## FISCAL STRATEGY FOR JAMAICA: REDUCING PUBLIC DEBT AND RESTORING FISCAL BUFFERS

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### A. Background — A History of Fiscal Crises, 1970–2009
- GDP per capita declined by almost 30 percent between 1972 and 1980.
- Government spending rose from 23 percent of GDP in 1972 to 45 percent of GDP in 1978, resulting in fiscal deficits of 15 percent of GDP.
- Debt-to-GDP ratio rose to near 200 percent of GDP following early 1980s depreciation (large share of debt foreign-currency denominated).
- Banking crisis in the mid-1990s; blanket deposit guarantee added almost 40 percent of GDP to the debt.
- Interest payments peaked at 17 percent of GDP in 2009 and debt reached 142 percent of GDP.

### B. The Great Adjustment During 2009–2019 — Fiscal Consolidation and Debt Reduction
- Fiscal balance improvement between FY2009/10 and FY2019/20: 12.4 percentage point of GDP (from a deficit of 11.2 percent to a surplus of 1.2 percent).
- Major contributors:
  - Interest payments fell by almost 11 percentage points to 6.3 percent of GDP.
  - Primary balance increased by only 1.4 percent points.
  - Revenue increased by 3.1 percentage points of GDP (measures included increase in the general consumption tax (GCT) rate; increase in the personal income tax rate for high income earners).
  - Primary expenditure increased by 1.8 percentage point (measures included nominal freeze on wages and purchase of goods and services; program spending, especially PATH, increased).
  - Two domestic debt exchange operations (2010 and 2013) reduced interest payments and extended maturities; government bought back Petrocaribe debt.
- By FY2018/19:
  - Primary balance: 7.5 percent of GDP.
  - Overall balance: 1.2 percent of GDP.
  - Public debt: 94 percent of GDP.
- Selected fiscal aggregates (FY2009/10 → FY2018/19, in percent of GDP):
  - Total Revenue and grants: 27.5 → 30.6 (Change 3.1)
  - Tax revenue (incl incentives): 24.5 → 26.4 (Change 1.9)
  - Non tax-revenues: 1.9 → 3.5 (Change 1.6)
  - Total expenditure: 38.7 → 29.4 (Change -9.3)
  - Primary Spending: 21.4 → 23.2 (Change 1.8)
  - Wage bill: 11.6 → 9.7 (Change -1.9)
  - Programs (goods and services, transfers): 6.6 → 10.2 (Change 3.6)
  - Capital spending: 3.2 → 3.2 (Change 0.0)
  - Interest spending: 17.3 → 6.3 (Change -11.0)
  - Overall balance: -11.2 → 1.2 (Change 12.4)
  - Primary balance: 6.1 → 7.5 (Change 1.4)
  - Public Debt: 141.9 → 94.3 (Change -47.6)

### C. The Covid Crisis and the Impact on Public Finances
- Real GDP shrank by 10 percent (tourism and transport sectors especially hit).
- World Bank estimate: headcount poverty rate increased to 23 percent in 2020 (from 19 percent in 2017).
- Fiscal rule suspended for one year under the Fiscal Responsibility Law (criteria include: severe downturn, natural disaster, health and other disasters, public emergencies; independent verification required if fiscal impact exceeds threshold of 1.5 per cent of GDP; parliamentary approval required).
- Target date for reducing public debt to 60 percent of GDP shifted back two years, to FY 2027/28.
- FY2020/21 fiscal outcomes:
  - Tax revenues (tax to GDP) in 2020 were 1½ percent of GDP lower relative to 2019.
  - Spending of nearly 1.6 percent of GDP used for CARE program.
  - Overall fiscal deficit for FY2020/21: -3.1 percent of GDP (versus surplus of 0.9 percent of GDP in FY2019/20).
  - Debt-to-GDP ratio increased by about 14 percentage points to 108 percent in FY 2020 (mainly due to decline of GDP and currency depreciation increasing domestic currency value of foreign-exchange denominated debt).
- Financing actions: used existing fiscal buffers (government deposits from divestment) and additional budgetary financing from IFIs (WB, IDB and CDB).

### D. Revenue System: History of Tax Reforms and Current Shortcomings
- Historical evolution:
  - 1960s–1970s: tax rates raised; system became complex (by 1985 six tax brackets with zero threshold; highest rate 80 percent).
  - 1980s–1990s: simplification and rate reductions; PIT single rate of 33⅓ per cent (later reduced to 25 percent); implementation of general consumption tax (GCT).
  - 2000s: tax base broadened by repealing incentives and lowering income tax thresholds; exemption threshold for PIT raised to J$1.5 million in 2017; marginal tax rate for earnings above J$6 million increased from 25 to 30 percent.
- Current GCT and rates:
  - Standard GCT rate: 16.5 percent (lowered to 15 percent during the pandemic); lower rate of 10 percent for the tourism sector.
- Administration improvements: introduction of ASYCUDA; improved collection of arrears; expansion of e-filing for large taxpayers; improved audit capacity in Large Taxpayers’ Office (LTO).
- Payroll and related taxes (rates as provided):
  - PAYE income tax: Rate(s): 25.0; 30.0 (Statutory income less income tax threshold of J$1.5 million per annum. Taxable emoluments in excess of J$6 million per annum.)
  - NIS contribution (pension): Employee rate 3.0; Employer rate 3.0
  - Education tax: Employee rate 2.25; Employer rate 3.5
  - NHT tax (Housing trust): Employee rate 2.0; Employer rate 3.0
  - HEART contributions: Employer rate 3.0 (Gross taxable payroll if employer’s payroll costs exceed a turnover limit per annum)
- Progressivity and composition:
  - Standard PIT rate: 25 percent; top rate for high earners: 30 percent.
  - CIT rate: 33.3 percent.
  - Income tax threshold (JD$1.5 million) is twice per-capita GDP — many individuals do not pay tax.
  - Payroll taxes for social programs total 7.25 percent; the “tax wedge” about 16 percent at lower income levels and increases to 30 percent at higher income levels.
  - Share of direct taxes in total tax revenue declined from 38 percent in FY2010/11 to 32 percent in FY 2020/21.
- Shortcomings and tax expenditures:
  - Tax regime complicated: relatively high rates, narrow base, heavy reliance on direct taxes, numerous exemptions and waivers.
  - Statutory rates yield relatively little revenue due to large informality and weak tax compliance.
  - Tax expenditures estimated to have fallen to 2 percent of GDP in 2019 (from 9 percent in 2008); tourism, mining, and food items account for two thirds of tax expenditures.
  - Discretionary tax waivers capped at JD$120 million annually (less than 0.01 percent of GDP); limited revenue potential from reducing waivers.
  - Potential yields from major categories cited: reduced VAT rate for tourism (0.25%), zero rating on food items and health care (0.21%), tax incentives for mining sector (0.07%).
- Policy implication: Given large informal sector and low economic growth, further shift toward indirect taxes may be desirable, but losses from tax expenditures must be minimized.

