## _cr04263

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---

### Executive summary
- Authorities stabilized the economy and improved market confidence after a near crisis in early 2003.
- Key recent outcomes:
  - Primary budget surplus reached 11 percent of GDP in FY 2003/04.
  - Public debt ratio declined slightly to 145 percent of GDP.
  - Real GDP growth reached 2 percent in FY 2003/04.
  - Government secured foreign currency financing of around US$450 million (including a €200 million Eurobond issue in February 2004).
  - Public debt peaked at 146½ percent of GDP in FY 2002/03.
  - From March 2002 to June 2003, cumulative reserve loss amounted to about US$800 million (about 40 percent) and the currency depreciated by 24 percent.
  - Twelve-month inflation rose to double digits following depreciation and tax measures; annualized monthly inflation declined to single digits in recent months.

### Fiscal policy framework and debt-reduction strategy
- Authorities’ strategy and medium-term targets:
  - Ambitious, prolonged fiscal adjustment aimed at gradual reduction of the public debt-to-GDP ratio.
  - Fiscal strategy: reduce the fiscal deficit in FY 2004/05, balance the budget by FY 2005/06, and maintain small overall surpluses thereafter.
  - Objectives predicated on primary surpluses of about 14 percent of GDP over the medium term.
  - Under authorities’ strategy, public debt would decline gradually to just above 100 percent of GDP by FY 2008/09.
  - Authorities rule out a comprehensive debt restructuring involving a substantial cut in NPV.
- Recent fiscal developments and composition (FY 2003/04):
  - Revenue increased to 30 percent of GDP (about 2 percentage points of GDP increase).
  - Primary expenditure declined to 19 percent of GDP (a 2 percentage point decline).
  - Overall government deficit (including extra-budgetary expenditure considerations) narrowed to 9.3 percent of GDP.
  - Consolidated overall surplus of major public sector bodies improved to 1.7 percent of GDP.
  - Over 50 percent of total debt is in foreign currency or indexed to the U.S. dollar; a further 25 percent consists of variable-rate instruments linked to the six-month Treasury bill yield.
- FY 2004/05 projected adjustment composition and fiscal assumptions:
  - Public debt projection for FY 2004/05: decline by 8½ percentage points of GDP to 136½ percent of GDP.
  - Primary surplus expected to rise by 2.7 percentage points of GDP, to 13.8 percent of GDP.
  - Budgetary revenue projected to increase by 1.9 percentage points of GDP, reflecting:
    - stepped-up collection of arrears: 1.0 percent of GDP
    - expected grant disbursements from the EU: 0.7 percent of GDP
    - full-year impact of measures introduced in FY 2003/04 budget: 0.2 percent of GDP
  - Primary expenditure projected to decline by 0.8 percent of GDP.
  - Wage bill projected to decline by 1.1 percentage points of GDP (to 11.3 percent of GDP), reflecting wage moderation under the MOU with trade unions.
  - Extra-budgetary expenditure projected to rise by 1 percentage point of GDP to 3 percent of GDP in FY 2004/05; bulk related to central bank losses (2.7 percent of GDP in FY 2004/05).
  - Gross financing requirement for FY 2004/05 is estimated at 31 percent of GDP.
- Mission assessment and risks:
  - FY 2004/05 targets are ambitious but achievable with determined effort, hinging on unwavering tax collection (including arrears) and expenditure control.
  - Potential pressures from sustained high oil prices could complicate expenditure control and MOU implementation.
  - On unchanged policies, a gap of about 1.7 percent of GDP would emerge in FY 2005/06 relative to the balanced-budget target.
  - Mission urged quick identification of measures to close the gap (e.g., in forthcoming tax reform) and elaboration of a comprehensive fiscal reform agenda.
  - Vulnerabilities: elevated public debt ratio, large gross financing requirements, high degree of indexation of domestic debt to the U.S. dollar and to short-run interest rates; fiscal consolidation will limit government ability to spend on social programs and infrastructure without major additional revenue effort.

### Monetary and exchange rate policy
- Exchange rate regime and external accounts:
  - Jamaican dollar determined in an interbank market free of restrictions on current payments, with an open capital account.
  - Exchange rate remained around J$60 per U.S. dollar over the past year.
  - Real effective exchange rate has risen somewhat since the steep depreciation but remains well below its range in the six-year period through 2002.
  - External current account deficit narrowed to 11 percent of GDP in FY 2003/04.
- Monetary operations and interest rates:
  - BOJ sharply increased interest rates on open market instruments around March 2003 to about 35 percent; by June 2004 BOJ rates were reduced to 14–17 percent.
  - Monetary policy relied on open market operations guided by inflation and NIR objectives.
  - Contraction in the central bank’s NDA contained base money growth at about 11½ percent while allowing a partial recovery in NIR during FY 2003/04.
- BOJ targets and projections:
  - NIR target for end-March 2005: US$1.4 billion.
  - Authorities’ NIR target consistent with a projected widening of the current account deficit in FY 2004/05 to 13.2 percent of GDP (2½ percentage points wider than FY 2003/04).
  - Authorities’ NIR target for FY 2004/05 equivalent to about 40 percent of broad money and consistent with gross reserves of 12 weeks of imports, or about 70 percent of the government’s short-term debt obligations.
  - Mission recommended flexible and balanced use of monetary and exchange policies and cautioned that debt overhang constrains policy tools.
- Policy instrument note:
  - Jamaica maintains a surrender requirement under which authorized foreign exchange dealers and cambios are required to sell 5 percent of their gross purchases of foreign exchange to the BOJ; mission encouraged consideration of removal of the surrender mechanism.

### Financial sector and external developments
- Banking and financial indicators:
  - Bank soundness indicators remained favorable: percentage of past due loans stands at 3 percent; provisioning, capital adequacy, and profitability remain well above minimum international standards.
  - Broad money growth exceeded nominal GDP growth, with significant buildup in foreign assets.
  - Private sector credit showed strong recovery, concentrated in tourism and telecommunications.
  - Deposit dollarization increased somewhat; banks maintained a roughly balanced foreign exchange position and used foreign currency mainly to invest in government dollar-denominated debt and to lend to private-sector clients with foreign exchange revenue.
- External sector drivers:
  - Tourism receipts recovered; alumina exports rose on capacity expansion and better prices.
  - Agricultural exports improved following weather-related recovery; remittances reported to have risen (but believed to remain underestimated).
  - Imports declined reflecting currency depreciation and winding down of telecom investments.
- Financial sector regulatory actions:
  - Financial Services Commission preparing prudential requirements for securities dealers including capital adequacy and margin requirements.
  - Government requested participation in joint IMF/World Bank Financial Sector Assessment Program scheduled to start in early 2005.
  - New Pensions Act passed by the lower house to regulate and facilitate private pension schemes.
  - AML/CFT legislative agenda includes enactment of a CFT bill and statutes enhancing AML framework.

