Statement at the Conclusion of an IMF Staff Mission to Jamaica

Press Release No. 14/230
May 16, 2014

An International Monetary Fund (IMF) mission visited Jamaica during May 5-16, 2014 to conduct discussions on the Article IV Consultation and fourth review of Jamaica’s IMF-supported program under the Extended Fund Facility (EFF). The mission met with the Prime Minister, Hon. Portia Simpson-Miller, the Minister of Finance and Planning, Hon. Peter Phillips, Bank of Jamaica Governor Brian Wynter, Financial Secretary Devon Rowe, senior government officials, as well as representatives of the private sector and civil society. The Article IV Consultation provided an opportunity to take a fresh look at the reform strategy, take stock of achievements in the first year of program implementation, and consider critical reforms to be implemented in the remainder of the program period.

At the conclusion of the mission, Mr. Jan Kees Martijn, the IMF’s mission chief for Jamaica, issued the following statement in Kingston:

“The economic outlook is improving. Since the start of the program in early 2013, crisis risks have receded, growth has picked up, net exports are stronger, inflation has been brought under control, and reserves are starting to recover. Economic activity is tentatively estimated to have expanded by 0.9 percent in 2013/14, with year-on-year growth amounting to 1.6 percent in the first quarter of 2014. Consumer price inflation moderated to 7.6 percent in April. The unemployment rate declined to 13.4 percent in January 2014, down from 14.9 percent in October and from 14.5 percent in January of last year. The current account has shown an ongoing improvement, and net international reserves increased to US$1.3 billion by end-April (with gross reserves at US$2.1 billion, equivalent to 3½ months of imports). The execution of the 2013/14 budget has been broadly on track, as the shortfalls in tax revenues due to weak economic demand were offset through strict expenditure control. The 2013/14 central government primary surplus amounted to 7½ percent of GDP, as planned.

“The program is on track. The IMF mission reached preliminary understandings with the authorities on a set of economic policies detailed in an updated Letter of Intent. These preliminary understandings are subject to approval by the IMF’s Management and Executive Board. Overall policy implementation under the program remains strong. All quantitative performance targets for end-March were met, as was the indicative target on social spending. The indicative target on tax collection was missed. Structural reforms are on track, albeit with some minor delays. Provided that performance remains strong, Board consideration of the fourth review of Jamaica’s IMF-supported program under the EFF could take place in June. Upon approval, SDR 45.95 million (about US$71 million) would be made available to Jamaica.

Much has been achieved in the first year of program implementation. There has been significant progress in implementing the needed reforms. A large fiscal adjustment has been put in place, achieving a primary surplus that is exceptional by international standards. Important steps to sustain that adjustment have has been made in the areas of tax reform and in institutionalizing a meaningful fiscal rule. The framework for the financial system has been fortified, monetary policy has been restrained, and the exchange rate has helped to restore a good deal of Jamaica’s lost competitiveness.

This is a marathon effort and there are no shortcuts. Jamaica’s economic transformation program offers a path from decades of stagnation to a future of sustained and vibrant growth. Emerging from the ingrained trap of low-growth and high debt requires a fundamental reorientation of policies. This will not happen overnight but will take several years of concerted economic restructuring. The government’s program is appropriately centered on a sustained fiscal consolidation supported by wide-ranging supply side reforms to kick-start growth. Reducing debt to a sustainable level is expected to take a decade of fiscal restraint and multiple years of productivity-enhancing policies.

“Broad social support for the reform program needs to be maintained. The recovery remains tentative and the social costs of the adjustment effort have been substantial. Investor confidence remains hesitant and higher growth and job creation are needed. Without these, there is a risk that societal support for the reform effort will be undermined. In this context, an ongoing emphasis on safeguarding social spending and increasing the social safety net is critical.

”The reform agenda is challenging. A reorientation of fiscal policy remains at the core of the adjustment effort. The immediate weakness of fiscal revenues calls for the prompt and steadfast implementation of the action plan to improve tax collection. Public sector reform needs to be stepped up without delay; a lasting fiscal consolidation that supports rather than hinders private sector growth will require a smaller and more efficient public service. The growth impact of scarce public investment needs to be leveraged through structured investment planning, prioritization and budgeting. Fiscal risks need to be carefully managed through tackling public sector inefficiencies, lessening unfunded pension obligations, commercializing loss-making public enterprises, and putting in place well-structured public-private partnerships.

“Determined action to boost growth is a must. Removing red tape and boosting competitiveness will bolster growth and job creation. The return to a more flexible exchange rate has resulted in important improvements in price competitiveness, and should be maintained. Confidence in the coherence of policies will be critical for boosting investor sentiment but private investment will only return if efforts are also focused on removing pervasive red tape and bureaucracy.

While the overall stance of monetary policy has been broadly appropriate, policy should shift towards greater reliance on interest rate channels. Containing inflationary pressures in face of exchange rate depreciation, and restoring an adequate level of reserves, necessitate a cautious monetary policy stance. This, however, needs to be weighed against the risk of excessively tight liquidity conditions undermining investment and creating risks in the financial system. The recent creation of a standing liquidity window and the expansion of repo instruments are welcome steps, but their design should be improved.

Vulnerabilities within the financial system need to be proactively addressed. The business model of the securities dealers needs to be reoriented. The next steps of the reform of the “retails repo” model should be implemented as soon as adequate safeguards have been put in place.

“The mission would like to thank the authorities and technical staff for their excellent cooperation.”



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