### E. Expenditure Measures — Trends, Shortcomings, and Efficiency
- Spending trends across periods:
  - FY2009-14: primary spending declined by 2.6 percent of GDP; decline driven by lower interest payments (overall balance improved by 10.7 percent of GDP).
  - FY2015-19: primary spending rose by 4.7 percent of GDP (mainly program spending and capital expenditures); interest payments fell modestly by 1.8 percent of GDP.
  - FY2020/21: primary spending further increased by 2.7 percent of GDP due to GDP contraction and higher Covid-19 related measures; overall balance declined to -3.1 percent of GDP.
- Selected fiscal aggregates (FY2009/10; FY2014/15; FY2019/20; FY2020/21, in percent of GDP):
  - Total Revenue and grants: 27.5; 26.2; 30.6; 29.2
  - Total expenditure: 38.7; 26.7; 29.7; 33.1
  - Primary Spending: 21.4 → 18.8 → 23.5 → 26.2
  - Wage bill: 11.6 → 10.1 → 10.0 → 11.4
  - Programs (goods and services, transfers): 6.6 → 7.2 → 10.2 → 12.2
  - Capital spending: 3.2 → 1.5 → 3.3 → 2.6
  - Interest spending: 17.3 → 8.0 → 6.2 → 6.9
  - Overall balance: -11.2 → -0.5 → 0.8 → -3.1
  - Primary balance: 6.1 → 7.5 → 7.1 → 3.8
- Shortcomings:
  - Wage bill relatively high at 11 percent of GDP (above LAC average); wages account for one-third of public expenditures.
  - Share of capital spending: 8 percent; social spending (CARE and PATH): 6 percent.
  - Investment level declining; quality of infrastructure relatively low.
  - Education spending in line with peers but education test scores and years of schooling relatively low.
- Efficiency measures recommended:
  - Improve effectiveness of existing expenditure.
  - Undertake Public Investment Management Assessment (PIMA) to identify areas to improve investment efficiency.
  - Minimize fiscal costs through better management of contingent liabilities from public bodies and PPPs.

### F. Completing the Restoration of Fiscal Sustainability — Targets and Institutional Reforms
- Fiscal trajectory and targets:
  - Government aims at a fiscal surplus of 0.3 percent of GDP for FY2021/22 and the next three fiscal years.
  - IMF staff estimate: a surplus of 0.3 percent of GDP is not high enough to attain FRL debt target of 60 percent of GDP by FY2027/28; higher surpluses needed later.
  - Maintaining a surplus of 1 percent of GDP from FY2023/24 onwards could avoid much sharper adjustments later on.
  - Jamaica will face gross financing needs of between 4-6 percent of GDP over the medium term.
- Institutional and transparency measures:
  - Publication of a fiscal framework that extends to FY2027/28 and shows how debt reduction will be achieved would increase credibility (current legal requirement covers next four fiscal years only).
  - A Fiscal Council law was passed recently; government working on composition. The Fiscal Council’s task: ensure Government’s policy commitments consistent with the Fiscal Responsibility Law.

### Fiscal space and interest payments; Measures to reach debt target
- Lower debt and maturing of high interest-rate bonds from the 2010 and 2013 debt exchange operations would further reduce interest payments and create more fiscal space for growth-critical spending.
- Many infrastructure projects were nearing completion and would provide fiscal space to undertake new projects.
- Revenue-side options and yields:
  - Unwinding of Covid-19 related GCT rate cuts once the pandemic is over could yield 0.7% of GDP.
  - Tax expenditures are about 2% of GDP; potential from reducing them is low but minimizing losses from incentives helps broaden the base.
  - Fiscal surplus scenarios:
    - Fiscal surplus of 0.3 percent of GDP is insufficient to meet FRL debt target of 60% of GDP by FY2027.
    - Raising the surplus to 1.0 percent from FY2023/24 onward would avoid the need for sharper adjustment in later years.
- Tax administration and compliance reforms:
  - Strengthen the Tax Administration of Jamaica (TAJ) and the Large Taxpayers’ Office (LTO) — LTO yields half of total Corporate Income Tax (CIT) revenues.
  - Amendments to the Revenue Administration Act allow TAJ to access third-party information, collect outstanding arrears, and seize and sell taxpayers’ property.
  - Reforms could address inaccurate taxpayer data, low on-time filing and payment rates, delays in GCT refunds, and low quality of audits leading to high objection rates.
  - Continued broadening of the GCT base will reduce policy gap and improve compliance as exemption loopholes are closed.
- Expenditure-side considerations:
  - New public sector compensation structure could standardize pay and increase transparency but may further add to the wage bill.
  - Increasing efficiency in public service provision could facilitate a reduction in public workforce size and help offset costs of the new wage structure.
  - Minimize fiscal risks from public bodies and PPPs through transparent selection, clear accounting for risks, and monitoring of execution.
  - A comprehensive assessment of contingent liabilities of the consolidated public sector would be useful.