### Structural reforms, social policy, and labor market
- Structural reform priorities:
  - Promote higher growth by addressing constraints: crowding out of private sector, infrastructure deterioration, financial sector vulnerabilities, labor market rigidities, education system weaknesses, and high crime incidence.
  - Authorities plan further trade liberalization and regional integration: CARICOM, FTAA, WTO; average tariff rate is 10 percent; trade regime rating is 5 on IMF’s 10-point index.
  - Government preparing administrative structures for FTAA obligations (Fair Trading Commission; Anti-dumping and Subsidies Commission; Jamaica Intellectual Property Office).
- Tax and public expenditure management reforms:
  - Planned tax reform to increase efficiency and equity; mission suggested removing many exemptions that narrow the consumption tax base and eliminate reduced rates and complicating features.
  - Reorganization of tax administration along functional lines; development of integrated tax administration computer system.
  - Customs reforms: service automation, online payments, risk-based clearance, fast-track release for compliant importers, and electronic links with tax administration.
  - Public expenditure reforms: extend modernization measures, establish output-based budgeting, link salary increases to performance by end of fiscal year, move toward accrual accounting over a three-year period, and strengthen cash management.
- Labor market and social safety net:
  - MOU caps annual wage increases at 3 percent for two years; MOU will freeze employment and cap nominal public sector salary increases through March 2006.
  - Mission urged rationalization of public sector employment concurrent with wider structural reforms.
  - Strengthen social safety net to mitigate short-term social impacts of fiscal adjustment.
- Education and crime:
  - Access to primary education close to the Millennium Development Goal of universal coverage; secondary education quality weak and inequalities persist.
  - Government plans initiatives to improve teaching of science and strengthen vocational training; consider increased cost sharing in tertiary education and expanded private sector role over medium term.
  - High crime rate affects business climate; government prioritizes National Crime Plan and intensified anti-drug initiatives with international partners.

### Growth prospects, projections, and risks
- Authorities’ growth and inflation outlook:
  - Authorities envisage growth of about 2½ percent in FY 2004/05 and in the region of 3–4 percent over the medium term.
  - Mission view: plausible assuming continued expansion in tourism and mining capacity.
  - Inflation projected to moderate to single digits.
- Medium-term macro projections (selected):
  - Net international reserves (NIR) would strengthen to about US$2.2 billion by FY 2008/09.
  - Public debt ratio would decline to close to 100 percent of GDP by FY 2008/09.
  - Authorities aim to balance the budget by FY 2005/06 given current interest rate projections, requiring a primary surplus of around 14 percent of GDP.
- Debt dynamics, stress tests, and vulnerabilities:
  - Even with full implementation, public debt-to-GDP would remain elevated and a major vulnerability.
  - DSA indicates major implementation risks and vulnerability to shocks; debt dynamics worsen under adverse shocks to interest rates, exchange rates, or if baseline GDP growth does not materialize.
  - Selected stress-test outcomes:
    - Scenario A1 (key variables at historical averages in 2004–08): public debt evolves from 144.8 to 100.3 by 2008/09.
    - Scenario A2 (primary balance under no policy change in 2004–08): public debt 2003/04: 144.8; 2008/09: 110.6.
    - Scenario B1 (real interest rate shock): public debt rises to 179.8 in 2004/05 and 218.4 in 2005/06.
    - Scenario B5 (one time 30 percent real depreciation in 2004): public debt 2003/04: 144.8; 2004/05: 180.9; 2005/06: 168.6; 2008/09: 138.0.

### Quantitative targets and monitoring (FY 2004/05 semi-annual)
- Semi-annual quantitative targets adopted for September 2004 and March 2005:
  - Change in net international reserves:
    - April 04–September 04: -US$288.6 million
    - April 04–March 05: -US$168.8 million
  - Change in net domestic assets:
    - April 04–September 04: J$20.4 billion
    - April 04–March 05: J$16.0 billion
  - Primary budget surplus:
    - April 04–September 04: J$27.6 billion
    - April 04–March 05: J$74.2 billion
  - Overall budget deficit:
    - April 04–September 04: J$21.9 billion
    - April 04–March 05: J$22.0 billion
- Notes:
  - Changes in NIR reflect seasonal pattern of foreign exchange flows.
  - Net domestic assets defined as the difference between change in base money and change in NIR; NIR converted at accounting exchange rate of J$62.40=US$1.
  - Over the medium term, extra-budgetary expenditure projected broadly constant at around 2 percent of GDP.

### Selected numerical highlights and projections (tables and series extracted)
- Real GDP growth (annual percentage change):
  - FY 2003/04: 2 percent; projections: 2004/05: 2.5; 2005/06: 2.5; 2006/07: 2.8; 2007/08: 3.3; 2008/09: 3.4.
- Inflation (CPI, end of period / average):
  - 2003/04 end: 16.8; 2004/05 end: 9.9; 2005/06 end: 7.0; 2003/04 average: 12.9; 2004/05 average: 11.5; 2005/06 average: 7.9.
- Interest rate (180 day BoJ CD rate, end of period): 2003/04: 16.0; 2004/05: 15.0; 2005/06: 14.0.
- Fiscal aggregates (percent of GDP):
  - Budgetary revenue: 2003/04: 29.9; projected 2004/05: 31.8.
  - Budgetary expenditure: 2003/04: 36.9; projected 2004/05: 35.2.
  - Budget balance (budgetary): 2003/04: -7.0; 2004/05 projection: -3.5.
  - Overall fiscal balance: 2003/04: -8.9; projections: 2004/05: -6.5; 2005/06: -1.8; 2006/07: -1.4; 2007/08: -1.5; 2008/09: -0.6.
  - Public debt: 2003/04: 144.8 percent of GDP; 2004/05: 136.4; 2005/06: 127.3; 2006/07: 119.6; 2007/08: 112.4; 2008/09: 104.7.
- External sector (selected US$ millions):
  - Current account: 2003/04: -865; 2004/05: -1,178; 2005/06: -1,166.
  - Exports (f.o.b.): 2003/04: 1,408; 2004/05: 1,550; 2005/06: 1,615.
  - Imports (f.o.b.): 2003/04: 3,282; 2004/05: 3,653; 2005/06: 3,807.
  - Net international reserves (US$ millions): 2003/04: 1,569; 2004/05: 1,400; 2008/09: 2,150.
- Monetary aggregates (J$ billions, end-period):
  - Net international reserves (end-period): 2003/04: 102.1; 2004/05: 96.5; 2005/06: 111.5.
  - Liabilities to private sector (M3): 2003/04: 190.8; 2004/05: 217.6; 2008/09: 314.2.
  - Money supply (M2): 2003/04: 124.9; 2004/05: 142.3; 2008/09: 205.5.
- Vulnerability indicators:
  - Current account (percent of GDP): 2003/04: -10.6; 2004/05: -13.2.
  - Total gross public sector financing requirement (percent of GDP): 2003/04: 28.6; 2004/05: 31.0.
  - Total gross external debt (percent of GDP): around 50.7–55.6 in early 2000s.
  - Deposit dollarization projection (memo): Dollarization 2008/09: 38.7.

