An overview of the effects of monetary policy in Jamaica on GDP and inflation, from 1981 to the present day.
% annual growth rate:
Sources: M2 from Bank of Jamaica and nominal GDP from IMF database, as at September 2023
The medium-term relationship between money and nominal GDP growth in Jamaica 1981-2022
Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period
Comment on monetary trends in Jamaica
Spanish coins, in particular Spanish Dollars, popularly known as "Pieces of Eight" were the oldest units of currency in Jamaica and remained in use for well over a century after 1655 when the British seized control of the island. In 1840, Jamaica became part of the Sterling area although it did mint some of its own coins and after the Bank of Jamaica was established in 1961 (a year before independence), all coins and banknotes were produced locally. In 1969, Sterling was replaced by the Jamaican dollar.
The Bank of Jamaica's mandate requires it to "promote price and financial system stability". It has faced considerable problems in fulfilling this mandate. Inflation, fuelled by high money growth, has been a persistent problem for much of the period since independence. In 1992, the annual inflation rate hit 77.3% before falling back below 10% in 1997. Only in 2015 did Jamaica enter a period where inflation remained consistently below 5% per annum. (The current target range is 4%-6%) Thanks to high inflation, real per capita GDP has increased at an average of just one percent per year over the last 30 years, making Jamaica one of the slowest growing developing countries in the world. Unemployment has only fallen below 10% in one out of the last 40 years (2007).
Jamaica is blessed with natural resources, including substantial supplies of Bauxite. It has an ideal climate for agriculture and is a leading producer of sugar. Bananas and coffee are also produced. Furthermore, its climate and sandy beaches make it an ideal destination for tourism. Given these factors, the country's poor economic performance is very disappointing.
In 2013, the International Monetary Fund announced a $1 billion loan to help Jamaica meet large debt payments. The loan required the Jamaican government to institute a pay freeze amounting to a 20% real-terms cut in wages. Jamaica is one of the most indebted countries in the world and spends around half of its annual federal budget on debt repayment. Jamaica has not thus far been as badly hit by the coronavirus pandemic as many other countries, but the Bank of Jamaica, as elsewhere, loosened monetary policy, including embarking on a substantial government bond buying programme. In consequence, by the end of December 2020, the annual growth rate of M2 had risen to 24.9%, well above the average for the previous decade.
Jamaica’s economy suffered further in 2020 as a result of the coronavirus pandemic. It has managed to avoid a recession since then. Inflation, however, rose to a 12-year high of 12% in early 2022 as a result of loose monetary policy in 2020. Broad money growth has since slowed while borrowing costs have been increased. Inflation nonetheless remains well above the typical levels of 2014-20.