### Conclusion and strategic priorities
- Jamaica’s pre-pandemic decade saw strong progress restoring macroeconomic and financial stability; the pandemic reversed some gains but fiscal buffers and policy responses prevented a broader crisis.
- Priorities as recovery advances:
  - Restart debt reduction and rebuild buffers given high susceptibility to external shocks and debt sustainability risks.
  - Raise fiscal surplus to about 1 percent of GDP in FY2023/24 and beyond to help attain the debt target without sharp later adjustments.
  - Revert pandemic VAT/GCT cuts to help toward debt reduction (unwinding could yield 0.7% of GDP).
  - Increase revenue and re-orient expenditure toward growth-enhancing items.
  - Minimize losses from tax expenditures (about 2% of GDP) and consider shifting further toward indirect taxes given informality and low growth.
  - Reduce the wage bill pressure by increasing public sector efficiency; lower interest payments from reduced debt would also create fiscal space.

### Export performance, complexity, and determinants — selected findings
- Export growth (past quarter century): exports of goods and services grew at an annual rate of 0.16 percent in constant dollar terms — the third lowest in the world.
- Exports-to-GDP ratio dropped from about 50 percent in the early 1990s to about 35 percent in recent years.
- Decline in traditional goods exports-to-GDP ratio by 15 percentage points from 1991–95 average:
  - 9 percentage points due to lower alumina exports.
  - 3 percentage points due to lower textiles exports.
  - 3 percentage points due to lower bananas and sugar exports.
- Tourism exports increased: share of tourism exports in GDP grew by almost 10 percentage points between 2010 and 2019; by 2019, tourism exports were twice as large as Alumina exports.
- Export concentration and per-capita exports:
  - Export concentration index (HHI) considerably above the Caribbean average; high share of alumina in exports.
  - Non-hydrocarbon/mineral (NHM) exports per capita and manufacturing exports per capita are considerably below comparator averages.
  - Non-tourism services exports are low per capita; BPO exports may be under-reported.
- Export complexity (Economic Complexity Index and Product Complexity Index):
  - Jamaica’s Economic Complexity Index is below zero and ranks considerably below comparable regions and in the lower half of the worldwide range.
  - Selected 2018 complex export values (US$, exact as reported):
    - Jamaica — Alcohols, phenols, phenol alcohols, glycerine: US$ 8.8; US$ per capita 3.0; Product Complexity Index 0.68
    - Jamaica — Medicaments: US$ 2.8; US$ per capita 1.0; Product Complexity Index 0.59
    - Jamaica — Office machines, nes: US$ 1.2; US$ per capita 0.4; Product Complexity Index 1.65
    - Comparator examples: Dominican Rep. — Pharmaceutical goods: US$ 89.8; US$ per capita 8.3; Product Complexity Index 1.30; Mauritius — Medicaments: US$ 30.1; US$ per capita 23.9; Product Complexity Index 0.59
- Determinants investigated: governance, education, infrastructure, trade policy openness; also location/proximity, population size, unit labor costs (minimum wage to GDP per capita), homicide rate, remittances.
- Key constraints identified:
  - Low Learning Adjusted Years of Schooling; low expected years of school and low harmonized test scores; enrollment rates especially low in secondary and tertiary education; brain drain (~40 percent of Jamaican nationals live out of the country).
  - Infrastructure and logistics weaknesses: World Bank Logistics Performance Index rank 131st; electricity cost to firms US$ 0.24 per kWh (fourth highest in the world).
  - High import tariffs and dispersion; maximum tariff reported is 100% (on vegetables and animal products); average tariff on agricultural goods about 20 percent; stamp duties raise average border protection from 10.4 to 12.6 percent.
  - High homicide rate: 56 homicide per 100,000 people (world average cited as 7 per 100,000).
  - High remittances: 17 percent of GDP in 2015-20.
- Empirical magnitudes cited:
  - Salinas (2021) estimate: an increase in years of schooling of one world standard deviation is associated with an increase of 160 percent in complex exports.
  - Regression implication: reducing Jamaica’s homicide rate from 56 to the world average of 7 would boost complex exports by 82 percent.
  - Regression implication: if Jamaica received the world average level of remittances as a share of GDP, it would increase its complex exports by 107 percent.
  - Salinas (2021) and other analysis indicate education, infrastructure, and trade openness combined with gravity variables explain above four fifths of cross-country heterogeneity in non-commodity export development.
- Policy implications and potential payoffs:
  - Combining major reforms—raising educational attainment to the highest among comparators, significantly reducing tariffs or signing FTAs with large countries, and reducing the homicide rate to the world average—could multiply Jamaica’s complex exports “4 or 5 times.”
  - Such combined efforts would allow Jamaica to match export complexity of manufacturing leaders like Mauritius and regions such as Central America and Mexico, leveraging Jamaica’s proximity to the United States and other large economies.

*Source: Jamaican authorities and IMF staff estimates as presented in the chapter.*

### References _______________________________________________________________________________ 15

### FISCAL STRATEGY FOR JAMAICA: REDUCING PUBLIC DEBT AND RESTORING FISCAL BUFFERS

### A. Background — A History of Fiscal Crises, 1970–2009
- Between 1972 and 1980 GDP per capita declined by almost 30 percent.
- Government spending rose from 23 percent of GDP in 1972 to 45 percent of GDP in 1978, resulting in fiscal deficits of 15 percent of GDP.
- Debt-to-GDP ratio rose to near 200 percent of GDP following early 1980s depreciation (large share of debt foreign-currency denominated).
- Banking crisis in the mid-1990s followed financial liberalization without adequate regulation; a blanket deposit guarantee added almost 40 percent of GDP to the debt.
- Interest payments peaked at 17 percent of GDP in 2009 and debt reached 142 percent of GDP.

