After decades of weak macroeconomic performance, Jamaica implemented an austerity program in 2013 which helped to reduce the public debt-to-GDP ratio by more than 50 percentage points. Improved fiscal discipline allowed the country to weather the impact of recent overlapping crises, including the COVID-19 pandemic and tightening global financial conditions. Notably, during the peak of the pandemic, the government was able to provide temporary assistance to vulnerable households and businesses to offset income losses, protect jobs, and stimulate demand. Additional assistance was provided to vulnerable households to mitigate the potential impact of rising prices on poverty. The public debt to gross domestic product (GDP) ratio increased by 15 percentage points to 110 percent of GDP in FY2020/21 but has since declined to 85 percent of GDP and is expected to gradually fall below 70 percent over the medium term. In this context, Jamaica maintained its highest credit rating in 20 years from Standard & Poor’s (B+) and in 14 years from Fitch (B+).
The country is recovering from a deep recession caused by the pandemic. The COVID-19 pandemic led to a significant decline in the net external demand and private consumption, resulting in a 10 percent drop in real GDP in Jamaica. While GDP is expected to return to its pre-pandemic level in 2023, the underlying drivers of its historically low growth experience have not been fully addressed. Prior to the pandemic, Jamaica was among the slowest growing economies in Latin America and the Caribbean reflecting issues of low productivity, limited technological adoption, high connectivity costs, a weak business environment, and pervasive crime. Jamaica is also prone to frequent climatic shocks affecting key sectors such as tourism and agriculture which often undermine the livelihoods of poor and vulnerable groups. Furthermore, disruptions in learning during the pandemic will have longer-term effects on growth and human capital and the future earning potential of students, if not addressed adequately.
To strengthen fiscal, financial, and social resilience to climatic shocks, Jamaica has gradually integrated climate change adaptation into its policy framework. The social protection system has also been strengthened, which has contributed to increased equity, social resilience, and poverty reduction.
Jamaica remains highly vulnerable to external developments given its reliance on imported essentials and external financing. Tourism and agriculture, which account for more than a third of available jobs, are vulnerable to shocks, which could undermine economic growth and poverty reduction efforts. Progress on addressing anti-money laundering and counter terrorism deficiencies, as well as strengthening financial supervision is also necessary to attract private investments and to assure financial system stability. While the financial sector is sound, it remains susceptible to various shocks.
The government has demonstrated the capacity to break the cycle of indebtedness, with broad public support, and is committed to continuing its program of fiscal consolidation and reform. However, debt-service costs remain high, crowding out other government spending, including capital investment. In this context, the government needs to strike a careful balance between continuing fiscal consolidation, mitigating the impact of inflation on the poor, and advancing critical growth-enhancing reforms.
Economic Recovery & Outlook
Jamaica’s real GDP expanded by an annual average rate of 4.4 percent between 2021 and 2022, primarily reflecting continued recovery in tourism and agriculture. Rising economic activity boosted labor market conditions and the unemployment rate fell below pre-pandemic levels. Nevertheless, the quality of employment remains a concern given high informality and fewer average hours worked relative to pre-pandemic levels. The poverty rate is estimated to have declined to 12.6 percent in 2022, from an estimated 23 percent in 2020.
Inflation has accelerated in recent years and reached an average of 10.3 percent in 2022, significantly above the central bank’s target range of 4-6 percent. To mitigate a decoupling of inflation expectations, the benchmark policy rate was adjusted by a total of 3 percentage points to 7 percent during 2022.
The fiscal account recorded a surplus of 0.3 percent of GDP in 2022, relative to 0.9 percent of GDP in 2021. Higher spending reflected increased outlays for compensation and transfers to vulnerable families to counter inflation pressures.
A current account deficit of 3.5 percent of GDP was recorded in 2022. Higher spending on imports, including on food and fuel, offset the impact of increased earnings from tourism. Although total visitor arrivals continued to recover in the year, they remain below 2019 levels by over 20 percent. In this context, Jamaica’s international reserves fell by US$317 million to US$4,520 million (5.8 months of total imports).
Real GDP growth is expected to average only 1.9 percent between 2023-24, driven by continued recovery in the tourism sector and increased mining and quarrying activities. On the demand side, growth will be driven by consumption and investments. Poverty is projected to fall to around 9 percent by 2024 as incomes improve with the economic recovery. Monetary policy will remain supportive of growth, ensuring adequate liquidity in the financial system; minimizing pressures on the currency; and returning inflation to within its target 4-6 percent range.
The fiscal account is expected to record an average annual surplus of 0.3 percent of GDP over the medium-term with revenues underpinned by the continued economic recovery. Spending is expected to decline slightly as a result of savings on interest payments. As such, public debt is projected to remain on a downward trajectory.
The external account balance is expected to improve amidst continued recovery in tourism, strong remittance inflows and reduced spending on imports given lower commodity prices. As such, gross reserves will remain at healthy levels, averaging more than 5 months of imports.
There are significant downside risks to the economic outlook including a possible deeper than expected slowdown in the global economy, which could undermine the recovery in tourism and depress remittance inflows. Further tightening in financial market conditions could raise the cost of borrowing, curtail private investments and derail longer term growth, climate change and debt objectives. Worsening crime, social unrest, and potential natural disasters could also impair growth and poverty reduction efforts.
Last Updated: Apr 03, 2023
