More taxes less cost keep GOJ in black

Nigel Clarke, Jamaica’s Minister of Finance

Data put out by Jamaica’s Ministry of Finance shows the government’s operating at a surplus with increased taxes and major cost reductions in two critical areas.
Information for the June quarter shows a surplus of $6.5 billion for the quarter against a planned deficit of a mere $58 million. Helping in achieving the positive outturn was near $4 billion in lower interest payments and the increased taxes and reduced expenditure of $3.6 billion on other areas of government operations. Capital expenditure saw $1.5 billion more spent than budget, while grants pulled in $3 billion less than planned.
Tax revenues brought in $128.7 billion, up 3.3 percent over budget and revenues from PAYE grew just one percent above budget, at $14.4 billion. Motor Vehicle license rose 7.7 percent above budget to reach $1 billion. GCT on local goods and services slipped 2.3 percent below budget to end at $24 billion but is up strongly on the total take for the 2018 first quarter. GCT on imports of $20.4 billion rose 2.7 percent above budget. Travel tax climbed 10.3 percent to $5 billion while betting, gaming and lottery taxes pulled in 28.6 percent more than in 2018 with $1.26 billion coming in for the June 2019 period.
The improvement is a continuation of healthy tax inflows for a number of years and is a sign of continued economic growth for the country.

Growth in 2019 tourist arrivals slowing

Jamaica had strong growth in tourism for winter 2019

Stopover arrivals growth to Jamaica slowed to 5.8 percent in May and June this year, compared to the hectic pace earlier in the year and 8 percent in May and June in 2018.
Growth of stopover arrivals was a robust 13.4 percent for the first four months of this year over the similar period, in 2018.
The country welcomed 238,888 stopover arrivals in June this year, an increase of 4.2 percent or 9,627 additional arrivals over the 229,261 recorded in June 2018. For the summer months of May and June, arrivals increased to 449,552 stopovers compared to 424,752 last year.
For the year to June, arrivals increased 11 percent, with 1,390,683 stopovers, 136,195 more than the 1,254,488 in 2018. Total stopover arrivals in 2018, grew 5.1 percent, over 2017 with to 2,472,727 compared to 2,352,915.
The United States remains Jamaica’s most important market, accounting for 68 percent of stopover arrivals in 2019, followed by Canada with 16 percent and the United Kingdom 8 percent. For the January to June period, the US market region has grown by 15.6 percent, with 945,761 visitors, 127,863 more compared to the 815,898 visiting during the same period in 2018.

Jamaica’s growth rate up 21%

The hotel and restaurant sector was a major contributor the 2019 Q1 growth.

The Jamaican economy is growing at a faster pace in 2019 than it did in the 2018 first quarter, data released by the Statistical Institute of Jamaica (STATIN) shows.
In the first quarter of 2017, growth was just 0.3 percent and for 2016 helped by election spending, it was up 0.9 percent. According to Statin the economy grew 21 percent faster than it did in the similar quarter of 2018, moving from a growth rate of just 1.4 percent to 1.7 percent in the 2019 March quarter. The stronger growth came about even as Statin reported that production in the Manufacturing sector declined.
The increase was positively impact by an 11.1 percent Mining and Quarrying and Hotels & Restaurants sector rising a strong 7.3 percent, the fastest pace since it grew 9 percent in the first quarter of 2008.
“This increase was due to growth in both the Services Industries and the Goods Producing Industries of 1.8 percent and 1.7 percent respectively,” Statin reported. “All industries within the Goods Producing industries recorded higher levels of output with the exception of the Manufacturing industry which decreased by 1.4 percent,” Statin went on to say. “Increased outputs were recorded for Agriculture,

The mining sector boost GDP growth strongly in Q1 2019.

Forestry & Fishing (0.3 percent), and Construction (3.4 percent). Growth in the Agriculture, Forestry and Fishing industry was largely due to higher output levels recorded in the Other Agricultural Crops sub-industry, which includes Animal Farming, Forestry and Fishing of 2.1 percent.
Growth was achieved in all eight (8) of the Services Industries: Electricity & Water Supply (1.9 percent) Wholesale & Retail Trade; Repairs; Installation of Machinery & Equipment (1.3 percent),Transport, Storage & Communication (1.2 percent), Finance & Insurance Services (2.5 percent), Real Estate, Renting & Business Activities 1.0 percent), Producers of Government Services (0.2 percent) and Other Services (1.8 percent).

Treasury bill rates plummet

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Investors pushed Treasury bill rates sharply downwards, on the two issues that were offered in June and maturating in September and December this year.
The two issues were for $700 million each and attracted $1.597 billion and $1.708 billion respectively and ended with average yields of 1.9548 percent and 1.836 percent. The previous auction in May yielded 2.09785 percent and 2.12567 percent.
The heavy oversubscription indicates that rates are heading much lower in the coming months.