### B. The Great Adjustment During 2009–2019 — Fiscal Consolidation and Debt Reduction
- Between FY2009/10 and FY2019/20, Jamaica improved its fiscal balance by 12.4 percentage point of GDP, from a deficit of 11.2 percent to a surplus of 1.2 percent.
- Major contributors to improvement:
  - Interest payments fell by almost 11 percentage points to 6.3 percent of GDP.
  - Primary balance increased by only 1.4 percent points.
  - Revenue increased by 3.1 percentage points of GDP (measures included increase in the general consumption tax (GCT) rate; increase in the personal income tax rate for high income earners).
  - Primary expenditure increased by 1.8 percentage point (measures included nominal freeze on wages and purchase of goods and services; program spending, especially PATH, increased).
  - Two domestic debt exchange operations (2010 and 2013) reduced interest payments and extended maturities; government bought back Petrocaribe debt.
- By FY2018/19:
  - Primary balance: 7.5 percent of GDP.
  - Overall balance: 1.2 percent of GDP.
  - Public debt: 94 percent of GDP.
- Table summary (FY2009/10 → FY2018/19, in percent of GDP):
  - Total Revenue and grants: 27.5 → 30.6 (Change 3.1)
  - Tax revenue (incl incentives): 24.5 → 26.4 (Change 1.9)
  - Non tax-revenues: 1.9 → 3.5 (Change 1.6)
  - Total expenditure: 38.7 → 29.4 (Change -9.3)
  - Primary Spending: 21.4 → 23.2 (Change 1.8)
  - Wage bill: 11.6 → 9.7 (Change -1.9)
  - Programs (goods and services, transfers): 6.6 → 10.2 (Change 3.6)
  - Capital spending: 3.2 → 3.2 (Change 0.0)
  - Interest spending: 17.3 → 6.3 (Change -11.0)
  - Overall balance: -11.2 → 1.2 (Change 12.4)
  - Primary balance: 6.1 → 7.5 (Change 1.4)
  - Public Debt: 141.9 → 94.3 (Change -47.6)

### C. The Covid Crisis and the Impact on Public Finances
- Jamaican economy severely affected by the pandemic; real GDP shrank by 10 percent (tourism and transport sectors especially hit).
- World Bank estimate: headcount poverty rate increased to 23 percent in 2020 (from 19 percent in 2017).
- Fiscal rule suspended for one year under the Fiscal Responsibility Law (criteria: severe downturn, natural disaster, health and other disasters, public emergencies; independent verification required if fiscal impact exceeds threshold of 1.5 per cent of GDP; parliamentary approval required).
- Target date for reducing public debt to 60 percent of GDP shifted back two years, to FY 2027/28.
- FY2020/21 fiscal outcomes:
  - Tax revenues (tax to GDP) in 2020 were 1½ percent of GDP lower relative to 2019.
  - Spending of nearly 1.6 percent of GDP used for CARE program.
  - Overall fiscal deficit for FY2020/21: -3.1 percent of GDP (versus surplus of 0.9 percent of GDP in FY2019/20).
  - Debt-to-GDP ratio increased by about 14 percentage points to 108 percent in FY 2020 (mainly due to decline of GDP and currency depreciation increasing domestic currency value of foreign-exchange denominated debt).
- Financing actions: used existing fiscal buffers (government deposits from divestment) and additional budgetary financing from IFIs (WB, IDB and CDB).

### D. Revenue System: History of Tax Reforms and Current Shortcomings
- 1960s–1970s: tax rates raised; system became complex (by 1985 six tax brackets with zero threshold; highest rate 80 percent).
- 1980s–1990s: simplification and rate reductions:
  - Personal income tax (PIT) single rate of 33⅓ per cent (later reduced to 25 percent).
  - Implementation of general consumption tax (GCT).
- Current standard GCT rate: 16.5 percent (lowered to 15 percent during the pandemic); lower rate of 10 percent for the tourism sector.
- 2000s: tax base broadened by repealing incentives and lowering income tax thresholds; exemption threshold for PIT raised to J$1.5 million in 2017; marginal tax rate for earnings above J$6 million increased from 25 to 30 percent.
- Administration improvements: introduction of ASYCUDA; improved collection of arrears; expansion of e-filing for large taxpayers; improved audit capacity in Large Taxpayers’ Office (LTO).
- Payroll and related taxes (rates as provided in Table 2):
  - PAYE income tax: Statutory income less income tax threshold of J$1.5 million per annum. Taxable emoluments in excess of J$6 million per annum. Rate(s): 25.0; 30.0
  - NIS contribution (pension): Gross emoluments. Employee rate 3.0; Employer rate 3.0
  - Education tax: Gross emoluments. Employee rate 2.25; Employer rate 3.5
  - NHT tax (Housing trust): Gross emoluments. Employee rate 2.0; Employer rate 3.0
  - HEART contributions: Gross taxable payroll if employer’s payroll costs exceed a turnover limit per annum. Employer rate 3.0
- Progressivity:
  - Standard PIT rate: 25 percent; top rate for high earners: 30 percent.
  - CIT rate: 33.3 percent.
  - Income tax threshold (JD$1.5 million) is twice per-capita GDP — many individuals do not pay tax.
  - Payroll taxes for social programs total 7.25 percent; the “tax wedge” about 16 percent at lower income levels and increases to 30 percent at higher income levels.
- Composition shift: share of direct taxes in total tax revenue declined from 38 percent in FY2010/11 to 32 percent in FY 2020/21.
- Current shortcomings:
  - Tax regime complicated: relatively high rates, narrow base, heavy reliance on direct taxes, numerous exemptions and waivers.
  - Statutory rates yield relatively little revenue due to large informality and weak tax compliance.
  - Tax expenditures estimated to have fallen to 2 percent of GDP in 2019 (from 9 percent in 2008); tourism, mining, and food items account for two thirds of tax expenditures.
  - Discretionary tax waivers capped at JD$120 million annually (less than 0.01 percent of GDP); limited revenue potential from reducing waivers.
  - Potential yields from major categories cited: reduced VAT rate for tourism (0.25%), zero rating on food items and health care (0.21%), tax incentives for mining sector (0.07%).
- Policy implication: Given large informal sector and low economic growth, further shift toward indirect taxes may be desirable, but losses from tax expenditures must be minimized.

