IMF Executive Board Concludes 2011 Article IV Consultation with JamaicaPublic Information Notice (PIN) No. 12/56
June 7, 2012
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 May 30, 2012 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Jamaica.1
The economy recorded a fragile recovery in 2011, following three years of recession during 2008-2010 in the wake of the global financial crisis. Real Gross Domestic Product (GDP) grew by 1.2 percent in FY2011/12, as agricultural production rebounded from the destruction of Tropical Storm Nicole in 2010 and production at an alumina firm was restarted. However, the unemployment rate remained high, at 14.1 percent as at January 2012. Inflation moderated to about 7.2 percent (year-on-year) at end April, reflecting a negative output gap and real exchange rate appreciation. The external current account deficit widened to over 11 percent of GDP, in part owing to a higher oil bill. At the same time, the financial account weakened from a sharp drop in external loan disbursements to the central government, and net international reserves fell to US$1.8 billion at end-March 2012 (from US$2.3 billion in mid-2011).
The fiscal position was weaker in FY 2011/12 than projected. The primary surplus of the central government is estimated at 3.1 percent of GDP (compared with 6.8 percent under the Stand-By Arrangement), reflecting lower tax revenues associated with cuts in fuel taxes, weak tax administration, and widespread use of tax incentives and waivers. Recurrent expenditures remained flat, with a higher wage bill offset by lower capital expenditure. As a result, the central government deficit remained at 6.4 percent of GDP. The ratio of government debt to GDP remained high, at about 140 percent (compared with an objective of 134 percent under the program), while gross financing requirements of the public sector rose, as the effects of the 2010 debt exchange on amortization payments falling due have now waned.
In response to the level of non-performing loans (NPLs) in the financial sector, the supervisory authorities have been actively encouraging banks to adopt the measures needed to address the deterioration in loan quality, including through increasing provisions and the fulfillment of their capitalization commitments. NPLs have stabilized at 9 percent of total loans (up from 6.5 percent in 2010), and provisions have improved to around 80 percent of NPLs (February 2012), while growth in loans to businesses has resumed (7 percent, year-on-year), after two years of contraction.
The outlook is for low growth, as well as weaker fiscal and debt positions, in the absence of strong fiscal and structural reforms. In this context, real GDP growth would hover at around 1 percent a year, the public sector deficit would increase to about 9 percent, and debt would exceed 150 percent of GDP over the medium term. However, ongoing improvements to the regulatory and supervisory frameworks, as well as the crisis management framework, are expected to contain financial sector risks. The risks to the outlook are tilted to the downside, given the uncertainties about the pace of the global recovery and world commodity prices, as well as natural disasters. Further, rollover and interest rate risks on the public debt could be exacerbated by waning investor confidence and a continued drain on net international reserves could lead to intensified portfolio hedging.
Last month, the authorities presented to Parliament a budget proposal for fiscal year 2012/13 that they expect will boost the primary surplus of the central government to around 6 percent of GDP. The budget includes both tax measures and expenditure cuts. The fiscal strategy proposed to Parliament by the government also endorses the fiscal targets contained in Jamaica’s Fiscal Responsibility Framework, including achieving, by March 2016, a balance budget for the central government and the reduction in the public sector wage bill to 9 percent of GDP and in the public debt to 100 percent of GDP.
Executive Board Assessment
Directors generally agreed with the thrust of the staff appraisal. They regretted that the successful debt exchange under the 2010 Stand-By Arrangement had not been accompanied by fiscal consolidation to put Jamaica’s public debt on a sustainable downward path. The current favorable political environment provides an opportunity to address the significant macroeconomic imbalances and rising vulnerabilities, and Directors welcomed the authorities’ progress in developing a comprehensive economic program. Reducing the high level of public debt and boosting growth and competiveness, while improving social conditions, are key priorities. Noting the authorities’ interest in a new arrangement with the Fund, Directors stressed that strong commitment to decisive implementation of the program, underpinned by prudent growth assumptions, will be essential.
Directors welcomed the authorities’ efforts to increase the primary surplus in this fiscal year. They were generally of the view that a strong upfront fiscal adjustment would provide credibility to the program. A number of Directors, however, supported a balanced pace of adjustment to safeguard the fragile recovery and social cohesion. Going forward, continued fiscal consolidation will be needed to secure permanent savings by generating sufficient and sustained primary surpluses over the medium term. This will be important to put the public debt on a decisive downward path, build fiscal buffers, and create space for social spending and growth-enhancing capital projects.
Directors encouraged the authorities to press ahead with fiscal reforms. Comprehensive tax measures are needed to expand the tax base and strengthen tax administration. Directors also called for improvements in public financial management and public sector reform aimed at restraining the public wage bill, advancing pension reform, and enhancing the quality of public spending. They emphasized that fiscal consolidation efforts should be complemented by an improved debt management strategy.
Most Directors encouraged the authorities to consider greater exchange rate flexibility as part of a comprehensive policy package, as it would contribute to boosting competiveness and building international reserves to a comfortable level. Some Directors were not convinced of the merits of enhanced flexibility. Directors noted that the planned transition to an inflation targeting regime would help sustain exchange rate fluctuations without adversely affecting inflation expectations. They supported continued technical assistance from the Fund in this area.
Directors welcomed ongoing initiatives to strengthen financial sector stability. They encouraged the authorities to accelerate the approval of reforms aimed at strengthening the regulatory and supervisory framework and reinforcing the crisis resolution framework. They stressed the need to further strengthen provisioning in the banking system.
Directors noted that structural reforms are vital to improving growth prospects. They encouraged the authorities to implement a robust reform agenda which aims at enhancing the business climate, developing the private sector, reforming the energy sector, and strengthening Jamaica’s resilience to natural disasters. Deepening financial intermediation will also foster private sector growth, while divestment of loss-making public enterprises will help reduce the debt stock.