Muddled interest rate policy

The Bank of Jamaica’s website shows their inflation target for the 2019 to 2020 fiscal year ranging from four to 6 percent and they expect that such high levels of inflation should be achieved by 2020/21.
While the central bank announced these targets, the government just reopened their 2029 bonds that was originally had a fixed interest rate of 5.679 percent. Investors placed bids to buy $12.9 billion although only $4 billion were offered for sale. The average yield came out at 5.195 percent. Some investors placed bids as high as 9 percent but were unsuccessful.
To tie up money for 10 years when the central banks is targeting inflation above the yield of the bond on the surface is puzzling. That of course is one conclusion. The more probable one is that those who invested in these bonds are betting that the central bank will not see inflation anywhere close to the levels that are targeting. This publication is of the view that the latter is the correct position.
Something is clearly wrong with the monetary policy.

BOJ interest rate & cash reserves cut will help push demand in the economy.

Changes in interest rates should start having an impact on the economy within six months, experts say. At this stage based on the reduction in rates over the past year or more, economic growth should be picking up sharply. That is not happening and its crawling along around 2 percent pace according to the PIOJ, worse, a lot of the growth is coming from export of goods and services, not from pick up in local production of goods or services.
At the start of 2018, BOJ policy rate was at 3 percent today it at a mere 0.75 percent. That is a very sharp reduction within just over a year. The central bank has also in recent times cut the cash reserves levels thus creating more liquidity in the system.
With all of those moves, lending rates remain relatively high, with the only noticeable change, being rates on motor car loans. The worse signal of this is that credit card rates remain at nearly 50 percent per annum without a single point move. Mortgage rates remain unchanged or largely so, with one or two institutions offering new borrowers lower rates. The 225 percentage points cut in overnight rates (ON) should have induced an across the board reduction in lending rates under normal circumstances but that is not happening and is clearly showing that something is wrong with the policy.

National Commercial Bank pays very low savings rates

Some of the impediments to lower lending rates, are caught up in the very measure BOJ is pushing. Banks have a large pool of very low cost deposits and current account balances that pay zero interest rates. When rates are low, it is much more difficult to cut a rate that is just a fraction of a percent. Put another way, if banks are paying 0.5 percent or less savings accounts, how do they pass the BOJ rate cut onto savers, the ones that will bear the cost?
A visit to NCB website sets out the likely interest rates they pay on deposits. Up to $99,999, a saver would get a mere 0.05 percent, at $1m one would get 0.55 percent and 0.70 percent would be the payment for $5 million and over. These rates were at April 2018. This is the clearest sign why the BOJ policy has not worked and will not work. Since last year April, the overnight policy rate is down by 200 basis points. With rates on deposits at almost zero the banks have limited options to cut rates and if they did, it would not be anywhere close to the extent of the ON rate cut.
Reducing the cash reserves is a far better tool to cut lending rates. Banks with the large amount of profits reported and in many cases lousy service, are not the friends of a large cross section of Jamaicans. Like them or hate them they still provide a useful service. Companies generally, do not absorb cost, they pass them on to consumers. When governments place taxes on banks and other financial institutions with the mistaken view that they are taxing those entities, they are making a huge error. What taxes do is increase the cost of banks providing service to customers. That is one reason why some in the system want government to move and curtail bank charges. When banks were first slapped with the asset tax, they turned to fees for added revenues, to offset the increased tax.
Government, if they are serious about stimulating the economy by lower lending rates must bell the cat. First, they must accept that the cutting interest rates on deposits will not work as those rates are already close to zero. Keeping savings rate artificially low will also encourage more persons to revert to savings in US dollar and place pressure on the Jamaican dollar. At best, banks may cut a few points here or there off lending rates but it will make little difference.
Government must sit with the financial institutions and arrive at an agreement to cut taxes in exchange for reduced interest rate on loans and credit cards. That is the only way to effect serious loan rate reduction to stimulate the economy in the shortest possible time.
To continue with a low savings rate policy that is not sustainable is going to lead to a bubble in the segments of the economy and when the inevitable reversal starts, there will be pain, as asset values adjust to the increasing value of money.

Jamaican government screwing savers

The Government of Jamaica is screwing savers and making real estate and stock market investors rich, the exact opposite of what the PNP government did in the 1990s managed by Dr. Omar Davies.
Davies who managed the finance portfolio for the government led by his party, created a paradise for the moneyed class, by having a prolonged period of excessive high interest rates that slaughtered the private sector and killed off many viable financial institutions. Jamaicans to this day continue to suffer for the ill-advised and protracted policy.
The JLP led government has moved in the direct opposite direction, by severely hurting savers. People with money are getting paltry returns by putting funds in banks and not much more if they get into riskier bonds, while savvy investors who understand the stock market are making a killing investing their money in stocks. Added to that, many of the savers are pensioners and must pay tax on the interest earned, thus further reducing the return on investment. At the same time, government sells shares in Wigton Windfarm to a select group of more than 31,000 Jamaicans who are likely to benefit in two ways from the current policy.

Stock market investors making a killing while savers get caned.

