Jamaica and the IMF

News Brief: Jamaica Revises Targets Under the Staff-Monitored Program

Country's Policy Intentions Documents

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Jamaica—Letter of Intent

December 4, 2001

The following item is a Letter of Intent of the government of Jamaica, which describes the policies that Jamaica intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Jamaica, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431, U.S.A.

Dear Mr. Köhler,

Over the first half of FY2001/02 the Jamaican economy is estimated to have grown at an annualised rate of 3 percent, the highest level in 7 years. This is partly due to a rebound in agricultural output following a period of drought as well as a recovery of mining activity. Nominal domestic interest rates have continued to decline reflecting growing confidence in the economy, and twelve-month inflation has been contained to around 7 percent under the Bank of Jamaica's tight monetary policy. The targets under the staff monitored programme (SMP) for end-June and end-September have been broadly met, with the Net International Reserves significantly above targeted levels as a result of the highly successful international bond issue in May. Structural reforms have also been proceeding as planned with continued divestment of FINSAC-controlled institutions.

The Jamaican economy has however sustained three major shocks since June: an outbreak of violence in a section of Kingston in July, which halted productive activity for a few days and negatively affected tourism over the longer term; a significant reduction in visitor arrivals consequent on the 11 September terrorist attacks on the USA; and major infrastructure damage and population dislocation as a result of wide-scale flooding associated with Hurricane Michelle in November. In addition, the slowdown in the global economy has negatively impacted exports and the current account deficit is now expected to be approximately 8 percent of GDP or US$200 million above the SMP projections. As a result of the shocks and the global slowdown, real GDP growth for the fiscal year is now expected to be 1½ percent or lower.

These adverse developments contributed to the emergence of downward pressure on the exchange rate in October. To restore orderly market conditions, the Bank of Jamaica intervened in the foreign exchange market and increased domestic interest rates. These measures were highly successful. As market conditions permit, we intended to resume the path of domestic interest rate reduction. The World Bank and the Inter-American Development Bank have agreed to provide additional loans to help us deal with these shocks.

In responding to the shocks, the Government aims to maintain the macroeconomic stability achieved under the SMP while regaining the momentum for higher growth. The Government is facing a deterioration in the central government fiscal deficit of around 2½ percentage points of GDP to around 5 percent of GDP resulting largely from the need for higher expenditures on security, tourism promotion and rebuilding after the floods, as well as lower revenues associated with the decline in economic activity. The Government has agreed with the IMF staff that the deterioration should be contained to around 1½ percentage points of GDP with a central government cash deficit of 4.1 percent of GDP. This will be achieved by reductions in capital and current expenditures, additional revenue enhancement measures and dividend payments from public enterprises reflecting, in part, lower world oil prices. The central government primary surplus target will be reduced by a similar amount to around 10 percent of GDP. Despite the fiscal pressures, social safety net expenditures will remain constant in real terms and the net international reserves target will remain unchanged at a build up of US$100 million for the fiscal year. The external commercial borrowing limit will be increased by US$50 million to reflect our plans for a shelf-registration in New York; we may, however, approach the markets for larger amounts to finance some of next year's requirements depending on market conditions. All other targets under the SMP remain unchanged.

The attached table presents the adjusted macro-economic targets. Meeting these targets should imply, despite the adverse shocks, the achievement of a significant decline in the public sector debt-to-GDP ratio from current high levels, thereby permitting faster growth and lower interest rates. In this context, the Government will continue to limit the issuance of central government guarantees on borrowing to third parties and the assumption of any additional debt. The Government remains ready to adopt additional measures to achieve the targets under the SMP and the authorities will provide to the Fund all the information necessary to monitor the programme.

The Government also hereby requests that the Fund staff monitor our FY2002/03 programme under a new SMP. In this context, the Government tentatively plans a reduction in the central government fiscal deficit of around 1 percentage point of GDP in FY2002/03 to 3 percent of GDP, and an inflation target of 5-6 percent while maintaining the FY2001/02 level of Net International Reserves. The Government looks forward to discussing the details of the programme to be monitored by the staff early next year.

Yours truly,

/s/
Omar Davies
Minister of Finance and Planning
Government of Jamaica
Kingston, Jamaica
    /s/
Derick Latibeaudiere
Governor
Bank of Jamaica
Kingston, Jamaica


 

Table. Jamaica: Quantitative Targets for Key Variables in the Staff-Monitored Program for 2001/02


   

Targets

             

 

Targets Actual   Targets Actual   Revised Original   Revised Original
 
 
 
 
 

Jun. 2001

 

Sept. 2001

 

Dec. 2001

Mar. 2002


 

(In millions of Jamaica dollars; end of period)

                       

Net domestic assets of central bank 1

-31,758

-40,409

 

-32,458

-40,916

 

-27,524

-27,524

 

-34,294

-34,294

                       

Overall balance of selected public enterprises

-1,050

1,050

 

-300

1,096

 

1,250

1,250

 

2,400

2,400

                       

Primary balance of the central government (indicative) 2

3,400

2,194

 

11,900

10,914

 

18,600

23,500

 

35,400

38,500

                       

Overall balance of the central government 2

-10,700

-10,887

 

-13,800

-13,440

 

-19,800

-15,000

 

-14,800

-10,000

                       
 

(In million U.S. dollars; end of period)

                       

Net international reserves of Bank of Jamaica 3

1,336

1,541

 

1,336

1,537

 

1,336

1,336

 

1,386

1,386

                     

Foreign short term commercial borrowing 4

50

n/a

 

50

n/a

 

50

454550

 

50

50

                       

Foreign medium- and long-term commercial borrowing 2 3

275

400

 

275

400

 

450

400

 

450

400


1 Using an accounting exchange rate of J$46.6 per dollar, and the cross-currency exchange rate against the US dollar as of March 31, 2001.
2 Cumulative figures for fiscal year to date.

3 Will be raised by the amount of additional government borrowing (above US$50 million) from bond markets intended to prefund next year's borrowing requirement. Such sums will be placed on deposit at the Bank of Jamaica.
4 Defined as trade credits to selected public enterprises.

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