The Commodity Price Bomb and Jamaica John W. Robinson Bank of Jamaica

Key Issues Vulnerabilities Impact of Commodity Prices Monetary framework and response Complementary Measures Outlook

Vulnerabilities- Openness Heavily dependent on trade and consequently on world market conditions Exports typically amount to 45% of GDP Imports normally amount to 60% of GDP C/A gap reduced by remittances to ~5% Pvt capital + Official borrowing allow for reserve accumulation

Energy Dependence

Major Commodity Prices Years FY2006/07FY2007/08FY2008/09 Oil (WTI) /bbl % change HRW Wheat % change SRW Wheat Corn /mt % change Soybeans % change Rice % change Aluminium /mt % change

Exports

Relief Valves Petrocaribe Remittances FDI Reserves

Financial Flows

Vulnerability – Debt Overhang

Monetary Policy Framework Base money targets Exchange rate channel dominant Joint use of open market operations and forex market intervention to meet targets Supported by well developed securities market Transitioning to IT lite

Inflation Path

Inflation Target Missed

Monetary Response Special instruments to tighten liquidity Allow controlled depreciation to temper demand As TOT continues to deteriorate, signal further tightening to contain second round impact Communicate expectations

Monetary Response

Competitiveness maintained

Other Responses Welfare support via initial subsidization of basic foods Targeted income support of most vulnerable Strong Government support of expansion of domestic food supply Energy conservation and diversification Focus on expanding earnings from tourism

Lessons Need to reduce vulnerability to external shocks generally Food security a real issue Monetary policy will be a costly substitute where structural reforms are the real solution.