When Oil Fell: The Global Price Crash That Handed Jamaica an Unexpected Fiscal Dividend

In the second half of 2014, a decision taken by OPEC’s Gulf members to maintain production levels as global demand softened sent the price of oil crashing from above one hundred dollars a barrel toward fifty. For oil exporters, it was a crisis. For Jamaica — a country that imported virtually all of its petroleum — it was something close to a gift, arriving at precisely the moment the adjustment programme needed breathing room.

• Global oil prices collapse from above US$100 to near US$55 per barrel
• Jamaica’s fuel import bill falls sharply, improving the current account balance
• Inflation declines faster than projected as energy costs drop across the economy
• Bank of Jamaica accelerates rate cuts as the external anchor strengthens
• GDP for 2014 confirmed at approximately 0.5%, second consecutive year of growth
• EFF year two completed; all targets met as programme enters its final half

Jamaica imported virtually all of its petroleum, and petroleum was central to everything the economy did — electricity generation, transportation, manufacturing, and the diesel generators that kept hotels and businesses running when the grid was unreliable. When the price of Brent crude fell from above one hundred dollars a barrel in June to below sixty dollars by December, the impact on Jamaica’s import bill was swift and substantial. The current account deficit, which had been stubbornly elevated through years of adjustment, narrowed materially. The trade balance improved. The pressure on the Jamaican dollar, which had been depreciating steadily under the managed float the EFF required, eased.

The fiscal implications were almost as significant. Jamaica’s government was a major fuel consumer through its ownership of the Jamaica Public Service Company and its direct subsidy of fuel costs in several sectors. Lower global prices reduced the cost of energy for public institutions, improved the fiscal accounts, and provided the government with a buffer against any slippage in its revenue collection. The primary surplus — seven and a half per cent of GDP, the programme’s inviolable target — was not only being met but being exceeded in some quarters as the fuel dividend flowed through the accounts.

Inflation responded. Bank of Jamaica data showed the consumer price index decelerating sharply as energy costs fell across the economy. Petrol prices at the pump dropped, reducing household transport costs. Electricity tariffs, linked to the price of heavy fuel oil, fell for both residential and commercial consumers. The Bank of Jamaica, which had been navigating between inflation control and exchange rate stability, found that the oil price collapse had done much of the work for it: inflation was falling faster than projected, giving the central bank room to accelerate the interest rate reductions that would support private credit growth and investment.

The year closed with GDP for 2014 confirmed at approximately zero point five per cent — positive for the second consecutive year, twice the rate of 2013, and consistent with an economy that was slowly finding its footing. The EFF had completed its second year with no waivers, no missed targets, and no emergency discussions about programme continuity. That record was, in the context of Jamaica’s history with the IMF, genuinely unprecedented. The government of Portia Simpson-Miller had inherited a broken programme in 2012 and was delivering on one that had, for two years running, passed every test it had been set.

What This Means

The oil price collapse of late 2014 was an external windfall that Jamaica had done nothing to earn. But windfall moments are precisely when the quality of a country’s institutional framework reveals itself — whether the extra resources are deployed to ease the adjustment, accelerate the debt reduction, or simply absorbed into the political economy without trace. In Jamaica’s case, the EFF’s structural targets meant that the windfall was largely used to exceed the fiscal targets rather than to loosen them. The debt-to-GDP ratio, already declining, declined faster. The reserve position improved. The foundation for year three of the programme was stronger than it had been for year two.

The Road Ahead

As 2014 closed, Jamaica was entering the second half of its EFF with a combination of factors working in its favour that would have seemed implausible two years earlier: a programme on track, growth positive, inflation declining, the current account improving, and a global energy price environment that was reducing the external pressure on the island’s accounts. The challenge for 2015 was to sustain the compliance record while delivering on the structural benchmarks that grew more demanding as the programme aged. The business environment improvements, the public sector efficiency measures, the financial sector reforms — these were not tasks that could be completed with a budget or a law. They required years of administrative follow-through that had defeated previous reform attempts. The programme had two years left. The structural reform agenda had considerably more.

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