Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Jamaica

May 4, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 07/50
May 4, 2007

On April 30, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the 2007 Article IV consultation with Jamaica.1


Jamaica's economy is estimated to have achieved its best growth performance in over a decade during FY 2006/07, which ended on March 31, 2007. Notwithstanding some recent moderation of momentum, the economy is estimated to have expanded by just under 3 percent in real terms, up from 2 percent the previous year and 0.4 percent the year before. While tourist arrivals have recently weakened, they were robust through December 2006 and agricultural activity has rebounded sharply after the weather-related shocks encountered during 2004-05.

Inflation has fallen significantly. Annual consumer price growth fell to 6½ percent at end-FY 2006/07, compared to a target of 9½ percent and a recent high of 19 percent in September 2005. The rebound in agriculture, which weighs heavily in the consumer price basket, has contributed to the decline in headline inflation.

On the external front, the current account deficit is estimated to have strengthened by 1 percent of GDP in FY 2006/07 to 10½ percent of GDP, largely on account of increased exports alongside robust tourism receipts and remittances. Capital inflows enabled a sharp build up in net international reserves (NIR) through 2006 and they currently remain broadly at historical highs.

However, fiscal targets for FY 2006/07 were missed by a wide margin notwithstanding the overall strong economic context. The fiscal slippage is primarily attributable to higher expenditures, although revenues also fell short of the ambitious target set out in the budget. A variety of mid-year expenditure increases were approved in a supplementary budget, mainly relating to agreed public sector wage increases and higher interest costs. As a result, budgetary expenditures for the 2006/07 fiscal year as a whole are estimated to have exceeded fiscal targets by 2½ percent of GDP. Little progress was made in reducing public debt—which stands at about 132 percent of GDP (excluding a recent bond to pre-finance FY 2007/08 obligations).

Monetary policy remains focused on containing inflation while also seeking to engender a sustainable reduction in interest rates. With inflation declining, the Bank of Jamaica eased monetary policy during FY 2006/07 by removing special deposit requirements on banks and reducing interest rates in three steps during May-December, to 12 percent on six-month instruments currently.

Financial sector soundness indicators for regulated entities remain robust despite a search for high yields. With (ex post) real rates of return on treasury bills declining sharply, financial institutions have sought out profitable lending opportunities and bank credit to the private sector has increased markedly. Nevertheless, prudential indicators for both banks and other regulated financial institutions remain sound. However, anecdotal evidence suggests that there has also been an apparent rise in unregulated investment schemes promising very high returns.

Executive Board Assessment

Executive Directors commended the authorities for recent policy successes and noted the strong economic growth in 2006/07, and the declining trend in the current account deficit. The authorities have also succeeded in sharply reducing inflation and bringing about a recovery in revenue collections after their decline in FY 2005/06.

Nevertheless, Directors expressed concern regarding the substantial breach of the deficit target in FY 2006/07, which related in part to one-off expenditures, and the limited progress in reducing the very high debt burden. They considered the medium-term macroeconomic program adopted in 2004 now in need of a fundamental reinvigoration. In this context, Directors saw the need for a broad political consensus to carry through the reforms necessary to secure sustained debt reduction.

Directors viewed fostering private sector led growth as critical to reducing the debt burden. Toward that end, they encouraged the authorities to reform the tax system, and to move ahead with reforms of the civil service aimed at improving efficiency. They also considered that steps to improve the business environment would raise the growth and employment impact of private sector investment.

Directors welcomed the planned improvement in the FY 2007/08 primary budget target as a promising start and an important signal of the authorities' continuing commitment to debt reduction. However, while welcoming progress at strengthening tax administration, Directors noted that it would be challenging to achieve the authorities' revenue objectives through such means alone. Most Directors recommended additional tax and expenditure actions to secure the budgetary objectives. To improve fiscal control and transparency, several Directors encouraged the authorities to continue the process of consolidating the operations of off-budget entities into a single unified framework.

