Towards the end of 2008, storm clouds were settling over the Jamaican economy that portended a period of severe stress, on a scale not seen since the meltdown of the local financial sector in the late 1990s, or the structural adjustment programme of the mid-1980s. Governments and leading international institutions were, at the time, moving frantically to bail out large chunks of the global financial system, and capital was fleeing emerging markets, sending several countries to the International Monetary Fund (IMF) for emergency support.

Meanwhile, the US recession, which had been under way from earlier in the year, was deepening, as credit markets froze and monthly job losses reached record levels. Jamaica, it seemed, could not escape the effects of the crisis, given the widening contours of the downturn in the American economy and our close linkages to the worst-affected industries - construction, automobiles and travel. In addition, remittances were bound to be cut as the US unemployment lines grew and job insecurity heightened.

Though our financial system was proving resilient, less-than-timely policy response, which is now recognised, had set off tremors in the foreign-exchange market, to which the Bank of Jamaica (BOJ) reacted by hiking interest rates. In a context where public-sector borrowing requirements had to be met from the local market as access to the external markets dried up, higher domestic interest rates would aggravate an already acute debt problem and a rising fiscal deficit. Those countries in the Latin American and Caribbean region with lower debt ratios and strong fiscal positions were, on the other hand, able to cut interest rates to stimulate their economies as export markets softened.

First and worst casualty

As the New Year began, the impact of the recession on Jamaica soon became clear in the five areas that determine, in large mea-sure, the trajectory of our economy: bau-xite, tourism, foreign investment, remittances and oil. The first and worst casualty was the bauxite industry, where production cuts and closure of smelters and alumina plants were undertaken globally in response to plummeting demand by consumers in the construction and auto industries. In the process, three of Jamaica's four alumina plants were closed, as the owners were under severe financial strain, with inventories of alumina and aluminium rising and aluminium prices falling by February 2009 to two-thirds of their July 2008 peak levels.

Prior to this, the bubble in commodity markets had pushed prices to astronomical levels, but by late 2008 when the bubble burst, aluminium, prices went into a free fall. Combined with the production cuts, the slippage in prices led to an over 60 per cent reduction in the industry's gross earnings in the first 10 months of the year. With bauxite and alumina exports accounting for over one-half of the total value of our exports of goods, this is likely to lead to a hefty fall of over 40 per cent in such exports.

Not only has there been a downturn in production, but investment activity has also slumped, which partly accounts for the 51.7 per cent drop in private-investment flows reported by the BOJ for the January-August period. The impact of the cessation of investment in the industry has been felt in the construction industry, and particularly in the mid-island parishes, where some US$1.4 billion had been spent between 2002 and 2008 on various plant upgrading and expansion projects. The projects generated over 3,000 direct jobs in these parishes and created demand for a range of local goods, including cement, which has suffered a sharp decline in sales.

Strong foundations

The local tourist industry has fared much better, benefiting from strong foundations laid in modernising road, water, airport, telecoms and other infrastructure. Massive investment in new hotels by European hotel chains has also expanded market penetration in Canada, propelling impressive growth in visitors from that country. This has compensated for declines in arrivals from Europe and the USA.

Earnings from the industry have, however, slipped, due to heavy discounting of rates, as consumers seek bargains in a depressed international economy. Investment in the sector has fallen even more as existing projects are completed and new ones postponed due to the credit squeeze and economic downturn. This is the main reason for the sharp drop in private investment flows referred to earlier.

Having ended 2008 on a positive note in spite of the onset of recession in the three major countries that are remittance sources (USA, UK, Canada), inflows dropped sharply by February. The decline has moderated somewhat, but up to October, was running at over 14.1 per cent. Falling remittances have been a major blow for many Jamaicans as these flows are their main source of income and the country's leading generator of foreign inflows. Along with setbacks in other areas of the economy, the fall in remittances may push up poverty levels.

Big losses

Notwithstanding big losses in four of the five levers on which the Jamaican economy operates, the collapse of oil prices, from over US$140 per barrel in July 2008 to under US$40 per barrel at the end of 2008, brought about dramatic improvements in the country's balance of payments. Even though oil prices have again climbed, the current-account deficit fell by US$1.65 billion in the first eight months of 2009, or by nearly 80 per cent. Oil imports alone actually fell by US$1.79 billion, or 66.7 per cent, reflecting a combination of lower oil prices and reduced imports consequent on the plant closures in the bauxite industry.

This last point illustrates the vital importance of action to diversify our energy source and transform the inefficiency with which we use energy, for we cannot solve our balance-of-payments problems by contracting economic acti-vity, or by depending on the current moderation of oil prices.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.