IMF Executive Board Concludes 2008 Article IV Consultation with Jamaica

Public Information Notice (PIN) No. 08/51
May 13, 2008

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.

On April 21, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jamaica.1

Background

Jamaica's economy has weathered a series of adverse shocks over the past year. Hurricane Dean and heavy rains caused extensive damage to agriculture and disrupted mining activity. Also, there was a reversal of the one-off increase in tourists diverted from hurricane-affected Mexican destinations in 2006. As a result of these developments, real economic growth is estimated to have declined to 1 percent in FY 2007/08 (April-March) from 2½ percent the previous year. Moreover, the supply side impact of the weather-related shocks exacerbated already significant price pressures associated with rising global food and oil prices. Headline inflation more than doubled over the past year to 19.9 percent by March 2008.

The fiscal primary balance improved in FY 2007/08 but by less than anticipated in the original budget and due in part to delays in implementing investment spending. Improved tax administration enabled the government to increase revenues by over 1 percent of GDP over the previous year. However, non-wage current expenditures and capital spending were increased sharply in a mid-year budget supplement, although capital spending fell behind schedule. All in all, the primary surplus for FY 2007/08 is estimated at 9 percent of GDP, compared to 8 percent of GDP the previous year but short of the 10¼ percent of GDP target in the original budget.

Bank prudential indicators have remained generally sound notwithstanding a sustained rapid growth in credit. The growth of unregulated investment schemes promising implausibly high rates of return has, however, been a worrisome financial development with potentially adverse macroeconomic consequences.

On the external front, rising global energy prices contributed to a widening of the current account deficit to 15½ percent of GDP. Moreover, the confluence of economic developments in Jamaica and ongoing turbulence in global credit markets unsettled the foreign exchange market in 2007, put pressures on the capital account and led to reserve losses. All in all, reserves declined by 20 percent during July-November 2007. Reserves have, however, recovered significantly in recent months following hikes in domestic interest rates by the Bank of Jamaica.

Executive Board Assessment

Executive Directors noted that Jamaica's economic challenges have been compounded by a more difficult environment, with natural disasters, the global economic slowdown, and increases in global oil and food prices contributing to slower economic growth, rising inflation and a widening current account deficit. Strains in international financial markets have put further pressure on an economy reliant on external financing. Directors agreed that the key imperatives are to address the economy's vulnerabilities, improve Jamaica's lack-luster growth performance, and strengthen its medium-term public debt dynamics.

Against this background, Directors welcomed the authorities' efforts at setting out an ambitious medium-term macroeconomic strategy that places high priority on the maintenance of macroeconomic stability, fiscal consolidation, and structural reforms. They encouraged the authorities to work expeditiously toward the implementation of their strategy and to build a broad domestic consensus in support of their reform initiatives.

Directors welcomed the authorities' medium-term program of fiscal adjustment aimed at balancing the budget by FY 2010/11 and at establishing a virtuous cycle of lower debt and higher growth. They noted that the adjustment effort would need to be underpinned by broad-ranging reforms of the tax system, public services and public enterprises, and they underscored the Fund's readiness to provide technical assistance in its areas of competence. In particular, Directors saw merit in the early preparation of a fiscal Report on the Observance of Standards and Codes (ROSC) to help strengthen fiscal management and improve transparency.

In discussing the desirable pace of fiscal adjustment, Directors recognized the need to set realistic targets and to provide adequate fiscal space for growth-enhancing investment spending. At the same time, most Directors considered that a stronger fiscal adjustment in the current budget year would make a good start to the substantial effort needed over the coming three years to implement the authorities' program. Against this background, they encouraged the authorities to examine carefully the scope to reduce non-productive expenditures, noting that this would help reverse the weakening primary surplus projected for FY 2008-09. Early fiscal adjustment would also support monetary and exchange rate policies, against the backdrop of the widened current account deficit, higher-than-expected inflation, and the weak external environment.