### Policy recommendations (summary)
- Fiscal:
  - Continue fiscal consolidation to reduce public debt-to-GDP ratio; maintain steadfast fiscal discipline and identify additional measures promptly if one-off revenues discontinue.
  - Elaborate a comprehensive fiscal reform agenda, strengthen tax administration, remove exemptions and reduced rates that narrow the consumption tax base, and step up arrears collection (focus on larger taxpayers).
  - Contain the wage bill and rationalize government employment; protect priority social and education expenditures; strengthen social safety net.
- Monetary and exchange rate:
  - Use monetary and exchange rate policies flexibly and minimize intervention in the foreign exchange market; target inflation and international reserves via open market operations.
  - Exercise early activation of available policy instruments if pressures on international reserves arise.
- Financial sector and regulation:
  - Review and strengthen prudential regulation given large exposure of banks to public debt; introduce prudential requirements for securities dealers and accelerate implementation where possible.
  - Proceed with AML/CFT legislative agenda and prepare for the FSAP in early 2005.
- Structural and social policies:
  - Advance trade liberalization, reduce labor market rigidities (notably high redundancy costs), improve education quality and vocational training, and continue crime-reduction priorities to support private investment and growth.
- Data and surveillance:
  - Strengthen statistical system, update national accounts base year and CPI weights, compile IIP statistics, and commit to SDDS subscription within a defined timeframe.
  - Authorities requested intensified surveillance; staff envisages semi-annual interim staff reports for the Executive Board between Article IV consultations.

*Source: Executive Summary and selected excerpts from IMF staff report and Article IV consultation materials (content unit _cr04263).*

### Executive Summary ......................................................................................................

### Executive Summary

### Stabilization and near-term outcomes
- The authorities stabilized the economy and improved market confidence after a near crisis in early 2003.
- Key recent outcomes:
  - Primary budget surplus reached 11 percent of GDP in FY 2003/04.
  - Public debt ratio declined slightly to 145 percent of GDP.
  - Real GDP growth reached 2 percent in FY 2003/04.
  - The government secured foreign currency financing of around US$450 million (including a €200 million Eurobond issue in February 2004).
  - The public debt peaked at 146½ percent of GDP in FY 2002/03.
  - From March 2002 to June 2003, cumulative reserve loss amounted to about US$800 million (about 40 percent) and the currency depreciated by 24 percent.
  - Twelve-month inflation rose to double digits following depreciation and tax measures, but annualized monthly inflation declined to single digits in recent months.

### Fiscal policy framework and debt-reduction strategy
- Authorities’ strategy:
  - Ambitious and prolonged fiscal adjustment aimed at gradual reduction of the public debt-to-GDP ratio.
  - Fiscal strategy calls for reducing the fiscal deficit in FY 2004/05, balancing the budget in the next fiscal year, and maintaining small overall surpluses thereafter.
  - These objectives are predicated on primary surpluses of about 14 percent of GDP over the medium term.
  - Under the authorities’ strategy, public debt would decline gradually to just above 100 percent of GDP by FY 2008/09.
  - Authorities rule out a comprehensive debt restructuring involving a substantial cut in NPV.
- Recent fiscal developments and composition:
  - Revenue increased to 30 percent of GDP in FY 2003/04 (about 2 percentage points of GDP increase).
  - Primary expenditure declined to 19 percent of GDP in FY 2003/04 (a 2 percentage point decline).
  - Overall government deficit (including extra-budgetary expenditure considerations) narrowed to 9.3 percent of GDP.
  - Consolidated overall surplus of major public sector bodies improved to 1.7 percent of GDP in FY 2003/04.
  - Notes on debt structure: Over 50 percent of total debt is in foreign currency or indexed to the U.S. dollar; a further 25 percent consists of variable-rate instruments linked to the six-month Treasury bill yield.

### Monetary and exchange rate policy
- Exchange rate regime and external accounts:
  - The Jamaican dollar is determined in an interbank market free of restrictions on current payments, with an open capital account.
  - The exchange rate remained around J$60 per U.S. dollar over the past year.
  - The real effective exchange rate has risen somewhat since the steep depreciation but remains well below its range in the six-year period through 2002.
  - The external current account deficit narrowed to 11 percent of GDP in FY 2003/04.
- Monetary operations and interest rates:
  - BOJ sharply increased interest rates on open market instruments around March 2003 to about 35 percent; by June 2004 BOJ rates were reduced to 14–17 percent.
  - Monetary policy has relied on open market operations guided by inflation and NIR objectives.
  - The contraction in the central bank’s NDA contained base money growth at about 11½ percent while allowing a partial recovery in NIR during FY 2003/04.

### Financial sector and external developments
- Banking and financial indicators:
  - Bank soundness indicators remained favorable: percentage of past due loans stands at 3 percent; provisioning, capital adequacy, and profitability remain well above minimum international standards.
  - Broad money growth exceeded nominal GDP growth, with a significant buildup in foreign assets.
  - Private sector credit showed strong recovery, concentrated in tourism and telecommunications.
  - Deposit dollarization increased somewhat; banks maintained a roughly balanced foreign exchange position and used foreign currency mainly to invest in government dollar-denominated debt and to lend to private-sector clients with foreign exchange revenue.
- External sector drivers:
  - Tourism receipts recovered and alumina exports rose on capacity expansion and better prices.
  - Agricultural exports improved following weather-related recovery; reported remittances also rose (but are believed to remain underestimated).
  - Imports declined reflecting currency depreciation and the winding down of telecom investments.

### Structural reforms, risks, and policy recommendations
- Staff and mission recommendations and emphasis:
  - Support for the authorities’ fiscal consolidation effort, accompanied by structural reforms to reduce implementation risks and vulnerability to shocks and to promote higher growth.
  - Urged quick identification of policies to close a potential gap of about 1½ percent of GDP relative to the authorities’ balanced-budget target for FY 2005/06.
  - Encouraged major tax reform, improvements in tax administration, rationalization of government employment, and improvement of the public expenditure management system.
  - Strengthen the social safety net to mitigate short-term social impacts of fiscal adjustment and reforms.
  - Recommended measures to promote higher growth by addressing constraints including crowding out of the private sector, infrastructure deterioration, financial sector vulnerabilities, labor market rigidities, education system weaknesses, and high crime incidence.
- Policy interactions and constraints:
  - The mission supported a flexible and balanced use of monetary and exchange rate policies, noting constraints imposed by the large public debt and the high share of variable-rate and foreign currency-linked debt.
  - Mission stressed mutually reinforcing links between higher growth and debt sustainability.
  - Authorities plan to focus on further trade liberalization, addressing remaining financial sector vulnerabilities, reducing labor market rigidities, improving education, and combating crime.