### E. Expenditure Measures — Trends, Shortcomings, and Efficiency
- Public spending trends:
  - Two periods FY2009-14 and FY2015-19:
    - FY2009-14: primary spending declined by 2.6 percent of GDP; decline driven by lower interest payments (overall balance improved by 10.7 percent of GDP).
    - FY2015-19: primary spending rose by 4.7 percent of GDP (mainly program spending and capital expenditures); interest payments fell modestly by 1.8 percent of GDP.
    - FY2020/21: primary spending further increased by 2.7 percent of GDP due to GDP contraction and higher Covid-19 related measures; overall balance declined to -3.1 percent of GDP.
- Table summary (selected fiscal aggregates, in percent of GDP):
  - FY2009/10 Total Revenue and grants: 27.5; FY2014/15: 26.2; FY2019/20: 30.6; FY2020/21: 29.2
  - FY2009/10 Total expenditure: 38.7; FY2014/15: 26.7; FY2019/20: 29.7; FY2020/21: 33.1
  - Primary Spending: 21.4 → 18.8 → 23.5 → 26.2
  - Wage bill: 11.6 → 10.1 → 10.0 → 11.4
  - Programs (goods and services, transfers): 6.6 → 7.2 → 10.2 → 12.2
  - Capital spending: 3.2 → 1.5 → 3.3 → 2.6
  - Interest spending: 17.3 → 8.0 → 6.2 → 6.9
  - Overall balance: -11.2 → -0.5 → 0.8 → -3.1
  - Primary balance: 6.1 → 7.5 → 7.1 → 3.8
- Current shortcomings:
  - Wage bill relatively high at 11 percent of GDP (above LAC average); wages account for one-third of public expenditures.
  - Share of capital spending: 8 percent; social spending (CARE and PATH): 6 percent.
  - Investment level declining; quality of infrastructure relatively low.
  - Scope to increase effectiveness of existing expenditure—education spending in line with peers but education test scores and years of schooling relatively low.

### F. Completing the Restoration of Fiscal Sustainability — Targets and Institutional Reforms
- Fiscal trajectory and targets:
  - Government aims at a fiscal surplus of 0.3 percent of GDP for FY2021/22 and the next three fiscal years.
  - IMF staff estimate: a surplus of 0.3 percent of GDP is not high enough to attain FRL debt target of 60 percent of GDP by FY2027/28; higher surpluses needed later.
  - Maintaining a surplus of 1 percent of GDP from FY2023/24 onwards could avoid much sharper adjustments later on.
  - Jamaica will face gross financing needs of between 4-6 percent of GDP over the medium term.
- Institutional and transparency measures:
  - Publication of a fiscal framework that extends to FY2027/28 and shows how debt reduction will be achieved would increase credibility (current legal requirement covers next four fiscal years only).
  - A Fiscal Council law was passed recently; government working on composition. The Fiscal Council’s task: ensure Government’s policy commitments consistent with the Fiscal Responsibility Law.

*Source: Jamaican authorities and IMF staff estimates as presented in the chapter.*

### 23. Lower interest payments from lower debt and by retiring expensive debt would

### 23. Lower interest payments from lower debt and by retiring expensive debt would

### Fiscal space and interest payments
- Lower debt and the maturing of the (high interest-rate) bonds from the debt exchange operation of 2010 and 2013 would further reduce interest payments and create more fiscal space for spending in growth critical areas.
- Many infrastructure projects were nearing completion and would provide fiscal space to undertake new projects.

### Possible Revenue Measures
- A fiscal surplus of 0.3 percent would not be enough to get to FRL debt target of 60% of GDP by FY 2027 and would necessitate sharp increases of the surplus in later years.
- Raising the surplus to 1.0 percent from FY 2023/24 onward would avoid the need for sharper adjustment in later years.
- Unwinding of Covid-19 related GCT rate cuts once the pandemic is over could yield 0.7% of GDP and help attain the debt target.
- Tax expenditures are about 2% of GDP, so the potential is low. However, minimizing losses from tax incentives would help broaden the tax base.
- An in-depth rationalization of the cost and effectiveness of all tax incentives would be useful, while continuing to improve the methodology for measuring tax expenditures.
- A close monitoring of “specialized zones or single entity” SEZs would help prevent transfer pricing and migration of existing domestic businesses.
- There is scope to further strengthen tax administration:
  - Strengthening of the Tax Administration of Jamaica (TAJ) and the Large Taxpayers’ Office (LTO) which yields half of total Corporate Income Tax (CIT) revenues.
  - Amendments to the Revenue Administration Act have allowed TAJ to access third-party information to cross-check taxpayers’ information and activities.
  - TAJ was empowered to collect outstanding arrears and seize and sell taxpayers’ property.
  - Reforms could address inaccurate taxpayer data, low on-time filing and payment rates, delays in the payment of GCT refunds, and low quality of audits leading to high rates of objections.
  - Continued broadening of the GCT base will reduce the policy gap and improve compliance as exemption loopholes are closed.