The current valuation of local stocks will result in the stock price jumping and handing many a handy profit. The latest move by the central bank in chopping the overnight rate to 0.75 percent is going to increase the valuation of stocks above present levels as investors find the dividend yield of many stocks more attractive than money market instruments.
While the central bank lowers the rate to stimulate the economy, the government has artificially helped in keeping bank lending rates much higher than needed by taxing bank customers with high bank taxes that results in interest rates being around 3 percent points higher than they should. This is where the focus needs to be and not on lowering on savings rate to stimulate the economy. The time for removing the distortion in taxes on banks is long gone. The situation is that banks do not pay the high levels of taxes consumers do, as banks pass on the cost to the end user. Lowering the high bank taxes will do far more to cut lending rates and stimulate the economy than the foolish cutting of the savings rate.

Sharp slash to interest rates

Bank of Jamaica slashed their overnight policy interest rate by a hefty 50 basis points to 0.75 percent per annum, effective 20 May 2019.
This decision reflects Bank of Jamaica’s assessment that inflation will remain low for until the end of 2020 as well as provide added stimulant for faster economic growth.
The reality is that there is a huge disparity between the move by the central bank and government policy. While the central bank lowers the rate to stimulate the economy, the government has artificially helped in keeping bank lending rates much higher than needed by taxing customers of banks by high taxes on banks that is resulting in interest rates being around 3 percent points higher than they should. This is where the focus needs to be and not on lowering on savings rate.
Low inflation is here to stay, despite the central bank’s continued focus on an excessively high 4 to 6 percent range. The lowering of interest rates is hurting savers particularly pensioners who have to rely on savings.
According to Bank of Jamaica, the decision is intended to stimulate an even faster expansion in private sector credit which should lead to higher economic activity, consistent with the inflation target. The move also comes at the same time that the bank announced the lowering of the cash reserves that commercial banks need to keep with the central.
What are the implications, investors looking for yields on local bonds will be getting less on the dollar for savings. Stocks will become more attractive as dividends in a number of cases are paying more than Treasury bill rates that sits at 2 percent per annum. Real estate will benefit from more demand as an alternate form of investing.

Jamaica’s April inflation tame

Monthly inflation figures returns well below the 2 percent per annum level in April according to data put out by the Statistical Institute of Jamaica (STATIN) today.
According to Statin, the All Jamaica Consumer Price Index recorded an inflation rate of 0.1 percent in April 2019. the inflation for April comes against a rise of inflation in march to 0.8 percent.
This movement in April was mainly attributable to a 0.5 percent increase in the index for Food and Non-Alcoholic Beverages. The two groups within this division Food and Non-Alcoholic Beverages recorded increases of 0.5 percent and 0.3 percent respectively. Transport division, rose by 0.4 percent due to the rise in petrol prices and its related products. The overall movement was tempered by a 1.5 percent decline in the index for the Housing, Water, Electricity, Gas, and Other Fuels division resulting from lower rates for electricity, water and sewage. The calendar year-to-date inflation movement is 0.8 percent, while inflation over the past twelve months comes out at 3.9 percent and the fiscal year-to-date is a low 0.1 percent with just one month having elapsed.

Jamaica’s historical low unemployment

The unemployment rate fell to its lowest level on record, with January 2019 unemployed falling 1.6 percentage points from 9.6 percent in January 2018 and ending at was 8 percent for the first month of 2019.
The fall in the unemployed number arose from an increase in the Employed Labour Force for January 2019 of 1,232,700, some 28,600 or 2.4 percent more than in January 2018. The largest increase in employment was in the occupation group ‘Clerks’ 12,800 or 15.8 percent, which moved to 94,000 in January 2019. Of the increase in employment in this group, females accounted for 8,300 persons.
Female employment was 3.5 percent more and males 1.4 percent than in the 2018 period, Statin data shows. The increase in employment for females was more than twice that of males. The number of employed males increased by 9,500 to 673,500 and employed females by 19,100 to 559,200.
More females were employed in the occupation groups ‘Professionals, Senior Officials and Technicians’ and ‘Clerks’. There was also an increase in the number of females employed in the industry groups ‘Hotels & Restaurants Services’ and ‘Real Estate, Renting and Business Activities’.

Jamaica’s inflation up 0.8% in March

Inflation in Jamaica rose 0.8 percent in March and brings the year to 0.7 percent date data released by the Statistical Institute of Jamaica (STATIN) shows and the fiscal year inflation to 3.4 percent.
According to Statin, the movement was mainly attributable to a fall of 0.9 percent in the index for the heaviest weighted division Food and Non-Alcoholic Beverages and a 1.5 percent rise in the Housing, Water, Electricity, Gas and Other Fuels division at resulted from a 2.7 percent increase in the group ‘Electricity, Gas and Other Fuels’. Also contributing to March’s inflation rate was an increase of 1.1 percent in the index for the ‘Transport’ division. This was mainly attributable to the rise in petrol prices.