Directors commended the authorities' commitment to monetary and exchange rate flexibility. They were reassured that the authorities stand ready to take necessary actions as conditions warrant. Directors were of the view that a further moderate rise in interest rates might be needed to alleviate inflationary pressures and stem capital outflows. They considered that the current level of the exchange rate broadly reflects fundamentals, and advised the authorities to stand ready to let the Jamaican dollar adjust should large balance of payments pressures persist.

Directors welcomed the positive indicators of banking sector soundness. They stressed that continued vigilance over the financial sector is warranted, in particular with respect to the risks posed by the unregulated investment schemes promising implausibly high rates of return. Directors were encouraged by the authorities' intention to prevent unregulated investment schemes that are not in the public interest, while ensuring that legitimate investments can proceed. They supported the authorities' request for technical assistance in this regard. Given the cross-border risks posed by such schemes, Directors also encouraged enhanced regional cooperation among supervisors. They called on the authorities to broaden the collection of information on the formal financial system to allow for a more comprehensive assessment of systemic risks, including from changes in the global and domestic economic environments.

Directors considered the broad nature of the authorities' structural agenda as appropriate, and they encouraged an expeditious detailing and sustained implementation of the reforms. Directors welcomed the authorities' intention to continue to implement measures to improve the business environment and to divest non-core public companies, which will be essential to promote critically-needed private sector led growth and strengthen competitiveness.


Jamaica: Selected Economic Indicators 1/
 
        Prel. Est.
  2004/05 2005/06 2006/07 2007/08
 
  (Annual percentage changes)

GDP, prices, and employment

       

Real GDP

0.4 2.0 2.4 1.0

Nominal GDP

10.9 17.0 10.0 13.2

Consumer price index (end of period)

13.2 11.2 8.0 19.9

Consumer price index (average)

12.8 14.8 7.4 12.4

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

61.5 65.3 67.6 70.8

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

5.2 4.1 -1.8 ...

Unemployment rate (in percent)

12.2 11.6 10.8 ...
  (In percent of GDP)

Government operations

       

Budgetary revenue

31.2 29.0 29.9 31.5

Budgetary expenditure

36.6 32.7 35.5 35.1

Primary expenditure

19.3 18.0 21.8 22.5

Interest payments

17.4 14.7 13.8 12.7

Budget balance

-5.4 -3.7 -5.6 -3.7

Of which: primary fiscal balance

11.9 11.0 8.1 9.0

Off-budget expenditure 2/

3.1 1.2 1.7 1.3

Overall fiscal balance

-8.6 -4.8 -7.3 -4.9

Public debt 3/

139.6 133.0 134.3 127.4

External sector

       

Current account balance

-7.5 -11.6 -11.7 -15.4

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

17.5 17.8 20.8 20.8

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

41.2 44.4 48.2 49.9

Net international reserves (in millions of US$)

1,902 2,078 2,329 2,083
  (Changes in percent of beginning of period broad money)

Money and credit

       

Net foreign assets

7.5 1.7 4.2 -4.0

Net domestic assets

2.7 6.9 6.6 25.2

Of which: credit to the central government

0.5 -5.6 -3.5 6.7

Broad money

10.3 8.6 10.8 21.2

Velocity (ratio of GDP to broad money)

2.6 2.8 2.8 2.6

Memorandum items:

       

Nominal GDP (in billions of J$)

550 643 707 801

Exchange rate (average, J$/US$)

61.4 63.2 66.3 69.7
 

Sources: Jamaican authorities; and Fund staff estimates and projections.
1/ Fiscal years run from April 1 to March 31. Authorities' budgets presented according to IMF definitions. FY 2007/08 figures reflect a combination of outturns and projections.
2/ Includes debt issued to BOJ to cover its cash losses, and debt related to off-budget projects financed initially by the private sector.
3/ Including PetroCaribe debt. At end FY2006/07 includes a US$350 million bond issued for prefinancing.


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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