*Source: Executive Summary (IMF staff report).*

### 13.      While supporting the authorities’ fiscal consolidation efforts, the mission

### 13.      While supporting the authorities’ fiscal consolidation efforts, the mission

### Fiscal Policy Framework
- Authorities’ fiscal strategy: balance the budget by FY 2005/06 and maintain small overall surpluses thereafter to reduce the debt ratio; predicated on primary surpluses of about 14 percent of GDP over the medium term.
- Projected public debt path: decline gradually to just above 100 percent of GDP by FY 2008/09.
- FY 2004/05 objectives: reduce the budget deficit to below 4 percent of GDP; real GDP growth in the range of 2–3 percent; reduction in twelve-month inflation to single digits; maintenance of broadly unchanged NIR.
- Public debt projection for FY 2004/05: decline by 8½ percentage points of GDP to 136½ percent of GDP.
- FY 2004/05 fiscal adjustment composition:
  - Primary surplus expected to rise by 2.7 percentage points of GDP, to 13.8 percent of GDP.
  - Budgetary revenue projected to increase by 1.9 percentage points of GDP, reflecting:
    - stepped-up collection of arrears: 1.0 percent of GDP
    - expected grant disbursements from the EU: 0.7 percent of GDP
    - full-year impact of measures introduced in FY 2003/04 budget: 0.2 percent of GDP
  - Primary expenditure projected to decline by 0.8 percent of GDP.
  - Wage bill projected to decline by 1.1 percentage points of GDP (to 11.3 percent of GDP), reflecting the wage moderation under the MOU with trade unions.
  - Interest bill projected to decline only slightly.
- Extra-budgetary expenditure: projected to rise by 1 percentage point of GDP to 3 percent of GDP in FY 2004/05; bulk related to central bank losses (2.7 percent of GDP in FY 2004/05).
- Mission assessment:
  - FY 2004/05 targets are ambitious but achievable with determined effort.
  - Success hinges on unwavering tax collection (including arrears, particularly from larger taxpayers) and expenditure control.
  - Potential pressures from sustained high oil prices could complicate expenditure control and MOU implementation.
  - Priority expenditures, including social sector and education-related spending, should be protected.
- Medium-term risk and gap:
  - On unchanged policies, a gap of about 1.7 percent of GDP would emerge in FY 2005/06 relative to the balanced-budget target.
  - Shortfall partly due to non-recurrence of one-off revenue factors (foreign grants and tax arrears) and somewhat higher projected interest expenditure.
  - Mission encouraged quick identification of measures to close the gap, e.g., in forthcoming tax reform.
  - Authorities expect continued tax arrears collection in FY 2005/06 and stand ready to take measures to ensure achievement of medium-term targets.
- Mission recommendation: elaborate a comprehensive fiscal reform agenda; rationalize government employment to underpin envisaged reduction in the wage bill by 3 percentage points of GDP over the medium term.
- Vulnerabilities noted:
  - Economy remains vulnerable due to elevated public debt ratio, large gross financing requirements, and high degree of indexation of domestic debt to the U.S. dollar and to short-run interest rates.
  - High public debt implies continued vulnerability for the heavily exposed financial system.
  - Fiscal consolidation will limit government ability to spend on social programs and infrastructure without major additional revenue effort.
- Footnotes preserved:
  - Gross financing requirement for FY 2004/05 is estimated at 31 percent of GDP.
  - Adjusted wage-bill decline: adjusted for a budgeted payment of arrears on wage-related payroll contributions, the decline in the wage bill would be 1.7 percentage points of GDP.
  - MOU caps annual wage increases at 3 percent for two years.
  - Pricing mechanism for petroleum products permits an automatic pass-through of higher import prices.

### Fiscal reforms
- Tax system diagnosis:
  - Revenue collection levels comparable to other middle-income countries but with important distortions and increasing complexity from ad-hoc measures and exemptions.
  - Government plans tax reform in next year’s budget to increase efficiency and equity.
  - Mission advice: design tax reform to help achieve the balanced budget target for next year and provide for a stable ratio of tax revenue to GDP over the medium term.
  - Mission suggestion: remove many exemptions that narrow the consumption tax base and eliminate reduced rates and other complicating features.
- Revenue administration improvements:
  - Reorganization along functional lines has improved audit and assessment.
  - Development of an integrated tax administration computer system.
  - Customs reforms: service automation, online payments, quality control systems, goods clearance procedures based on risk assessment, fast-track release for compliant importers, and electronic links with tax administration.
  - Authorities view these measures as important contributors to increased revenue-to-GDP in FY 2003/04.
  - FY 2004/05 plans: establish comprehensive tax arrears collection plan with specific annual targets; strengthen monitoring of arrears collection; review related administrative procedures.
  - Mission encouraged focus on arrears collection efforts targeting larger taxpayers.
- Public expenditure management reforms:
  - Plan to extend modernization measures from pilot ministries to the rest of central government this year.
  - Measures aim to establish output-based budgeting, link salary increases to performance by end of fiscal year, and move toward accrual accounting over a three-year period.
  - Further strengthening of the cash management system planned.
  - Mission noted these measures require adequate time and resources; emphasized strengthening reporting of public enterprise finances and contingent fiscal liabilities.
- Expenditure constraint and public sector employment:
  - Wage and interest bills together represent over 80 percent of budgetary expenditure.
  - Spending on wages exceeds 12 percent of GDP; capital outlays are comparatively low.
  - High public sector employment levels are a major factor.
  - MOU will reduce public sector wage growth in April 2004–March 2006 by freezing employment and capping nominal public sector salary increases below inflation; calls for modernization and rationalization of public sector activities but no specific plans yet.
  - Mission urged rationalization of public sector employment concurrent with wider structural reforms to foster private sector activity.
  - Social protection system and social safety net should be strengthened to mitigate short-term social impact.

### Monetary and Exchange Rate Policy
- Bank of Jamaica (BOJ) stance:
  - Continue to rely on open market operations to target base money growth compatible with inflation and balance of payments objectives.
  - Operate on assumption that demand for broad money (M3) will grow in FY 2004/05 at least in line with nominal GDP.
  - This provides resources for continued strong growth in credit to the private sector.
- BOJ NIR and targets:
  - NIR target for end-March 2005: US$1.4 billion—somewhat less than the March 2004 level which reflected recent external bond placements in anticipation of upcoming debt repayments.
  - On assumption that demand for base money parallels M3, BOJ set an NDA target whose achievement will require only a small increase in the stock of open market instruments, facilitating some further decline in interest rates on open market instruments.
  - BOJ will exercise flexibility in exchange rate policy; monetary projections consistent with a roughly unchanged real effective exchange rate.
- External sector and reserves:
  - Authorities’ NIR target consistent with projected widening in the external current account deficit in FY 2004/05.
  - Current account deficit in FY 2004/05 projected to widen by 2½ percentage points of GDP to 13.2 percent of GDP, reflecting mainly higher oil import bill and increased expatriation of profits and dividends.
  - Authorities’ NIR target for FY 2004/05 is equivalent to about 40 percent of broad money and is consistent with gross reserves of 12 weeks of imports, or about 70 percent of the government’s short-term debt obligations.
- Mission recommendations and cautions:
  - Supported authorities’ inflation and NIR objectives; recommended flexible and balanced use of monetary and exchange policies.
  - Welcomed market-determined exchange rate and refraining from intervention while substantially reducing interest rates.
  - Emphasized early activation of available policy instruments in event of pressures on international reserves given limited room for intervention.
  - Cautioned that debt overhang will constrain monetary and exchange rate policy: size of public debt and share of variable rate and foreign currency-linked debt mean changes in interest rates or exchange rate could have substantial adverse impact on debt dynamics.
  - Authorities indicated policy stance broadly in line with mission’s approach to use flexibility to raise interest rates and allow exchange rate to depreciate if pressures in the foreign exchange market arise.
- Footnote preserved:
  - Jamaica maintains a surrender requirement under which authorized foreign exchange dealers and cambios are required to sell 5 percent of their gross purchases of foreign exchange to the BOJ; mission encouraged consideration of removal of the surrender mechanism.