### Potential Expenditure Measures
- The new public sector compensation structure is a long-overdue reform that could make the wage structure more transparent, standardized and equitable, and reduce the large differences in pay with the private sector. But it will also further add to the wage bill, which is already one of the highest in the region, reducing the room for other critical expenditures.
- Increasing efficiency in the provision of public services could facilitate a reduction in the size of the public workforce and help offset the costs of the new wage structure.
  - A reassessment of the various roles and responsibilities of government, as well as increasing efficiency in the provision of public services, could facilitate a reduction in the size of the public workforce.
  - The figure indicates that General government employment in Jamaica is high relative to other countries in the region.
- Undertaking Public Investment Management Assessment (PIMA) would help identify key areas where investment efficiency could be improved.
- Minimize fiscal costs through better management of potential fiscal risks from public bodies and public private partnerships (PPPs).
  - The main sources of fiscal risks are contingent liabilities from public bodies and PPPs.
  - A comprehensive assessment of contingent liabilities of the consolidated public sector would be useful.
  - PPPs can be useful to access private sector expertise and efficiency, but the selection process needs to be transparent, with clear rules on the accounting for risks as well as the monitoring of the execution of the projects.

### Conclusion
- Jamaica has a long history of fiscal and debt crises. In the decade preceding the pandemic, Jamaica made good progress in restoring macroeconomic and financial stability. The economy was heavily affected by the pandemic, which severely affected its fiscal position. However, the availability of fiscal buffers built-up during the pre-crisis period and the policy response to the crisis ensured that the pandemic related shock was not followed by a fiscal, financial, or balance of payments crisis.
- As the crisis recedes and the recovery advances Jamaica should restart debt reduction and rebuild buffers, given high susceptibility to external shocks and risks to debt sustainability.
  - A fiscal surplus of 0.3% of GDP is too low to attain the FRL debt target of 60 percent of GDP by FY2027.
  - Raising the fiscal surplus to about 1 percent of GDP in FY 2023/24 and beyond would help attain the debt target and avoid the need to raise the fiscal surplus much sharper in later years to meet the debt target.
  - Reverting the VAT tax cut that occurred during the pandemic would help towards that goal.
- Increasing revenue and re-orientation of expenditure could free additional resources for growth-enhancing expenditures.
  - Tax expenditures are about 2% of GDP, so the potential is low. However, minimizing the losses from tax expenditures could help broaden the tax base.
  - Given the large share of the informal sector and the low economic growth, a further shift toward indirect taxes may be desirable.
  - Indirect taxes such as VAT have the greatest revenue generating capacity and are the most efficient.
  - Jamaica’s wage bill is high (relative to countries in the region) and is crowding out growth-critical spending.
  - Increased efficiency in the provision of public services could facilitate a reduction in the size of the public workforce and help offset the costs of the new wage structure.
  - Lower interest payments (from lower debt) could also create fiscal space for much needed growth critical spending.

### Export performance and diversification (selected findings)
- Export growth in Jamaica has been among the weakest in the world in the past quarter century.
  - In constant dollar terms, exports of goods and services grew at an annual rate of 0.16 percent only, the third lowest in the world.
  - The ratio of exports of goods and services dropped from about 50 percent in the early 1990s to about 35 percent in recent years.
- Jamaica’s traditional goods exports-to-GDP ratio has declined by 15 percentage points from their average in1991-95.
  - Of this decline, 9 percentage point was due to lower alumina exports, 3 to lower textiles exports and 3 to lower bananas and sugar exports.
- Tourism exports increased: the share of tourism exports in GDP grew by almost 10 percentage points between 2010 and 2019 before Covid-19 hit; by 2019, tourism exports were twice as large as Alumina exports.
- Jamaica’s export concentration index (Herfindahl-Hirschman Index, HHI) is considerably above the average for Caribbean countries and well above HHI of high performing manufacturing exporter regions; the high concentration reflects the high share of alumina in exports.
- Jamaica’s non-hydrocarbon/mineral (NHM) exports per capita and manufacturing exports per capita are considerably below the average in comparator regions/countries.
- Non-tourism services exports are low in per capita terms, though official statistics may under-report Business Process Outsourcing (BPOs) exports; after the collapse of textile exports, BPOs have become the largest exports from Jamaica’s SEZs.

*JAMAICA — INTERNATIONAL MONETARY FUND.*

### 14.      Jamaica’s export complexity is low. With an Economic Complexity Index (Hidalgo and

### 14.      Jamaica’s export complexity is low. With an Economic Complexity Index (Hidalgo and

### Summary finding on export complexity
- Jamaica’s Economic Complexity Index (Hidalgo and Hausmann, 2009) is below zero and “ranks considerably below comparable regions and in the lower half of the worldwide range of this index.”
- Using an alternative measure that sums the value of exports with Product Complexity Index (PCI) above zero and normalizes by population (Salinas, 2021), Jamaica’s per capita complex exports corroborate the low development of export complexity.
- Jamaica exports several complex products that comparators export, but at much lower per capita levels (examples below).

### Examples of complex exports (2018, selected)
- Dominant comparator examples (Dominican Republic, Mauritius) and Jamaica’s comparable complex exports with exact reported values from the 2018 UNCTAD Comtrade-based table:
  - Dominican Rep. — Pharmaceutical goods: US$ 89.8; US$ per capita 8.3; Product Complexity Index 1.30
  - Dominican Rep. — Medicaments: US$ 34.6; US$ per capita 3.2; Product Complexity Index 0.59
  - Jamaica — Alcohols, phenols, phenol alcohols, glycerine: US$ 8.8; US$ per capita 3.0; Product Complexity Index 0.68
  - Jamaica — Medicaments: US$ 2.8; US$ per capita 1.0; Product Complexity Index 0.59
  - Jamaica — Office machines, nes: US$ 1.2; US$ per capita 0.4; Product Complexity Index 1.65
  - Mauritius — Medicaments: US$ 30.1; US$ per capita 23.9; Product Complexity Index 0.59
  - Mauritius — Orthopaedic appl., hearing aids, artif. parts/body: US$ 8.9; US$ per capita 7.1; Product Complexity Index 1.19
- Note: Complex exports are defined as products with Product Complexity Index (PCI) above zero. The PCI in 2018 had mean zero and standard deviation one.

