IMF Executive Board Concludes 2009 Article IV Consultation with Jamaica

Public Information Notice (PIN) No. 10/115
August 18, 2010

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Jamaica is also available.

On February 4, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jamaica.1

Background

The Jamaican economy has been deeply impacted by the global crisis. Real Gross Domestic Product (GDP) is projected to fall by 3.5 percent in FY 2009/10. Mining production and remittances have fallen sharply. Tourism has also been negatively affected, although it has proven to be far more resilient than in the rest of the Caribbean. Inflation fell steadily from 26.5 percent in August 2008 to 9 percent in November 2009, reflecting weak domestic demand and a decline in global commodity prices from their mid-2008 peaks. The external current account deficit is expected to narrow from 18 percent of GDP to 9.5 percent, as the contraction in imports exceeds, by far, that of exports.

Government finances have deteriorated despite the introduction of fiscal measures equivalent to almost 2 percent of GDP. The public sector deficit is projected to widen from 9.5 percent of GDP in FY 2008/09 to 12.75 percent of GDP in FY 2009/10, owing mainly to increases in interest payments and public wage costs.

Over the past year and a half, concerns about economic prospects and the sustainability of Jamaica’s public debt, which stands at 135 percent of GDP, have placed pressure on the currency. In the aftermath of the September 2008 shock, the central bank intervened in the foreign exchange market and also tightened monetary conditions, including a 680 basis point increase in the policy rate to 21.5 percent. Net international reserves fell from US$2.3 billion in September 2008 to US$1.6 billion in February 2009, while the currency depreciated by over 20 percent against the U.S. dollar. In more recent months, a drop in inflation has allowed the central bank to cut its policy rate, while some stability has returned in the foreign exchange market. At end-2009, net international reserves stood at US$1.7 billion (equivalent to three months of imports), after having been boosted by the SDR allocation (US$320 million).

Executive Board Assessment

The Executive Directors observed that Jamaica’s persistently weak fiscal position and unsustainable debt burden had magnified the fallout from the global economic crisis. Lack of access to external financing and large fiscal and balance of payments gaps had constrained the authorities’ room for policy maneuver. Directors underscored the urgency of fundamental reforms to break the vicious cycle of low growth and high debt dynamics. Full implementation of the ambitious economic strategy that underpins the Fund-supported program2 is of critical importance, with its three pillars being: medium-term fiscal consolidation and reforms to entrench fiscal discipline, a debt strategy aimed at reducing interest costs, and financial sector reforms to address systemic sources of risk.

Directors supported the goal of eliminating the overall public sector deficit in four years and putting the debt on a clear downward path. They welcomed the package of revenue measures recently introduced and the planned expenditure measures to be included in the FY 2010/11 budget. Directors emphasized the need to reduce distortions by eliminating exemptions and tax incentives, and saw scope for further action in this regard. They endorsed measures to contain recurrent spending and plans to increase spending on targeted social safety net programs. While acknowledging that the proposed extension of the wage freeze is necessary in the short term, Directors called on the authorities to implement more sustainable public employment reforms, with a view to securing fiscal savings over the long term.

Directors stressed the importance of addressing longstanding institutional weaknesses through structural reforms. High priorities in this regard include swift passage of fiscal responsibility legislation and creation of a Central Treasury Management System to strengthen budget execution and accountability. Renewed efforts are also crucial to rationalize the public enterprise sector and eliminate deficits in large loss-making companies. Directors welcomed recent steps to divest Air Jamaica and encouraged the authorities to make further efforts to successfully conclude ongoing discussions with a foreign airline.

Directors commended the authorities for the successful completion of a par-to-par debt exchange operation, enabling a more equitable burden sharing of the fiscal adjustment and effectively balancing the need to secure cash flow savings without jeopardizing financial sector stability. Temporary liquidity support provided by the Financial System Support Fund would help sustain confidence in the financial system. Going forward, it will be important to press ahead with the planned initiatives to enhance the supervision of financial conglomerates, establish a legal framework to formalize the central bank’s responsibility for overall financial system stability, and strengthen capital adequacy standards for all deposit-taking institutions and securities dealers. In the interim, Directors supported the temporary moratorium on new licenses for securities dealers.

Directors agreed that monetary policy should remain focused on containing inflation and promoting exchange rate flexibility. They saw some scope for reducing interest rates as sovereign risk premiums decline following the debt exchange and as fiscal consolidation progresses. They encouraged the authorities to limit foreign exchange intervention to smoothing excessive volatility.