### Structural Reforms and Social Issues
- Growth and debt sustainability:
  - Mission stressed links between higher growth and achieving greater debt sustainability.
  - Authorities noted past structural reforms (trade liberalization, financial sector deregulation) but acknowledged remaining structural and social weaknesses that discourage private investment, hamper external competitiveness, and limit growth potential.
  - Authorities to focus on trade liberalization, financial sector, labor market, education system, and domestic security.
- Trade liberalization and regional integration:
  - Authorities plan further integration in CARICOM, the FTAA, and the WTO.
  - Trade liberalization started mid-1980s; Jamaica removed all quantitative restrictions and reduced maximum common external tariff on non-agricultural products under CARICOM to 20 percent by January 1999.
  - Average tariff rate is 10 percent; trade regime’s overall rating is 5 on the IMF’s 10-point index of trade restrictiveness.
  - Government preparing administrative structures for future FTAA obligations: Fair Trading Commission; Anti-dumping and Subsidies Commission; Jamaica Intellectual Property Office.
  - Planned removal of EU preferential regime for exports of sugar and bananas from the Caribbean will have relatively minor impact on Jamaica due to small share of these commodities in exports; government taking steps to increase productivity in these sectors with EU financial assistance.
- Financial sector regulatory strengthening:
  - Financial system relatively large with gaps in supervisory and regulatory framework.
  - Supervision of banking system improved since 1996–97 crisis; securities dealers remain vulnerable to interest rate and liquidity risks.
  - Securities industry intermediates retail funds large relative to its capital base and exceeding banking system deposit base.
  - Financial Services Commission preparing prudential requirements for securities dealers, including capital adequacy and margin requirements.
  - Government requested participation in joint IMF/World Bank Financial Sector Assessment Program scheduled to start in early 2005.
  - New Pensions Act passed by the lower house to regulate and facilitate private pension schemes.
  - AML/CFT legislative agenda includes enactment of a CFT bill and statutes enhancing AML framework.
- Labor market reforms:
  - Mission emphasized reducing labor market rigidities to improve business environment and job creation.
  - Authorities taking steps to allow more flexible work arrangements.
  - High redundancy costs identified by private sector as a key issue; mission encouraged development of appropriate reforms.
- Education and social policy:
  - Access to education comparable to higher income economies but quality of secondary education is weak and inequalities persist.
  - Government plans initiatives next fiscal year to improve teaching of science and strengthen vocational training.
  - Mission suggested considering increased cost sharing in tertiary education and expanding private sector role in education over the medium term.
  - Access to primary education is close to the corresponding Millennium Development Goal of universal coverage.
- Crime and security:
  - High crime rate affects living conditions and business climate.
  - Government prioritizes fight against crime through the National Crime Plan—social interventions to prevent criminal behavior and improvements in law enforcement.
  - Anti-drug initiatives to be intensified in cooperation with the U.S., British, and Canadian governments.

*IMF mission report excerpt.*

### 32.      The authorities’ strategy, if fully and successfully implemented, would bring

### _cr04263 - 32.      The authorities’ strategy, if fully and successfully implemented, would bring

### Growth prospects and macroeconomic outlook
- The authorities envisage that the Jamaican economy will grow by about 2½ percent in FY 2004/05, and in the region of 3–4 percent over the medium term.
- Mission view: this is a plausible growth scenario on the assumption of continued expansion in tourism and mining capacity, and growth in tourism-related services.
- Inflation would moderate further to single digits.
- The external current account deficit would narrow substantially, consistent with capacity expansion in the bauxite/alumina and tourism industries, financed mainly by FDI.
- Exports are projected to increase significantly as world demand for aluminum continues to increase.
- Investments by Spanish companies are expected to open new markets for Jamaica’s tourism industry.
- Over the period through FY 2008/09:
  - Net international reserves (NIR) would strengthen to about US$2.2 billion.
  - The public debt ratio would decline to close to 100 percent of GDP.
- The authorities’ aim is to balance the budget by FY 2005/06 and to maintain small overall surpluses thereafter, which—given current interest rate projections—would require maintaining a primary surplus of around 14 percent of GDP.

### Debt dynamics, sustainability, and vulnerabilities
- Even if the authorities’ strategy is fully and successfully implemented, public debt-to-GDP would remain elevated and constitute a major vulnerability.
- Debt sustainability analysis (DSA) indicates major implementation risks and vulnerability to shocks; debt dynamics would considerably worsen under scenarios with adverse shocks to key economic variables (Table 8).
- The debt ratio will worsen significantly in the face of interest rate and exchange rate shocks, or if baseline GDP growth rates do not materialize.
- The DSA shows an improvement in debt dynamics when all key variables are set at their historical averages—unusual here because the 10-year average for the real interest rate is negative.
- External debt sustainability analysis (Table 9) is complicated by a large foreign currency-denominated domestic public debt and lack of information on private sector external debt.
- Projected debt-creating inflows are small as the bulk of external current account deficits are expected to be financed by foreign direct investment.

### Fiscal targets and quantitative goals for FY 2004/05
- Semi-annual quantitative targets adopted for September 2004 and March 2005:
  - Change in net international reserves:
    - April 04–September 04: -US$288.6 million
    - April 04–March 05: -US$168.8 million
  - Change in the net domestic assets:
    - April 04–September 04: J$20.4 billion
    - April 04–March 05: J$16.0 billion
  - Primary budget surplus:
    - April 04–September 04: J$27.6 billion
    - April 04–March 05: J$74.2 billion
  - Overall budget deficit:
    - April 04–September 04: J$21.9 billion
    - April 04–March 05: J$22.0 billion
- Notes:
  - The changes in NIR reflect the seasonal pattern of foreign exchange flows.
  - Net domestic assets defined as the difference between the change in base money and the change in NIR. The latter will be converted into Jamaica dollars at the accounting exchange rate of J$62.40=US$1.
- Over the medium term, extra-budgetary expenditure would be broadly constant, at around 2 percent of GDP.
- Initiatives to improve financial operations of loss-making entities (such as the NWC) and a tapering off in capital outlays are envisaged to restore the overall account of the public bodies to a surplus position.

### Staff appraisal of fiscal policy and implementation risks
- The authorities prioritized reduction in the public debt-to-GDP ratio via prolonged fiscal adjustment and structural policies to promote higher growth; they rejected large upfront debt restructuring.
- Staff supports fiscal consolidation efforts but stresses prospects for debt reduction hinge on steadfast fiscal discipline and appropriately designed structural reforms.
- Staff notes even successful implementation would leave public debt ratio at high enough levels to be a major vulnerability.
- While FY 2004/05 fiscal targets appear achievable, staff projections based on existing policies point to potential shortfalls relative to medium-term targets.
- Achievement of the fiscal deficit target of 4 percent of GDP in FY 2004/05 will be helped by savings from the agreement with public sector trade unions.
- Risks to the fiscal outlook include non-recurrence of one-off revenue items (foreign grants and tax arrear reduction) and higher interest payments than currently projected.
- Government must maintain tax collection (including tax arrears) and control expenditure, particularly given potential pressures from sustained high oil prices.
- Early identification and prompt implementation of any necessary additional measures will be key.