### Determinants investigated
- The paper focuses on horizontal policy determinants associated with export development: governance, education, infrastructure, and trade policy openness. It also reviews location/proximity, population size, unit labor costs (minimum wage to GDP per capita), homicide rate, and remittances.

### Location and size
- Proximity to Markets (PM) index: Jamaica’s PM is higher than the PM index of all its comparators except EAEM (East Asian Emerging Markets). Despite higher PM than most comparators, Jamaica’s export development remains weak.
- Population size: Panel regressions (Table A.2) do not find a negative relation between being a small state and non-commodity exports per capita. Examples: Iceland, Mauritius, Seychelles have multiple times higher non-commodity and manufacturing exports per capita than Jamaica; St. Kitts and Nevis (about 50,000 people) has about twice as high manufacturing exports per capita than Jamaica.

### Education
- Learning Adjusted Years of Schooling: Jamaica’s measure is below most comparators including the Caribbean average and especially low relative to Mauritius and EAEM.
- Low expected years of school and low harmonized test scores drive the low Learning Adjusted Years of Schooling. Enrollment rates are especially low in secondary and tertiary education, worsened by low student retention and brain drain (about 40 percent of Jamaican nationals live out of the country).
- Empirical estimate from Salinas (2021): an increase in years of schooling of one world standard deviation is associated with an increase of 160 percent in complex exports. Mauritius’ years of schooling are half a standard deviation above Jamaica’s; reaching Mauritius’ level would increase Jamaica’s complex exports by about 80 percent (per Salinas (2021) estimate).

### Infrastructure and logistics
- World Bank Logistics Performance Index: Jamaica ranks 131st, only surpasses the Caribbean average; particularly low scores in Customs and International Shipments logistics.
- Electricity cost to firms: US$ 0.24 per kWh (reported as the fourth highest in the world). This is:
  - 70 percent higher than the Dominican Republic.
  - 50 percent higher than the average in Central America and Mexico.
- Factors behind high electricity cost: Special Consumption Tax on fuel, about 200,000 abundant non-paying users, and high reliance on imported fuel.
- Red tape: Obtaining electricity involves more red tape than in Latin America and the Caribbean. Customs processing times and costs are high, with only limited use of risk-based inspections.

### Trade policy openness and tariffs
- High import tariffs: Jamaica has a high simple average tariff and high dispersion; maximum tariff reported is 100% (on vegetables and animal products).
- Very high average tariff on agricultural goods: about 20 percent.
- Stamp duties raise average border protection from 10.4 to 12.6 percent (World Trade Organization, 2017).
- Empirical evidence cited (Salinas, 2021): a reduction of 10 percentage points in average tariffs is associated with about 60 percent higher complex exports per capita.
- Comparison disadvantage: Nearby countries in Central America and Dominican Republic have Free Trade Agreements (FTAs) with the United States and among themselves; FTAs have been associated with substantial export gains (example cited: Ahmed (2017) finds NAFTA doubled Mexico’s exports to Canada and the United States relative to a synthetic counterfactual).

### Governance and crime
- Institutional quality: Jamaica has relatively good standing on institutional quality and ranks particularly well on Voice and Accountability and Regulatory Quality; less favorably on Political Stability and Absence of Violence and Rule of Law but around the comparator average.
- Homicide rate: Jamaica’s homicide rate is very high at 56 homicide per 100,000 people (current reported). World average cited as 7 per 100,000 people.
- Estimated impact: The coefficient of the homicide rate in Table A.2 implies that reducing Jamaica’s homicide rate from 56 to the world average of 7 would boost complex exports by 82 percent.
- IADB cross-country analysis (Jaitman and Torre, 2017) suggests crime-related costs in Jamaica could be up to 4 percent of GDP.

### Remittances and Dutch-disease effects
- Remittances: Accounting for 17 percent of GDP in 2015-20, Jamaica’s remittances are higher than all comparators.
- Estimated impact: Regression results indicate that if Jamaica received the world average level of remittances as a share of GDP, it would increase its complex exports by 107 percent.
- Natural resource exports: Jamaica’s hydrocarbon/mineral exports per capita are low relative to comparators (only higher than the average in Central America). Tourism exports per capita are lower than in comparators except the Dominican Republic.

### Unit labor costs
- Unit labor cost proxy (minimum wage to GDP per capita): Jamaica’s ratio in 2019 is not particularly high relative to many comparators, but competitors such as Dominican Republic and Mexico have much lower ratios as does Mauritius.
- Panel analysis: Panel Figure A.1 and Table A.2 show a strong negative relation between the minimum wage per GDP per capita ratio and per capita exports of non-tourism services.

### Overall diagnosis
- Major constraints to export development identified:
  - Low access and quality of education.
  - Weak infrastructure, notably expensive energy.
  - Relatively high import barriers and tariff dispersion (maximum 100%).
  - Strong competition from nearby countries with FTAs with large economies.
  - Very high homicide rate (56 per 100,000) and very high remittances (17 percent of GDP).
- Salinas (2021) and other statistical analysis cited indicate education, infrastructure, and trade openness combined with gravity variables explain above four fifths of cross-country heterogeneity in non-commodity export development.

