IMF Survey : IMF Loan to Help Jamaica Cope With Growth and Debt Challenges
May 1, 2013
- Jamaica’s very high debt undermines confidence and investment
- New program seeks to boost growth and jobs, lower debt, improve competitiveness
- Challenge is to achieve agreed budget surplus target
The IMF’s Executive Board approved a 48-month, $932 million Extended Arrangement for Jamaica. The program will help create the conditions for sustained growth through a significant improvement in the fiscal and debt positions and in competitiveness.
Interview on Jamaica
During most of the past three decades, Jamaica has suffered from very low growth, high public debt, and serious social challenges. Repeated efforts to overcome these economic problems, often with Fund support, have failed to result in an enduring recovery.
The authorities’ new program, approved on May 1, seeks to address long-standing structural challenges by implementing an aggressive, front-loaded, and comprehensive reform agenda.
In this interview, the IMF’s mission chief for Jamaica, Jan Kees Martijn, discusses the key priorities for Jamaica and what it will take for the program to succeed.
IMF Survey: Jamaicans know they face significant economic challenges. We also know that we have to work together to resolve them. Give us a sense then of what the key priorities are in Jamaica for the Fund and the government. And what role do you envision for the Fund beyond financial support in promoting these measures?
Martijn: Building a more prosperous future for Jamaica hinges on the resolve of the authorities and other domestic stakeholders to adjust policies to lower debt to a sustainable level and establish the conditions for durable growth. The authorities’ program provides a realistic roadmap to achieve these goals. In this context, I am encouraged to see the creation of a broad-based, private sector-driven committee to provide oversight of policy implementation. This committee includes government creditors, labor unions, and representatives of civil society.
The Fund is a supporting partner in the authorities’ efforts to address their long-standing structural challenges. Fund support includes our policy dialogue, technical assistance, and, of course, formal support for the program, including financing. We will work closely with the Jamaican authorities, as well as with its domestic and foreign partners, over the four-year program period to help maintain the reform momentum and strengthen the program over time.
IMF Survey: Jamaica has undertaken many fiscal adjustment programs in the past. How confident are you that the country can deliver this time?
Martijn: The new government, which took office at the beginning of 2012, faces a unique opportunity to make a renewed effort to address the challenges of low growth, high debt, and diminishing competitiveness. It also enjoys a large majority in Parliament, and its remaining regular period in office still spans most of the four-year program period.
The government has taken time during its first year in office to review the challenges facing the country and has designed its own medium-term program, which bodes well for successful implementation. Actually, the implementation of the reform package is off to a promising start. All prior actions under the IMF program have been implemented, and several other key actions have been taken. In particular, the new budget for 2013/14 is in line with the program objective of raising the primary surplus of the central government to 7.5 percent of GDP—an ambitious but essential target.
I think that there is widespread recognition of the need for change in Jamaica, which the authorities can build on to create a broad partnership to sustain the reform effort. In our view, a strong communication strategy for all parties who are involved in overseeing program implementation will be extremely important. There will be difficult moments, and it will be important to ensure that everyone understands the purpose of the steps that are to be taken.
IMF Survey: At almost 150 percent of GDP, Jamaica’s level of public debt is one of the highest in the world. What will it take to bring down debt to a sustainable level?
Martijn: Putting public debt on a credible downward path is critical to restore confidence and economic growth in Jamaica. One should also not forget that the very high debt service places a huge burden on the budget, leaving very little room for the government to support, for example, infrastructure or social objectives.
Unfortunately, there is no easy solution to the debt problem. In February 2013 the authorities put in place a debt exchange that lowers its interest costs, and thereby reduced the need for new borrowing. This will help bring down the debt burden over time.
That said, most of the debt reduction will come from very tight government budgets. Put in simple terms, the government will have to live within its means and improve its financial position over time. Sustaining this approach will be a serious challenge, but there is no alternative. The benefits of this effort will become very evident over time.
Achieving the agreed budget surplus will help remove the crippling debt overhang, eventually freeing up the government’s resources so that these can be used to provide real services rather than paying for the current massive interest costs and debt repayments.
IMF Survey: The economic program includes social welfare reform. But are the most vulnerable groups in society being protected?
Martijn: The government is very much aware of the need to protect the most vulnerable groups, especially in the context of a slow economic recovery and high unemployment and poverty. The Fund fully agrees that assisting the poor and the most vulnerable is a critical part of the program.
One element of the strategy is to promote growth and employment, as this will offer a path out of poverty for many who are now unemployed or underemployed. The program includes a range of measures to improve competitiveness and the business climate, so that Jamaica can attract investment and create jobs, as well as training opportunities to assist the migration from welfare to work.
A second element of the program is requiring a floor on social spending to make sure that it is given priority even when the overall room for government spending is limited. The government also intends to increase the number and targeting of beneficiaries under the Program for Advancement Through Health and Education (PATH).
Close collaboration with other development partners, in particular the World Bank and the Inter-American Development Bank, will be very important in the design and implementation of policies to support economic growth and social spending, especially on these issues that are not part of the Fund’s core areas of expertise.
IMF Survey: The IMF has had a long relationship with Jamaica. What lessons has the IMF itself learned from working with Jamaica?
Martijn: The Fund has worked with Jamaica for many years, and the relationship has not always been easy. We do recognize that the reputation and record of the Fund in Jamaica remains subject to much debate and strong emotions. Against this background, the first lesson is the importance of maintaining transparency and an open dialogue with both the authorities and the wider population. In this dialogue, we will seek views and proposals on how best to resolve the economic difficulties, and also try to explain what the Fund does, how the Fund tries to be helpful, and how the Fund has changed over time.
The IMF team that has been working with the authorities on this program has tried to learn lessons from the experience with previous Fund-supported policy programs. For example, we have looked, in particular, at the Stand-By Arrangement of 2010, which went off track within a year, as the program’s targets for improving the government’s budget position were missed. The slippage started with higher wage costs than had been foreseen under the program. The current program is designed to limit these risks of budgetary slippages by including a multi-year wage agreement for government workers as a prior action, agreeing on ambitious budget targets upfront, broadening the tax base, and adopting a binding fiscal rule to guide the annual budgets.