### Policy recommendations and structural reform priorities
- Staff encourages the authorities to elaborate a comprehensive fiscal reform agenda to strengthen the budgetary outlook.
- Wage bill reduction should be underpinned by policies to rationalize government employment after the two-year wage agreement; the social safety net should be strengthened to mitigate impacts.
- Tax reform should be designed to help achieve the balanced budget target and provide for a stable ratio of tax revenue to GDP over the medium term; consider removing exemptions that narrow the consumption tax base and eliminating reduced rates and other complicating features.
- Monetary and exchange rate policy:
  - Current exchange rate level appropriately reflects market forces.
  - Authorities should make flexible use of monetary and exchange policies and minimize intervention in the foreign exchange market, guided by objectives for inflation and international reserves.
- Financial sector and regulatory priorities:
  - Introduce prudential requirements for securities dealers to cushion interest rate and liquidity risks; consider accelerating implementation.
  - Review and strengthen prudential regulation of the overall financial sector given its large exposure to public debt.
  - Ongoing preparatory work on legislation to combat money laundering and the financing of terrorism is welcome.
  - A joint IMF/World Bank Financial Sector Assessment Program (FSAP) is planned for early 2005.
- Labor market and social policies:
  - Develop options for reducing labor market rigidities, particularly high redundancy costs, to improve the business and investment environment and help job creation.
  - Support planned initiatives to improve the education system and ongoing efforts to fight crime.

### Surveillance and reporting
- Authorities requested more intensive surveillance despite having no balance of payments need.
- The Article IV report will describe and assess the authorities’ program; semi-annual interim staff reports are expected to be prepared for the information of the Board between regular annual consultations.
- The first semi-annual interim report would follow a mission scheduled to visit Jamaica in the fall.
- Mission encouraged the authorities to publish the Article IV report and interim reports.
- Staff envisages producing semi-annual interim staff reports for information of the Executive Board between Article IV consultations.

### Statistics and data dissemination
- Jamaica provides core statistics that are broadly adequate for surveillance and formally adopted the GDDS in January 2003.
- Further strengthening of the statistical system remains a priority.
- Staff encourages the authorities to commit to a plan to subscribe to the SDDS within a defined timeframe, consistent with the government’s desire to maintain access to international capital markets.

*Source: IMF staff report text provided in content unit _cr04263 - 32.*

### 47.      It is expected that the next Article IV consultation with Jamaica will be conducted on

### _cr04263 - 47.      It is expected that the next Article IV consultation with Jamaica will be conducted on

### Overview
- Jamaica is on the standard 12-month Article IV consultation cycle.
- The Executive Board concluded the 2004 Article IV consultation with Jamaica on August 2, 2004.

### Recent macroeconomic developments and projections
- Real GDP:
  - FY 2003/04: 2 percent growth (real GDP reached 2 percent in FY 2003/04).
  - Table projections: 2004/05: 2.5; 2005/06: 2.5; 2006/07: 2.8; 2007/08: 3.3; 2008/09: 3.4 (annual percentage change series under "Real GDP").
- Inflation:
  - Consumer price index (end of period): 2003/04: 16.8; 2004/05: 9.9; 2005/06: 7.0; 2006/07: 6.0; 2007/08: 6.0; 2008/09: 5.0.
  - Consumer price index (average): 2003/04: 12.9; 2004/05: 11.5; 2005/06: 7.9; 2006/07: 6.4; 2007/08: 6.0; 2008/09: 5.4.
- Interest rates:
  - 180 day BoJ CD rate (end of period): 2003/04: 16.0; 2004/05: 15.0; 2005/06: 14.0; 2006/07: 13.5; 2007/08: 13.0; 2008/09: 12.5.

### Fiscal sector: performance, projections, and key fiscal indicators
- FY 2003/04 fiscal outturn:
  - Primary fiscal surplus (excluding privatization-related receipts) increased to 11.0 percent of GDP (from 7.8 percent of GDP in FY 2002/03).
  - Budgetary revenue: 2003/04: 29.9 percent of GDP; projected 2004/05: 31.8 percent of GDP.
  - Budgetary expenditure: 2003/04: 36.9 percent of GDP; projected 2004/05: 35.2 percent of GDP.
  - Budget balance (budgetary): 2003/04: -7.0 percent of GDP; 2004/05 projection: -3.5 percent of GDP.
  - Overall fiscal balance: 2003/04: -8.9 percent of GDP; projections: 2004/05: -6.5; 2005/06: -1.8; 2006/07: -1.4; 2007/08: -1.5; 2008/09: -0.6.
  - Public debt: 2003/04: 144.8 percent of GDP; projections: 2004/05: 136.4; 2005/06: 127.3; 2006/07: 119.6; 2007/08: 112.4; 2008/09: 104.7.
- Fiscal measures and financing:
  - Revenue increased by about 2.0 percentage points of GDP in FY 2003/04 to 30.0 percent of GDP, reflecting measures including a general consumption tax increase, changes to personal income tax, taxes on interest, and an import surcharge.
  - Government obtained foreign currency financing of around US$450 million towards the end of the fiscal year.
- Table 2 detailed fiscal levels (in billions of J$):
  - Budgetary revenue and grants: 2003/04: 145.5; 2004/05: 176.6; 2005/06: 181.0; 2006/07: 195.3; 2007/08: 211.8; 2008/09: 226.2.
  - Budgetary expenditure: 2003/04: 179.6; 2004/05: 195.9; 2005/06: 191.3; 2006/07: 203.1; 2007/08: 218.5; 2008/09: 229.4.
  - Interest (budgetary): 2003/04: 62.1; 2004/05: 88.2; 2005/06: 96.2; 2006/07: 99.1; 2007/08: 99.9; 2008/09: 98.6.

### Monetary policy and financial sector
- Monetary policy conducted via open market operations guided by inflation and NIR objectives.
- Bank of Jamaica interest rate movements:
  - Following peaks in March 2003, BoJ reduced open market interest rates to the 14–17 percent range by June 2004.
- Monetary aggregates (Table 5 highlights):
  - Net international reserves (end-period, in billions of J$): 2003/04: 102.1; 2004/05: 96.5; 2005/06: 111.5; 2006/07: 136.5; 2007/08: 163.1; 2008/09: 167.0.
  - Liabilities to private sector (M3, end-period, in billions of J$): 2003/04: 190.8; 2004/05: 217.6; 2005/06: 240.7; 2006/07: 263.3; 2007/08: 288.5; 2008/09: 314.2.
  - Money supply (M2, end-period, in billions of J$): 2003/04: 124.9; 2004/05: 142.3; 2005/06: 157.5; 2006/07: 172.3; 2007/08: 188.9; 2008/09: 205.5.
- Banking sector indicators and developments:
  - Past due loans (NPLs) reduced to 3 percent (text: "the percentage of past due loans stands at 3 percent").
  - Provisioning, capital adequacy, and profitability remain above minimum international standards.
  - Deposit dollarization: FX deposits share in total deposits around 38.7 percent in projections (Table 5 memorandum: Dollarization 2008/09: 38.7).
  - Banks maintained a roughly balanced foreign exchange position.