Directors encouraged the authorities to continue to pursue public enterprise reform and strengthen the framework to formulate and assess the overall direction of fiscal policy. They recommended preparation of a fiscal Report on the Observance of Standards and Codes, Fund technical assistance to help improve public financial management, and to put in place a consolidated public sector accounting framework.

Directors pointed to the improving credibility of monetary policy in Jamaica and underscored the benefits of increased monetary and exchange rate flexibility. Given fiscal dominance in Jamaica, Directors considered exchange and interest rate flexibility crucial to allowing the Bank of Jamaica greater independence in pursuing inflation objectives.

Directors welcomed progress in financial sector reforms as an important element to guard against swings in market conditions and sentiments. Looking forward, they underscored the benefits of the authorities' efforts to improve the resilience of the debt profile to interest rate shocks. Directors also called for increased vigilance over speculative investment schemes, and recommended continued efforts to strengthen consolidated supervision, and prioritizing the development and testing of crisis management systems.

Jamaica: Selected Economic Indicators 1/

  2003/04 2004/05 2005/06 2006/07

  (Annual percentage changes)

GDP, prices, and employment


Real GDP

1.9 0.4 2.0 2.7 - 2.9

Nominal GDP

18.5 11.0 17.0 10.3

Consumer price index (end of period)

16.8 13.2 11.4 6.6

Consumer price index (average)

12.9 12.7 15.1 7.2

Exchange rate (end of period, in J$/US$)

8.6 0.9 6.2 3.5

End-of-period REER (percent change, appreciation +)

-0.8 5.2 4.1 ...
  (In percent of GDP)

Government operations 1/


Budgetary revenue

29.4 31.2 29.0 29.8

Budgetary expenditure

36.8 36.7 32.7 35.5

Primary expenditure

18.4 19.4 18.0 21.8

Interest payments 2/

18.5 17.4 14.7 13.7


0.0 0.0 0.0 0.0

Budget balance

-7.4 -5.5 -3.7 -5.7

Of which: primary fiscal balance

11.0 11.9 11.0 8.0

Off-budget expenditure 3/

2.4 3.1 1.2 1.4

Overall fiscal balance

-9.9 -8.6 -4.8 -7.1

Public debt

143.7 139.6 133.0 134.7

External sector


Current account balance

-6.8 -7.2 -11.4 -10.5

Of which: exports of goods, f.o.b.

17.7 17.5 17.8 19.5

Of which: imports of goods, f.o.b.

39.7 41.2 44.4 46.2

Net international reserves (in millions of US$)

1,569 1,902 2,078 2,329
  (Changes in percent of beginning of period broad money) 4/

Money and credit


Net foreign assets

9.0 7.5 1.8 3.3

Net domestic assets

11.3 2.7 6.8 9.5

Of which: credit to the central government

9.7 0.5 -8.5 1.8

Broad money

20.2 10.3 8.6 12.9

Velocity (ratio of GDP to broad money)

2.6 2.6 2.8 2.7

Memorandum items:


Nominal GDP (in billions of Jamaican dollars)

495 550 643 709

Exchange rate (end of period, J$/US$)

60.8 61.5 65.3 67.6

Sources: Jamaican authorities; and IMF staff estimates and projections.

1/ Based partly on assumptions provided by the authorities. Fiscal years run from April 1 to March 31. Public debt is central government debt including debt assumed from public entities, plus guaranteed public entity debt, plus PetroCaribe debt. For FY 2006/07, the debt includes US$350 million bond issued for prefinancing. Cash-flow savings from the PetroCaribe agreement with Venezuela are managed by an extrabudgetary Fund that lends to both budgetary and off-budget entities.

2/ Includes capitalized interest payments on previous year's BoJ Special Issue bonds.

3/ Includes debt issued to BOJ to cover its cash losses, and debt related to off-budget projects financed initially by the private sector.

4/ Including valuation adjustments.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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