WEIGHT OF WAR

Fiscal Commissioner Courtney Williams has sounded a warning that the geopolitical tensions in the Middle East are posing a material risk to the Jamaican economy, and that a prolonged conflict could lead to worsened terms of trade and amplified price pass-through effects, along with higher production costs, as well as dampened economic activity and confidence.

To maintain fiscal credibility and disciplined budgeting, the fiscal commissioner wants Finance and the Public Service Minister Fayval Williams to clarify whether the Government’s fiscal projections have been updated with more recent macroeconomic data or whether the January assumptions, including the gross domestic product (GDP) deflator, upon which the Budget was cast, remains valid within the current environment.

Oil prices surged above US$100 per barrel late last week as the United States’ and Israel’s war against Iran escalated. Energy markets are in turmoil as the Strait of Hormuz, the narrow area between the Persian Gulf and the Gulf of Oman where 20 per cent of global oil supplies are shipped to countries around the world, remains closed, as Iran threatened to attack ships traversing the passageway.

Minister’s response

The fiscal commissioner’s latest comments come against the background of the finance minister’s Budget Debate response to his Economic and Fiscal Assessment Report (EFAR), which was released to the public last week.

In a news release last week, the Independent Fiscal Commission (IFC) said it welcomed the engagement by the finance minister in relation to the EFAR.

The IFC now says it has noted, in particular, the minister’s critique of its expressed concerns regarding the GDP deflator that informed the Budget projections.

Pointing out that it values constructive dialogue, which will serve to improve the quality of fiscal governance, the IFC reiterated its call for a useful update of the Government’s macroeconomic and fiscal projections, to reflect more current data that are available.

Revisiting its original concern set out in the EFAR, the IFC has maintained that the Government’s projection of a nearly 10 per cent GDP deflator for financial year 2026-2027 is high and not supported by current evidence.

While agreeing with the finance minister that the consumer price index (CPI) and GDP deflator measure different concepts, the IFC emphasised that the salient point of its concern was not about the divergence between the two measures, but whether the GDP deflator used to cast the Budget was too high.

The IFC highlighted a few factors that it said established the link between both variables and which confirm that price pressures are moderating. Beginning with agricultural recovery, the IFC said stronger-than-expected rebounds in agriculture, supported by proactive policy and farmer support, are already tempering domestic food prices, which should exert downward pressure on the deflator.

In terms of imported inflation, the IFC noted that Jamaica’s manufacturing and construction sectors depend heavily on imported inputs, which are reflected in the CPI and ultimately feed into the prices of domestic output. This linkage, according to the IFC, suggests that under prevailing conditions, the deflator is unlikely to reach the levels projected in the Government’s Fiscal Policy Paper (FPP).

The third factor mentioned by the IFC is outdated data. The IFC said the FPP relied on projections prepared in January 2026, missing the December 2025 and January 2026 inflation data which confirmed easing price pressures.

The IFC acknowledged the finance minister’s revised projection, particularly that real GDP growth for fiscal year 2025-2026 and 2026-2027 are now expected to outperform earlier estimates made in the immediate aftermath of Hurricane Melissa.

However, the IFC has emphasised that nominal GDP depends on both real growth and the deflator.

“With real GDP revised upwards and a lower deflator, the final nominal GDP outcome, and by extension, the key fiscal and debt ratios, will hinge on which of these opposing forces dominates. It was against this backdrop that the EFAR called for a recasting of the fiscal projections,” Courtney Williams noted.

In opening the Budget Debate last week, the finance minister said she respected the views of the fiscal commissioner, but argued that it was incorrect to conflate the consumer price index with the GDP deflator.

“The CPI measures the change in the cost of living for consumers. This figure includes the cost of imports and locally produced goods, while the GDP deflator measures how the prices of everything produced within Jamaica have changed,” she said.

Williams contended that while CPI and GDP deflator usually track together, the post-hurricane environment from Hurricane Melissa creates a “wider-than-usual variance” between the two owing to localised scarcity and domestic production shifts.

“In normal times, they track closely and there is little difference. However, in the aftermath of an event like a Category 5 hurricane, where domestic production in certain areas has been decimated, with scarcity influencing prices of locally produced goods, and there is a surge in demand for reconstruction from citizens and businesses, we can have a wider-than-usual variance between CPI and the GDP deflator. It is not abnormal or suspicious,” she said.

edmond.campbell@gleanerjm.com