### External sector and balance of payments
- Current account:
  - FY 2003/04 current account: -10.6 percent of GDP; projections: 2004/05: -13.2; 2005/06: -12.4; 2006/07: -11.6; 2007/08: -9.2; 2008/09: -7.0.
  - Table 7 (US$ millions): 2003/04 current account -865; 2004/05: -1,178; 2005/06: -1,166; 2006/07: -1,145; 2007/08: -960; 2008/09: -775.
- Trade and services:
  - Exports (f.o.b., US$ millions): 2003/04: 1,408; 2004/05: 1,550; 2005/06: 1,615; 2006/07: 1,595; 2007/08: 1,826; 2008/09: 1,923.
  - Imports (f.o.b., US$ millions): 2003/04: 3,282; 2004/05: 3,653; 2005/06: 3,807; 2006/07: 3,961; 2007/08: 4,034; 2008/09: 4,069.
  - Services (net, US$ millions): 2003/04: 471; 2004/05: 542; 2005/06: 607; 2006/07: 695; 2007/08: 784; 2008/09: 907.
- Reserves:
  - Net international reserves (in millions of US$): 2003/04: 1,569; 2004/05: 1,400; 2005/06: 1,550; 2006/07: 1,850; 2007/08: 2,150; 2008/09: 2,150.
- External financing and capital flows:
  - Financial account (net, US$ millions): 2003/04: 1,111; 2004/05: 1,032; 2005/06: 1,334; 2006/07: 1,463; 2007/08: 1,279; 2008/09: 795.
  - Direct investment (net, US$ millions): 2003/04: 396; 2004/05: 337; 2005/06: 766; 2006/07: 914; 2007/08: 911; 2008/09: 529.

### Public debt dynamics, stress tests, and vulnerabilities
- Public debt path (percent of GDP):
  - Actual and projections: 2001/02: 132.1; 2002/03: 146.4; 2003/04: 144.8; 2004/05: 136.4; 2005/06: 127.3; 2006/07: 119.6; 2007/08: 112.4; 2008/09: 104.7.
- Debt composition highlights (Table 3):
  - Government debt (in percent of gross public debt): 2003/04: 95.4; 2004/05: 95.8; 2005/06: 96.4; 2006/07: 96.6; 2007/08: 97.0; 2008/09: 97.1.
  - Domestic currency debt (percent of gross public debt): 2003/04: 49.7; 2004/05: 47.4; 2005/06: 48.6; 2006/07: 48.2; 2007/08: 47.8; 2008/09: 47.6.
  - Foreign currency debt or US$ linked (percent of gross public debt): 2003/04: 40.9; 2004/05: 43.0; 2005/06: 47.9; 2006/07: 46.7; 2007/08: 46.6; 2008/09: 45.3.
- Debt-stabilizing primary balance:
  - Debt-stabilizing primary balance (percent of GDP) table shows values (example): 2003/04: 10/ (footnote reference), and baseline primary balances in Table 8.
- Stress tests (selected scenarios from Table 8):
  - A1 (key variables at historical averages in 2004–08): public debt evolves from 144.8 to 100.3 by 2008/09.
  - A2 (primary balance under no policy change in 2004–08): public debt 2003/04: 144.8; 2008/09: 110.6.
  - B1 (real interest rate shock): public debt rises to 179.8 in 2004/05 and 218.4 in 2005/06 (stress scenario).
  - B5 (one time 30 percent real depreciation in 2004): public debt 2003/04: 144.8; 2004/05: 180.9; 2005/06: 168.6; 2008/09: 138.0.
- Vulnerabilities and indicators (Table 6):
  - Current account (percent of GDP): 2001/02: -9.6; 2002/03: -14.9; 2003/04: -10.6; 2004/05: -13.2.
  - Total gross public sector financing requirement (percent of GDP): 2003/04: 28.6; 2004/05: 31.0.
  - Public sector gross debt (PSGD, percent of GDP): 2001/02: 132.1; 2002/03: 146.4; 2003/04: 144.8; 2004/05: 136.4.
  - Total gross external debt (percent of GDP): around 50.7–55.6 in the early 2000s (Table 6 series).
  - Gross external financing requirement (US$ billion): 2003/04: 1.4; projections around 1.4–1.8 in neighboring years.
- Executive Directors' view:
  - Directors welcomed stabilization but emphasized the high level of public debt and associated vulnerabilities, including indexation of debt to exchange rates and short-term interest rates.
  - Directors stressed that achieving lower public debt hinges on steadfast fiscal discipline and structural reforms to promote growth.
  - Directors urged early identification and prompt implementation of additional measures if contingencies arise.

### Structural and statistical issues
- Structural reforms and priorities:
  - Directors encouraged a comprehensive fiscal reform agenda: contain the wage bill, rationalize government employment, strengthen tax administration, reduce exemptions and reduced rates that narrow consumption tax base.
  - Strengthen social safety net to protect disadvantaged during adjustment.
  - Structural reforms to improve private investment climate and external competitiveness remain necessary.
- Statistical weaknesses (Appendix II summary):
  - National accounts: significant weaknesses in level and growth estimates of GDP; updating base year underway; first quarterly national accounts published August 2002.
  - Prices: CPI weights outdated (household survey from 1984; price relatives from January 1988).
  - Production data: no recent published industrial production indices, wholesale or producer prices, import volumes, or export/import prices in IFS.
  - Government finance statistics: historical data reported back to 1991; inconsistencies prevent full GFSY publication in some series; 2002 reported in GFSM 2001 format for GFSY 2003.
  - Monetary accounts: BOJ statistics sectorized and timely; expanded coverage including credit unions; plans to include merchant banks and building societies.
  - Balance of payments: BOJ compiles monthly and annual BOP; Jamaica does not compile IIP statistics but began preparatory work with EU assistance to collect IIP data in 2004.

### Key policy recommendations and priorities (from Executive Directors and staff observations)
- Fiscal policy:
  - Continue fiscal consolidation to reduce public debt-to-GDP ratio.
  - Maintain steadfast fiscal discipline and implement structural fiscal reforms to support growth.
  - Strengthen tax administration and design tax reform to stabilize tax revenue: reduce exemptions and eliminate reduced rates that complicate the tax system.
  - Contain the wage bill and rationalize government employment; expand and protect social safety nets.
  - Identify and be ready to implement additional measures to achieve balanced budget targets if one-off revenues discontinue or interest payments exceed projections.
- Monetary and exchange rate policy:
  - Continue minimizing intervention in the foreign exchange market and make flexible use of monetary and exchange rate policies.
  - Maintain open-market operations guided by inflation and reserve objectives.
  - Consider eliminating the multiple currency practice associated with the foreign exchange surrender requirement (noted by a few Directors).
- Financial sector:
  - Review and strengthen prudential regulation given large exposure of banks to public debt.
  - Continue policies to improve bank soundness metrics and manage dollarization risks.
- Data and statistical improvements:
  - Update national accounts (including base year) and strengthen institutional capacity and legal authority for data collection.
  - Update CPI weights and reconcile price relatives and reference periods.
  - Compile and publish industrial production indices and other price and volume series.
  - Continue improvements in government finance statistics and prepare International Investment Position statistics.

