Jamaica: Macro-Socio-Economic and Environmental Assessment of ...

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The robust growth in the real sector was unhampered by the climate of uncertainty and loss
of confidence in the national currency prevailing in the first semester of 2003 and which
translated into a sharp depreciation in the exchange rate .The chain of events was triggered
by the official announcement in December 2002 that the actual fiscal deficit for FY
2002/2003 would exceed its expected target by a wide margin (-7.3 percent versus -
4percent of GDP) 16 .
The loss in the currency’s external value led the Bank of Jamaica to adopt a contractive
monetary policy resulting in significant increases in the spectrum of interest rates on its
open market instruments. The authorities complemented the interest rate hikes with
interventions in the foreign exchange rate market causing a decline in the stock of net
international reserves. At the same time the government announced a package of tax
measures to increase revenue and expenditure cuts to curtail the fiscal imbalance.
These measures were able to narrow the fiscal gap for FY 2003/2004 and tame the nominal
exchange rate depreciation in the second half of 2003 allowing the Central Bank to relax its
policy stance. The effects of the depreciation in the exchange rate were nonetheless felt in
the rate of inflation that reached the two-digit level for the first time in six years (14
percent).
On the external front the overall position in the balance of payments deteriorated in spite of
the reduction in the current account deficit (-13.3 percent and -12.4 percent of GDP in 2002
and 2003) as a result of the decline in the surplus in the capital and financial accounts due
to the decision of the government to avoid external refinancing options to repay its
international debt.
16 FY stands for fiscal year. The fiscal year in Jamaica runs from March to April.
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