Public Information Notices
Jamaica and the IMF
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On August 7, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jamaica.1
Following the financial crisis in 1995/96, the Jamaican government adopted stabilization policies aimed at reducing inflation through a broadly stable nominal exchange rate. While the government has succeeded in bringing inflation down (the inflation has been kept in single digits since 1997/98), tight monetary policy, coupled with high fiscal deficits, led to high real interest rates and an erosion in competitiveness. The public sector debt increased sharply during the period to over 130 percent of GDP, reflecting in part the costs of the financial sector rescue. Economic recovery has been slow. In June 2000, the Jamaican authorities undertook a Staff-Monitored Program (SMP) for FY 2000/01-2001/02 designed to tackle the heavy public sector burden and restore economic growth.
Over the past fiscal year (2001/02), Jamaica's economy was hit by a series of shocks including the outbreak of violence in July, the impact of the terrorist attacks of September 11 on tourism, and heavy floods in late November. The government responded to these shocks through steps to cushion the impact on the economy. However, partly as a result, public finances worsened significantly and the reduction in the public sector debt was much less than anticipated. Jamaica has again been hit by heavy flooding in May 2002.
After growing strongly in the first half of the fiscal year (at estimated 3 percent annual rate), the economy grew by about 1 percent in FY 2001/02 following the shocks. Inflation was around 7½ percent, and the real exchange rate appreciated by 4 percent. Despite a weaker external current account, Net International Reserves increased by about US$650 million boosted by strong remittances and proceeds from international bond issues. Domestic interest rates generally trended downwards, although with a hiccup in the third quarter of the fiscal year.
Public finances deteriorated with revenues declining sharply, reflecting weaker economic activities. Expenditures for tourist promotion, flood relief, and wages-resulting from earlier than expected wage settlements-were higher but offset by savings elsewhere. The cash government budget deficit increased to 5.7 percent of GDP relative to the revised SMP target of 4.1 percent of GDP, and the central government primary surplus contracted by nearly 3 percentage points of GDP to 8 percent of GDP. Public debt declined modestly to 129 percent of GDP.
On structural reforms, the government has succeeded in divesting intervened financial institutions through the Financial Sector Adjustment Company (FINSAC) and has restored the liquidity and the solvency of the financial system; FINSAC will be wound up by October 2002. Steps have been taken to strengthen further the regulatory framework for the financial sector and supervisory capacity of the regulatory authority.
To build on the progress achieved so far, the government has requested a new SMP for FY 2002/03. The objectives of the program are to consolidate the gains in macroeconomic stabilization and adjustment achieved to date and to lay the foundations for sustainable, strong economic growth that would further reduce poverty. The authorities' program for FY 2002/03 includes a renewed fiscal effort to reverse fiscal slippages in 2001/02 and maintaining single digit inflation through tight monetary policy. The budget targets a deficit of 4.4 percent of GDP, consistent with close to 2½ percentage points of GDP improvement in the primary surplus. This improvement is predicated on a series of revenue measures; the government is committed to exercise restraint in expenditures, including on wages. The fiscal effort would facilitate a further reduction in the heavy public sector burden.
To lay foundations for faster economic growth, the authorities are committed to maintain macroeconomic stability, take anti-crime measures to improve the business environment and maintain social order; improve infrastructure; strengthen the competitiveness of the economy including through adopting sector-specific growth-oriented policies; continue the effort to reduce labor market rigidities; and adopt further public sector reforms.
Executive Board Assessment
The Jamaican economy suffered major negative shocks during the last fiscal year, including a decline in tourism following the September 11 terrorist attacks, wide-scale flooding, and an outbreak of domestic violence. Directors commended the Jamaican authorities for having maintained macroeconomic stability through this difficult period, as evidenced by the low inflation and positive economic growth. They also saw Jamaica's successful borrowing in the international bond market as an encouraging sign of the credibility of the authorities' economic policies.
Directors acknowledged the authorities' strong fiscal efforts, as evidenced by the achievement of high primary surpluses over the last four years. Given the critical challenge to achieve a permanent reduction in the public debt burden, it was, nevertheless, a source of concern that, partly as a result of measures responding to the recent shocks, the public finances fell short of the targets in the Staff-Monitored Program (SMP) for FY 2001/02. Against this backdrop, Directors considered that key priorities for the authorities must be to redouble their effort to reverse the fiscal slippages and to strengthen policies over the medium term to improve Jamaica's growth performance and to achieve a faster reduction in the public debt burden.
Directors welcomed the authorities' determination to meet their fiscal targets for FY 2002/03 in the context of a new SMP. They emphasized that this will require expeditious implementation of revenue-enhancing measures, including efforts to improve tax compliance, and rigorous restraint in expenditures, particularly on wages. Noting the budgetary impact of the central bank's losses, they also urged early implementation of the recapitalization plan being worked out with the World Bank. Looking ahead, the authorities will need to maintain a sufficiently high primary surplus over the medium term to ensure the sustainability of public debt, and to facilitate a further reduction in real interest rates.
Directors commended the Bank of Jamaica for achieving single digit inflation for six consecutive years and supported the authorities' objective of maintaining low and stable inflation. A number of Directors suggested that the Bank should consider acting on very short term interest rates to reduce liquidity rather than longer-term rates, and, in this context, noted the positive impact on private sector lending and growth that could result from a prudent gradual reduction in interest rates.
Most Directors considered the authorities' approach to exchange rate management as broadly appropriate. A number of them saw scope for somewhat greater exchange rate flexibility to help boost competitiveness, without undermining disinflation efforts. A few other Directors, however, saw a trade-off between achieving competitiveness through significant depreciation and maintaining low inflation. All Directors stressed that sustained structural reform will remain key in underpinning the authorities' efforts to strengthen external competitiveness and improve current account prospects. Directors urged the authorities to press ahead with the elimination of the foreign exchange surrender requirement, which would remove the multiple currency practice associated with this scheme.
Directors welcomed the authorities' growth-oriented structural reforms. They urged the government to take further measures to improve public sector efficiency and governance and reduce labor market rigidities, noting that higher employment along with the government's anti-crime initiatives will be key to promoting social stability and improving the business climate. Some Directors also suggested that stronger efforts to simplify the tax system would foster private sector investment.
Directors commended the success of the Financial Sector Adjustment Company (FINSAC) in disposing of assets of the intervened institutions. They supported the authorities' continued efforts to improve the regulatory framework and strengthen the supervision of both banks and non-bank financial institutions.
Directors welcomed the move to replace reference prices with actual prices as the basis for assessing import duties for certain agricultural products. Noting the large rise in tariff rates for these products, several Directors encouraged the authorities to adopt a timetable for their reduction, although a few acknowledged that this should be facilitated in the context of an international effort to phase out agricultural protection.
Directors welcomed the authorities' intention to further strengthen the quality of economic statistics and their plan to participate in the General Data Dissemination System. Directors welcomed the measures being taken by the Jamaican authorities against money laundering and encouraged the authorities to continue implementing actions to combat terrorist financing in line with UN resolutions.
IMF EXTERNAL RELATIONS DEPARTMENT