IMF Executive Board Concludes 2009 Article IV Consultation with JamaicaPublic 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
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.