The Turn: How Jamaica’s Economy Began Growing Again After Two Years of Contraction

After two consecutive years of GDP contraction, the Jamaican economy began its long-awaited turn in 2011 — delivering positive growth for the first time since before the global financial crisis. With inflation falling sharply, interest rates declining, and the IMF programme intact through three consecutive reviews, the macroeconomic foundations were beginning to hold. The question, as the new year opened, was whether the stabilisation programme could be converted into a durable recovery.

• GDP grows 1.4 percent in 2011, ending two-year contraction cycle
• Inflation falls sharply to 7.5 percent from 12.6 percent prior year
• Third IMF review completed January 2011 with all criteria met
• IMF mission February 2011 confirms programme on track for fourth review
• Tourism earnings and remittances continue supporting external accounts
• Political pressure mounts on Golding government as Dudus enquiry continues

The numbers, when they finally arrived in full, told a story that Jamaica had been waiting two years to read. After contracting by 3.4 per cent in 2009 and a further 1.4 per cent in 2010, the country’s gross domestic product grew by approximately 1.4 per cent in 2011 — the first positive reading since the global financial crisis had swept through Caribbean economies and unmade the assumptions on which a decade of development planning had been built.

The return to growth was not dramatic. It was not the kind of rebound that erases in a year what two years of contraction had cost. It was, rather, the kind of tentative, uneven recovery that characterises economies working their way back from a balance-of-payments crisis under fiscal restraint: positive, but fragile; real, but unevenly distributed. In the communities that had borne the heaviest weight of unemployment and wage cuts, a 1.4 per cent expansion in GDP was barely perceptible. In the financial markets and the corridors of the Ministry of Finance, it was a landmark.

The first quarter of 2011 was when that turning point was first becoming visible — when the indicators that had been modestly improving through the second half of 2010 were beginning to cohere into something that looked, tentatively, like a recovery rather than a stabilisation.

Inflation’s Steep Decline

Among the most significant improvements of the period was the trajectory of inflation. Having reached 12.6 per cent in 2010 — itself elevated by the pass-through effects of the Jamaica Debt Exchange’s impact on domestic liquidity and the global commodity price rebound — inflation fell sharply across 2011, closing the year at 7.5 per cent. This was not simply a welcome easing of price pressures on households. It was the precondition for the Bank of Jamaica’s ability to continue its cautious monetary easing cycle, bringing down interest rates in a way that would, over time, reduce the cost of credit for businesses and individual borrowers alike.

The falling inflation also reflected the broader macroeconomic stabilisation that the programme had delivered. The exchange rate had held. The primary surplus was being maintained. The external accounts had improved. In a country that had periodically experienced sharp devaluations, spiralling import costs, and the cascading price effects of currency weakness, the relative price stability of early 2011 was, in its own right, a form of economic progress.

The Programme Holds Its Ground

The institutional framework underpinning the recovery remained the Stand-By Arrangement with the International Monetary Fund. On 14 January 2011, the IMF’s Executive Board completed the third review of the programme, approving a further disbursement of approximately US$49 million. The review confirmed what the data had been signalling for several quarters: Jamaica was meeting its performance criteria, managing its primary surplus targets, and maintaining the monetary policy stance that the programme required.

In February 2011, an IMF staff mission visited Kingston to prepare for the fourth programme review. The mission’s statement indicated that the programme remained broadly on track, that fiscal consolidation was continuing, and that the macroeconomic outlook was improving modestly. For a programme that had survived three quarters without a waiver or modification of performance criteria, the assessment was consistent with an emerging pattern: Jamaica was, quarter by quarter, building a track record of fiscal delivery that contrasted sharply with the experience of earlier IMF engagements.

Tourism, Remittances, and the External Story

The external accounts, which had improved so dramatically in 2010, continued to benefit from the resilience of Jamaica’s two largest foreign exchange earners: tourism and remittances. Stopover arrivals were continuing their recovery trajectory, supported by the airlift adjustments that had followed the restructuring of the Air Jamaica operations and by gradually improving conditions in the North American source markets.

Remittances, which had surpassed tourism as Jamaica’s largest single source of foreign exchange in 2010 with inflows above US$2 billion, were continuing to flow at levels that provided substantial household income support throughout the economy. In parishes where unemployment remained elevated and formal wage income had been compressed by the public sector freeze, remittances from diaspora relatives were, for many families, the difference between meeting basic costs and not. Their aggregate macroeconomic importance was matched by their intimate social role in sustaining Jamaican households through the adjustment period.

Politics in a Year of Transition

The economic improvement of early 2011 was not occurring in a political vacuum. The aftermath of the May 2010 security operation in Tivoli Gardens — conducted to facilitate the extradition of Christopher “Dudus” Coke to the United States — continued to reverberate through the political system. A commission of enquiry into the events of that operation was underway, and the reputational and political damage to Prime Minister Bruce Golding was severe and accumulating. In the corridors of Gordon House, the question of political succession was increasingly being asked, even as the government’s economic programme continued to deliver on its technical commitments.

The separation between political turbulence and economic management was not absolute. Investor confidence, always sensitive to perceptions of political stability, was watching closely. The government’s ability to sustain the difficult fiscal discipline that the programme demanded depended in part on its political authority and its capacity to hold together the coalition of institutional interests — public sector unions, financial institutions, the private sector — that had made the Jamaica Debt Exchange possible. A prolonged political crisis at the top was a risk that the economic programme could not afford.

What This Means

The first quarter of 2011 was the beginning of the end of Jamaica’s post-crisis contraction. The combination of fiscal stabilisation, improving external accounts, falling inflation, and the external credibility provided by three consecutive IMF reviews had created the conditions for the economy to return to positive territory. That growth was modest — 1.4 per cent for the full year — but its symbolism was significant. Jamaica had demonstrated that it could implement a difficult adjustment programme without the kind of political or social rupture that had undermined earlier attempts. The foundation, at least, had been rebuilt.

The unfinished work was also clear. Debt remained above 140 per cent of GDP. Unemployment was still elevated, and the wage compression of the adjustment period had left many households vulnerable. The structural reforms that Vision 2030 Jamaica required — improvements in the investment climate, energy sector reform, crime reduction, education system improvement — were still largely ahead of the country rather than behind it. Stabilisation had been achieved. Growth had returned. But sustainable development, in the sense that the national plan envisaged, remained a more distant ambition.

Outlook

As the year progressed, the political landscape would shift in ways that added uncertainty to an economic recovery still in its early stages. The broader trajectory of the IMF programme, the sustainability of the fiscal path, and the question of whether Jamaica could maintain the discipline of adjustment while simultaneously beginning to address the structural impediments to growth were all open questions as the first quarter of 2011 drew to a close.

What was clear, as the numbers slowly arrived, was that the economy had turned a corner. Whether it could sustain the turn — and use the modest growth now arriving to begin investing in the infrastructure, human capital, and institutional quality that durable development required — remained the test that Jamaica’s policymakers, and the Jamaican public, would be watching closely in the months ahead.

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