Jamaica: Selected Economic Indicators 1/

 
          Projections
  2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
 

GDP, prices, and employment

             

Real GDP

1.2 3.2 0.6 -1.6 -3.5 0.6 1.9

Nominal GDP

12.2 14.2 13.2 12.3 3.3 11.5 10.3

Consumer price index (end of period)

11.2 8.0 19.9 12.4 12.2 7.3 7.0

Consumer price index (average)

14.8 7.4 12.4 20.2 9.0 11.2 7.1

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

65.3 67.6 70.8 88.0

Exchange rate (average, J$/US$)

63.2 66.3 69.7 76.3

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

4.0 -0.7 4.0 -10.1

Treasury Bill rate, end-of-period, in percent

13.0 12.0 14.2 21.5

Treasury Bill rate, period average, in percent

13.0 12.3 12.5 17.0

Unemployment rate (in percent)

11.6 10.8 9.7 10.6

Government operations

             

Budgetary revenue

26.2 25.9 27.3 26.6 28.3 27.7 27.8

Budgetary expenditure

29.5 30.8 31.1 34.0 38.2 34.2 32.1

Primary expenditure

16.3 18.9 19.5 21.8 22.0 20.7 20.2

Interest payments 2/

13.2 11.9 11.6 12.2 16.2 13.5 11.9

Budget balance

-3.3 -4.8 -3.8 -7.3 -10.0 -6.5 -4.3

Of which: primary fiscal balance

9.9 7.0 7.8 4.8 6.2 7.0 7.7

Of which: underlying primary fiscal balance 3/

5.2 7.0 7.7

Off-budget expenditure 4/

1.0 1.5 1.1 -0.4 0.0 0.0 0.0

Net capital transfers to public entities 5/ 6/

0.0 0.6 -0.2 0.0 0.0

Public entities balance 5/

-3.4 -2.5 -2.8 -1.0 -0.6

of which financed with loans and deposits drawdown

-3.4 -3.1 -2.5 -1.0 -0.6

Overall fiscal balance

-8.2 -9.4 -12.7 -7.5 -4.9

Public debt 2/ 7/

119.9 116.5 113.5 124.0 140.0 140.0 135.6

External sector

             

Current account balance

-10.5 -9.7 -18.4 -18.0 -9.4 -8.8 -6.6

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

16.0 17.9 18.3 17.0 11.8 12.0 12.6

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

40.0 42.3 50.4 50.0 38.9 39.0 39.5

Net international reserves (in millions of US$)

2,078 2,329 2,083 1,629 1,378 1,078 1,325

Gross international reserves (In millions of US$)

2,373 2,614 2,106 1,664 2,051 2,151 2,635

Money and credit

             

Net foreign assets

1.7 4.2 0.9 -13.3 -6.1 -7.7 7.6

Net domestic assets

6.9 6.6 11.6 24.8 5.2 19.2 6.0

Of which: credit to the central government

-5.6 -3.5 2.7 8.7 5.1 2.2 2.7

Broad money

8.6 10.8 12.5 11.6 -1.0 11.5 13.7

Velocity (ratio of GDP to broad money)

3.1 3.2 3.2 3.3 3.4 3.4 3.3

Memorandum items:

             

Nominal GDP (in billions of J$)

714 815 923 1,037 1,071 1,194 1,317
 

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. Authorities' budgets presented according to IMF definitions.
2/ Assumes liability management operations on January 1st 2010 involving the par-for-par exchange of bonds, and targeting a 12.5 percent yield return on domestically-issued bonds and extension of maturities.
3/ Adjusts for one-off revenues in FY 2009/10.
4/ Includes debt issued to BOJ to cover its cash losses and, until 2007/08, debt related to off-budget projects financed initially by the private sector.
5/ Assumes that any expansion of the PetroJam refinery, costing about 10 percent of GDP in cumulative terms, does not involve government financing, neither direct nor guaranteed.
6/ Includes 20 selected public entities under rationalization or divestment plans and other public entities.
7/ Central government direct and guaranteed only, including PetroCaribe debt and proposed IMF disbursements.


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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm

2 See Press Release 10/24: IMF Executive Board Approves US$1.27 Billion Stand-By Arrangement with Jamaica



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