Press Release: IMF Executive Board Approves US$1.27 Billion Stand-By Arrangement with Jamaica
February 4, 2010Press Release No. 10/24
February 4, 2010
The Executive Board of the International Monetary Fund (IMF) today approved a 27-month Stand-By Arrangement with Jamaica in the amount of SDR 820.5 million (about US$1.27 billion) to support the country’s economic reforms and help it cope with the consequences of the global downturn. A disbursement of SDR 414.3 million (about US$ 640 million) will become available to Jamaica immediately.
The key objectives of the arrangement are to support the Jamaican authorities’ ample reform program to address deep-seated structural weaknesses in the country’s economy, increase its growth potential, and make it less vulnerable to external shocks.
To achieve these goals, the program focuses on a three-pronged strategy:
1) An ambitious plan that puts public finances on a sustainable path that includes much-needed public sector reform;
2) A debt strategy to lower exceptionally high interest costs and help address the problem of the debt overhang , and raise the productivity of public spending;
3) Financial sector regulatory reform to reduce systemic risks.
The Jamaican authorities are already implementing many of these actions, which are expected to improve the public sector fiscal balance by over 5 percent of GDP in FY 2010. Among them, a debt exchange aimed at generating interest savings of at least 3 percent of GDP and a 65 percent reduction in the amount of maturing debt over the next three years have been successfully carried out, with an acceptance level of almost 95 percent of bondholders. A tax package has already been enacted and is expected to produce an increase in revenues of around 2 percent of GDP. Loss-making public entities are being divested.
At the same time, the government’s economic program is designed to ensure a significant increase in social spending for targeted programs. Spending will increase by at least 25 percent (equivalent to 0.3 percent of GDP) in the school feeding program and the cash transfer Program of Advancement through Health and Education (PATH). The administration will also be pursuing efforts to expand the social safety net to assist persons below the poverty line who do not qualify for PATH assistance and improve their employability.
Approval of the Stand-By Arrangement is expected to generate about US$1.1 billion in funding from other international financial institutions. Part of the first disbursement will be used to establish a Financial Stability Support Fund, which will also include funds from other multilaterals and will help support the country’s financial sector.
Following the Executive board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:
“Jamaica’s large debt burden has magnified the fallout of the global crisis by limiting the scope for a counter-cyclical domestic policy response. Fundamental economic reforms are needed to restore fiscal sustainability, safeguard economic and financial sector stability, and enhance Jamaica’s growth potential. The ambitious economic program demonstrates that the authorities are committed to meeting these challenges.
“The authorities are to be commended for the strong measures taken to maintain economic stability. These include introducing a third tax package this fiscal year and extending the public sector wage freeze for two years. The 2010/11 budget provides for increased social spending while reducing recurrent expenditures. The government has successfully completed a domestic debt exchange operation, which has contributed to a more equitable sharing of the burden of the overall fiscal adjustment. The exchange has also struck an appropriate balance in terms of delivering necessary cash flow savings while taking appropriate account of the need to ensure financial sector stability.
“In addition to these near-term measures, the Jamaican authorities have committed to a comprehensive agenda of structural reform to help address the root causes of the deep economic imbalances. The swift passage of fiscal responsibility legislation and adoption of a central Treasury management system are necessary to enhance budget control and bolster fiscal transparency and accountability. Rationalization of the public sector, including through compensation and employment reforms and the divestment of public entities, aims to secure durable fiscal savings.
“The planned legislative and regulatory reforms will help reduce systemic risks to the financial system and strengthen the overall resilience of the economy to shocks. Key measures include the adoption of an omnibus banking law, an amendment to the Bank of Jamaica Act, and reforms of deposit-taking institutions and the securities dealer sector,” Mr. Kato said.
Recent Economic Developments
Jamaica has been strongly impacted by the global economic slowdown. Real GDP declined by 1.6 percent in Fiscal Year (FY) 2008/09 (April 1-March 31), with economic conditions deteriorating sharply in the second half of the year. During the current fiscal year, real GDP contracted further, registering a decline of 3 percent during the first half of the year.
Bauxite and alumina production and exports fell by about 60 percent, while remittances—a traditional source of balance of payments support—suffered a sharp decline. Tourism has also been negatively affected, although it has proven to be far more resilient than in the rest of the Caribbean.
In FY2009/10, 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. 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.
Government finances have deteriorated, constraining the authorities’ ability to respond to the global shock with countercyclical policies. The public sector deficit is projected to reach almost 13 percent of GDP in FY 2009/10. The interest bill rose by 38 percent, reflecting the effects of the depreciation and a steep rise in interest rates. The deficit of public entities remained large, at close to 3 percent of GDP. As a result of these combined shocks, concerns about economic prospects and the sustainability of Jamaica’s debt have placed significant pressure on the currency over the past year and a half.
Main Program Goals
Growth: Economic growth is projected to shift from a contraction of 3.5 percent in FY2009/10 to an expansion of 0.5 percent in FY2010/11 and a further increase of 2 percent thereafter.
Inflation: While one-off tax measures are expected to result in a temporary spike in inflation to just over 12 percent by end FY2009/10, in the absence of strong demand or foreign exchange market pressures, inflation is projected to fall to an average of 11 percent in FY2010/11 and further to 6 percent over the medium term.
Balance of payments: The external current account deficit is projected to continue to narrow gradually from 9.5 percent of GDP in FY2009/10 to 5 percent over the medium term, based on the recent depreciation of the currency in real effective terms and the expected increase in national saving as a result of fiscal consolidation.
Tax Reform: The organization of the tax administration and improving tax compliance is expected to be modernized. The authorities are committed to implementing rapidly the recommendations of a 2008 Fund Technical Assistance mission, including by unifying domestic tax administration and enhancing compliance through streamlined administrative procedures
Public Sector Reforms: The organization of the public sector will be streamlined, with a view to reducing the wage bill as a share of GDP. A committee has been appointed to review the existing structure of the public sector which is characterized by many entities with unclear or overlapping functions. The committee will present recommendations on a new structure by December 2010.
Financial sector reforms: Vulnerabilities in the financial system will be addressed, particularly the high exposure of securities dealers to government risk. The Jamaican government is committed to improving financial sector companies’ ability to withstand shocks, by enhancing capital adequacy and margin requirements. The Bank of Jamaica will take explicit responsibility for overall financial system stability.
Jamaica has been a member of the IMF since February 1963 and has a total quota of SDR 273.5 million. For additional information on IMF and Jamaica see: http://www.imf.org/external/country/JAM/index.htm