The Dollar and the Tourist: How Exchange Rate Pressure and a Tourism Boom Defined Jamaica’s Mid-2014 Economy

The second quarter of 2014 placed two stories in tension with each other. On the foreign exchange market, the Jamaican dollar was depreciating steadily, raising the cost of imports and complicating the Bank of Jamaica’s monetary management. On the hotel strips of the north coast, new investment was arriving at a pace not seen in a decade, and tourist arrivals were tracking toward another record year. Jamaica’s adjustment was working — but its costs were unevenly distributed.

• Jamaican dollar depreciates to approximately J$111 per US dollar during the quarter
• Tourism investment accelerates with new hotel capacity under construction on north coast
• GDP growth tracking toward 0.5% for 2014, led by services and construction
• IMF EFF quarterly reviews continue without deviation from performance targets
• Bank of Jamaica navigates between inflation control and exchange rate stability
• Private sector confidence improves as debt trajectory confirms downward path

The Jamaican dollar’s depreciation was, in the technical sense, working as intended. The Extended Fund Facility’s monetary policy framework required the Bank of Jamaica to allow the exchange rate to find its market level, reducing the interventions that had previously maintained an artificially strong currency at the cost of reserve depletion. The result was a currency that had fallen from around ninety-nine Jamaican dollars to the US dollar at the start of the programme to approximately one hundred and eleven dollars by the middle of 2014 — a depreciation of roughly twelve per cent in eighteen months. That rate of adjustment was uncomfortable for importers and for households buying fuel, food, and manufactured goods priced in foreign exchange. But it was improving Jamaica’s price competitiveness in sectors that competed internationally — most obviously tourism.

Tourism was accelerating. The combination of competitive pricing in Jamaican dollar terms, a recovery in North American and European discretionary spending, and the ongoing expansion of airlift capacity to Montego Bay’s Sangster International Airport was driving arrivals figures toward a new record. Hotel developers were responding: several major resort expansion projects were under construction along the north coast, adding rooms in the premium and luxury segments that generated the highest per-visitor spending. The supply-side investment was a lagging indicator of confidence — hotel developers take years to commit capital, and the decision to build reflected a view of Jamaica’s prospects that was more optimistic than anything the island had been able to offer during the crisis years.

In the domestic economy, construction was the clearest beneficiary of this investment cycle. Employment in the sector was growing, contributing to the gradual decline in the national unemployment rate. Statistical Institute of Jamaica data showed GDP growth tracking above the previous year’s marginal positive reading — the full-year figure for 2014 would eventually be recorded at approximately zero point five per cent. That pace remained far below what Jamaica needed to sustainably reduce its debt burden through growth alone, but the direction was consistent, and each quarterly increment added to the evidence that the economy had stabilised.

The Bank of Jamaica, threading between the inflationary pressure of the depreciating dollar and the growth benefits of lower domestic interest rates, was maintaining a cautious monetary stance. Rate cuts were continuing, but incrementally — the Bank was aware that the current account deficit remained large and that Jamaica’s reserve position, while improved by the EFF disbursements, was not so strong that it could absorb a speculative attack on the currency. The central bank’s foreign exchange interventions were measured, designed to smooth volatility rather than resist the trend depreciation that the programme required.

What This Means

The exchange rate depreciation was a politically visible consequence of the programme that disproportionately affected ordinary households. The tourists benefiting from cheaper Jamaican prices were, by definition, not Jamaican. The businesses accumulating profits in a sector priced in foreign exchange were not the ones whose import costs had risen. Jamaica’s adjustment was creating winners and losers, and the distribution was not comfortable. EPOC’s continued confirmation that the government was meeting its fiscal targets provided some political legitimacy, but the sense that the costs of adjustment were not evenly shared was beginning to create pressure that would intensify as the programme progressed.

The Road Ahead

With GDP growing modestly and the EFF on track, Jamaica’s most immediate challenge in mid-2014 was managing the pace of exchange rate adjustment without triggering an inflationary spiral that would force the Bank of Jamaica to reverse its rate-cutting cycle. The summer tourism season would provide a natural boost to foreign exchange inflows. What the country needed, beyond the next quarterly review, was the kind of structural improvement in productivity and competitiveness that would allow growth to accelerate without requiring further currency weakness. That was a task for years, not quarters.

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