Higher interest rates and tight fiscal policy will kill economy

The Central Bank says it is planning to increase interest rates in order to contain inflation and the rapid slide in the value of the Jamaican dollar. This will lead to a build-up in the debt, higher debt services charges and a reduction in the amount of money available to provide basic social services such as health care, education, national security and infrastructure development.  

A 1 percent fall in the value of the dollar will lead to a $13.1 billion increase in the debt and $661 million in additional interest charges, which amounts to 0.6 percent of gross domestic product or the total market value of all final goods and services produced within a year.

                                                             The impact of a 1% fall in the value of the $                                  

                     Depreciation                    Increase in debt                   Increase in interest                   %  of GDP

                         1:00%                           $13.10 billion                         $661.00million                            0.60%

The rapid depreciation in the value of the dollar will also lead to higher prices, falling consumption levels, lower investment expenditure, slower growth and increasing levels of poverty and criminality.

The signal rate or the rate at which the central bank lends to the commercial banks which run out of money overnight was pushed down to 0.5 per cent in 2019 to facilitate a reduction in commercial bank lending rates to the productive sector in order to drive growth. However, despite this reduction members of the productive sector, particularly the small business segment have been unable to access affordable capital, while the members of the financial sector used the cheap money to drive down the value of the dollar, rather than on lending to the productive sector. As a result, the rate of economic growth decelerated from 1.7 per cent during the first quarter of 2019 to 0.0 per cent during the last quarter before declining by 2.3 per cent during the first quarter of 2020 before the unwelcomed intervention of the deadly COVID-19 pandemic. The economy then crashed by 18.4 per cent during the second quarter because of COVID-19; subsequently by 10.7 per cent during the third quarter and by 8.3 per cent during fourth quarter before falling again by 6.7 per cent during the first quarter of this year. The central bank’s decision to hike rates shortly will, therefore, lead to further economic decline in conjunction with the COVID-19 lockdown measures unless more fiscal support is provided to the economy. Failure to do so will lead to more poverty and criminality.