### Policy implications and potential payoffs (conclusions)
- Combining major reforms—raising educational attainment to the highest among comparators, significantly reducing tariffs or signing FTAs with large countries, and reducing the homicide rate to the world average—could multiply Jamaica’s complex exports “4 or 5 times.”
- Such combined efforts would allow Jamaica to match export complexity of manufacturing leaders like Mauritius and regions such as Central America and Mexico, and better exploit Jamaica’s proximity to the United States and other large economies.

*Source: Chapter section on Jamaica’s export complexity and determinants in the IMF country study (text and tables as provided).*

### Appendix I. Complexity Determinants

### Appendix I. Complexity Determinants

### Regional classification of countries
- Regions and region codes as listed in Table AI.1:
  - Andean (AND): Bolivia, Colombia, Ecuador, Peru, Venezuela
  - Arab (ARB): Bahrain, Brunei, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Yemen
  - Central Asia (CA): Armenia, Azerbaijan, Belarus, Kazakhstan, Tajikistan, Turkmenistan, Uzbekistan
  - Central Am. & Mexico (CAM): Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama
  - Caribbean (CAR): Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Cuba, Dominica, Dominican Republic, French Guiana, Grenada, Guadeloupe, Guyana, Haiti, Jamaica, Martinique, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago
  - Eastern Europe (EE): Albania, Bosnia and Herzegovina, Croatia, Cyprus, Czech Republic, Estonia, Georgia, Hungary, Latvia, Lithuania, Montenegro, North Macedonia, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia
  - European Union (EU): Andorra, Austria, Belgium, France, Germany, Greece, Greenland, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Spain, Switzerland, United Kingdom
  - India (IND): India
  - Middle East (ME): Iran, Iraq, Israel, Jordan, Lebanon, Syria
  - North Africa (NA): Algeria, Egypt, Morocco, Tunisia, Mayotte
  - North America (NAM): Canada, United States
  - East Asia Emerging (EAE): China, Indonesia, Malaysia, Philippines, Vietnam
  - East Asia High Income (EAHI): Hong Kong SAR, Japan, Singapore, South Korea
  - East Asia Other (EAOTH): Cambodia, Lao P. D.R., Mongolia, Myanmar
  - Pacific Islands (PAC): Tonga, Tuvalu, Vanuatu
  - Pacific Isl. (subset entries): Cook Islds, Micronesia, Fed. States of, Faroe Islds, Fiji, French Polynesia, Kiribati, Maldives, New Caledonia, Palau, Papua New Guinea, Samoa, Solomon Islands, Papua New Guinea, Samoa, Solomon Islands, etc.
  - Oceania (OCE): Australia, New Zealand
  - Southern Cone (SCC): Argentina, Brazil, Chile, Paraguay, Uruguay
  - Scandinavia (SCND): Denmark, Finland, Iceland, Norway, Sweden
  - Sub-Saharan Africa (SSA): Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cabo Verde, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Congo, Republic of, Côte d'Ivoire, Djibouti, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mayotte, Mozambique, Namibia, Niger, Nigeria, Rwanda, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Sudan, Togo, Uganda, Tanzania, Zimbabwe
- (Table includes country-level assignments across many regions; listing above follows the source structure and entries as presented.)

### Determinants of complex exports (Table AI.2)
- Dependent variable: Log NHM exports (logarithm of the value of complex exports; exports of products with a Product Complexity Index (PCI) above zero according to Hausmann and others (2013)).
- Regression specifications (columns 1–3) — coefficients and significance:
  - Log distance: -1.295*** (col. 1); -1.569*** (col. 2); -1.701*** (col. 3)
  - Governance (WB Index): 0.748*** (col. 1); 0.717*** (col. 2); 0.991*** (col. 3)
  - Education (UN Index): 6.635*** (col. 1); 6.156*** (col. 2); 6.524*** (col. 3)
  - Infrastructure (GCR Index): 0.268*** (col. 1); 0.273*** (col. 2); 0.0672* (col. 3)
  - Average Tariff (percent): -0.0499*** (col. 1); -0.0491*** (col. 2); -0.0365*** (col. 3)
  - Small states dummy (1 if population below 1 million): -0.522*** (col. 1); -0.454*** (col. 2)
  - Remittances (% of GDP): -0.0507*** (col. 3)
  - Homicide rate (per 100,000 persons): -0.206*** (col. 3)
  - Constant: 4.940* (col. 1); 1.168.539*** (presentation in source shows "1.168.539***")
- Sample size and model statistics:
  - Observations: 44,172 (cols. 1 and 2); 38,890 (col. 3)
  - Rho: 0.92 (cols. 1 and 2); 0.94 (col. 3)
- Notes on methodology and sample:
  - "* p<0.1, ** p<0.05, *** p<0.01."
  - Panel regressions based on Hausman and Taylor (1981) technique with groups consisting of all combinations of reporter and partner countries in UN Comtrade database.
  - Observations are non-overlapping 5-year averages within the 1962-2018 period, depending on data availability.
  - Regression specification based on equation (7).
  - Multilateral resistance terms and partner country's policy variables included (coefficients not reported).

### Empirical relationships illustrated in figures
- Figures and their focal relationships (figures AI.1–AI.8):
  - Figure AI.1: Export Complexity and Proximity to Other Markets
  - Figure AI.2: Export Complexity and Governance
  - Figure AI.3: Export Complexity and Education
  - Figure AI.4: Export Complexity and Infrastructure
  - Figure AI.5: Export Complexity and Import Tariffs
  - Figure AI.6: Export Complexity and Remittances
  - Figure AI.7: Export Complexity and Crime
  - Figure AI.8: Export Complexity and Labor Costs

*Source: Appendix I. Complexity Determinants, as provided in the supplied content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1jamea2022002.pdf_