2006/07 FY2007/08 FY2008/09

   

Oil (WTI) /bbl 64.77 82.27 98.31

% change 8.17 27.02 19.49

HRW Wheat 189.08 309.33 481.67

% change 23.70 63.60 55.71

SRW Wheat 159.05 298.28 499.58

  22.38 87.54 67.49

Corn /mt 121.21 176.65 240.15

% change 36.71 45.74 35.95

Soybeans 266.68 447.11 609.62

% change 3.94 67.66 36.35

Rice 303.72 359.38 536.97

% change 6.68 18.32 49.42

Aluminium /mt 2664.92 2623.55 2670.28

% change 31.36 -1.55 1.78

Exports

2006/07 2007/08 Change %

Change 2006/07 2007/08

Bauxite 115.2 115.5 0.3 0.2 5.6 5.2

Alumina 1081.9 1221.2 139.3 12.9 52.5 54.8

Sugar 90.4 91.2 0.8 0.9 4.4 4.1

Bananas 13.3 6.4 -6.9 -52.2 0.6 0.3

Other Traditional Exports 78.5 75.9 -2.6 -3.3 3.8 3.4

Non-Traditional Exports 644.0 658.1 14.1 2.2 31.2 29.5

Re-Exports 38.0 60.2 22.2 58.5 1.8 2.7

Total 2061.3 2228.5 167.2 8.1 100.0 100.0

% of TotalUS$MN

EXPORTS

Relief Valves

• Petrocaribe

• Remittances

• FDI

• Reserves

Financial Flows

Q1 Q2 Q3 Q4 2006/07 Q1 Q2 Q3 Q4 2007/08

2. Capital & Financial Account 214.8 405.0 283.7 316.9 1220.4 370.8 542.7 572.8 538.9 2025.29

A. Capital Account 1.4 0.7 0.4 -1.7 0.8 -1.4 -1.3 -0.2 -1.7 -4.65

B. Financial Account 213.4 404.3 283.2 318.6 1219.6 372.3 544.0 573.0 540.7 2029.95

Other Private Investment (including Errors + Omissions) 52.9 459.6 -22.0 155.6 646.2 106.9 110.8 354.0 736.3 1307.98

o.w. Direct Investment 187.4 192.9 237.9 157.9 776.1 227.1 229.4 217.9 1187.9 1862.31

Other Official Investment 192.4 176.7 280.8 174.8 824.7 174.9 110.5 180.5 10.1 475.92

Change in Reserves (- = Increase) -31.9 -232.0 24.5 -11.8 -251.2 90.5 322.7 38.6 -205.7 246.05

Memorandum Item(s)

NIR Stock 2110.0 2342.0 2317.5 2329.3 2329.3 2238.9 1916.2 1877.6 2083.3 2083.29

JAMAICA: BALANCE OF PAYMENTS

FIFTH EDITION

(IN MILLIONS OF US DOLLARS)

Vulnerability – Debt Overhang

0

20

40

60

80

100

120

140

160

Dom Debt/GDP

Ext Debt/GDP

Monetary Policy Framework

• Base money targets

• Exchange rate channel dominant

• Joint use of open market operations and forex market intervention to meet targets

• Supported by well developed securities market

• Transitioning to IT lite

Inflation Path

Headline Inflation

02468

1012141618

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inflation Target Missed

FY2007/08: Projected 19.9

FY2007/08: Programmed 7.5

Variance 12.4

of which:

Exchange Rate 1.4

Crude Oil 2.8

Adverse Weather 3.4

Grains 2.6

Miscellaneous (expectations, etc) 2.2

Variance in Inflation between Programme and CurrentProjection for FY2007/08

Monetary Response

• Special instruments to tighten liquidity

• Allow controlled depreciation to temper demand

• As TOT continues to deteriorate, signal further tightening to contain second round impact

• Communicate expectations

Monetary Response

6-mth BOJ

10.511

11.512

12.513

13.514

14.5

Jun-0

5

Aug-0

5

Oct-

05

Dec-0

5

Feb-0

6

Apr-

06

Jun-0

6

Aug-0

6

Oct-

06

Dec-0

6

Feb-0

7

Apr-

07

Jun-0

7

Aug-0

7

Oct-

07

Dec-0

7

Feb-0

8

Competitiveness maintained

REER

80.0

85.0

90.0

95.0

100.0

105.0

110.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

REER

Other Responses

• Welfare support via initial subsidization of basic foods

• Targeted income support of most vulnerable

• Strong Government support of expansion of domestic food supply

• Energy conservation and diversification

• Focus on expanding earnings from tourism

Lessons

• Need to reduce vulnerability to external shocks generally

• Food security a real issue

• Monetary policy will be a costly substitute where structural reforms are the real solution.