*Source: IMF staff report and Public Information Notice summarizing the 2004 Article IV consultation with Jamaica (material extracted from the provided IMF document).*

### introduction of prudential requirements for securities dealers would help cushion the large

### _cr04263 - introduction of prudential requirements for securities dealers would help cushion the large

### Executive summary: Directors’ conclusions and requests
- Directors welcomed ongoing preparatory work on legislation to combat money laundering and the financing of terrorism.
- Directors welcomed the plan to undertake a FSAP in 2005.
- Directors urged authorities to develop options for reducing rigidities in the labor market, particularly high redundancy costs.
- Directors supported government initiatives to improve the education system and ongoing efforts to fight crime.
- Directors endorsed the authorities’ request for intensified surveillance of the Jamaican economy and progress in implementing their economic strategy; they looked forward to semi-annual interim reports for the Executive Board between Article IV consultations.
- Directors noted statistical information is broadly adequate for surveillance but encouraged the government to commit to a plan to subscribe to the SDDS within a defined timeframe.

### Selected economic indicators (highlights from table)
- Real GDP (annual percentage changes): -0.6; 1.1; 0.8; 1.0; 1.9; 2.0 (1998/99 to 2003/04, preliminary).
- Nominal GDP (annual percentage changes): 7.5; 8.1; 11.6; 9.5; 10.0; 16.6.
- Consumer price index (end of period): 6.0; 8.4; 6.4; 7.6; 6.2; 16.8.
- Consumer price index (average): 8.1; 6.3; 7.7; 8.0; 6.5; 12.9.
- Exchange rate (end of period, in J$/US$): 4.9; 10.6; 8.3; 4.0; 18.2; 8.1.
- End-of-period REER (percent change, depreciation +): -1.6; 4.0; 0.2; -3.9; 14.3; -4.2.
- Unemployment rate (in percent): 15.5; 15.7; 15.5; 14.8; 15.4; 12.8.
- Budgetary revenue (percent of GDP): 25.8; 29.1; 29.1; 27.0; 28.1; 29.9.
- Budgetary expenditure (percent of GDP): 37.7; 37.1; 33.6; 32.6; 35.7; 36.9.
- Of which: interest payments (percent of GDP): 17.3; 17.5; 16.0; 13.4; 14.9; 18.1.
- Budget balance (percent of GDP): -11.9; -8.1; -4.5; -5.6; -7.6; -7.0.
- Primary fiscal balance (percent of GDP): 5.4; 9.4; 11.5; 7.8; 7.3; 11.1.
- Off-budget expenditure (percent of GDP): ...; 0.5; 0.3; 0.5; 3.2; 1.9.
- Overall fiscal balance (percent of GDP): -11.9; -8.6; -4.8; -6.1; -10.8; -8.9.
- Public debt (percent of GDP): 116.5; 132.5; 132.0; 132.1; 146.4; 144.8.
- Current account balance (percent of GDP): -2.0; -3.3; -4.8; -9.6; -14.9; -10.6.
- Exports of goods, f.o.b. (percent of GDP): 20.0; 19.9; 20.5; 17.8; 15.6; 17.3.
- Imports of goods, f.o.b. (percent of GDP): 34.3; 35.3; 38.2; 37.6; 39.8; 40.3.
- Net international reserves (in millions of US$): 582; 704; 1,286; 1,942; 1,340; 1,569.
- Changes in percent of beginning of period broad money — Net foreign assets: 2.6; 12.5; 23.0; 24.3; -8.1; 9.0.
- Changes in percent of beginning of period broad money — Net domestic assets: 8.2; 6.8; 3.4; -14.3; 15.6; 11.3.
- Of which: credit to the central government (percent change): -0.2; -9.5; 26.6; 71.2; 8.2; 9.0.
- Broad money (percent change): 10.8; 19.3; 9.2; 10.0; 7.5; 20.2.
- Interest rate (180 day BoJ CD rate, end of period, in percent per annum): 22.0; 18.6; 16.9; 13.8; 33.5; 16.0.
- Velocity (ratio of GDP to broad money): 2.7; 2.4; 2.4; 2.6; 2.7; 2.6.
- Memorandum: Nominal GDP (in billions of Jamaica dollars): 287.4; 310.8; 346.8; 379.8; 417.7; 486.9.
- Memorandum: Exchange rate (end of period, J$/US$): 38.1; 42.2; 45.7; 47.6; 56.2; 60.8.

### Statement by Ian E. Bennett — Key points (summary)
- The economy has stabilized following a challenging period.
- Important challenges remain: reducing fiscal imbalances over the medium term and improving debt dynamics.
- Authorities have a medium-term program to eliminate the fiscal deficit by FY 2005/06 and gradually reduce the debt.
- Recent developments have lent credibility to the monetary policy framework and renewed confidence in the J$.
- Continuation of structural reform in the financial sector, labor market, and education system is key to sustaining growth.
- Authorities seek closer dialogue with the Fund through more frequent and intensified surveillance.

### Recent economic developments and outlook
- Early 2003: wider-than-projected fiscal deficits and external market developments led to use of NIR to meet maturing debt; J$ depreciated to J$70 to US$1 before stabilizing at about J$60 to US$1 after policy interventions.
- Monetary policy interventions included a hike in interest rates, an indexed bond offer, and moral suasion.
- Sectoral rebounds in agriculture, mining, and tourism:
  - Agriculture growth: 5.7 percent in 2003.
  - Mining: higher-than-projected alumina prices and near full capacity.
  - Tourism: visitor arrivals surpassed pre-9/11 levels and new highs in long-term visitor, cruise-ship passenger and total visitor expenditure categories.
- Overall real growth: 2.0 percent in FY 2003/04.
- Planned investments supporting medium-term outlook:
  - 5000 new hotel rooms over five years through investment of nearly US$600m.
  - Around US$700m investment in new capacity in the bauxite/alumina sector.
- Complementary infrastructure development and implementation of structural and fiscal reforms underpin the economic program.

### Fiscal policy and debt strategy
- Authorities acknowledge fiscal deficit is higher than desirable and that debt needs reduction.
- Program aim: eliminate the deficit by FY 2005/06 and gradually reduce debt through creation of small fiscal surpluses.
- Required fiscal effort includes achieving a primary surplus in the range of 14 percent of GDP.
- Revenue measures:
  - Sustained tax effort, tax system reform to widen the base and increase efficiency, stepped-up arrears collection, and anticipated grants.
  - Total revenue inflows expected to average around 32 percent of GDP (up from 28.1 percent in FY 2002/03).
  - Comprehensive review of the tax system slated for completion in the fall of 2004.
- Expenditure measures:
  - Tighter management and halting the rate of growth of the wage bill.
  - Memorandum of understanding signed February 2004 with major trade unions: public sector salary increases to be kept below inflation and public sector employment capped through 2006.
- Staff projects a small overall deficit in FY 2005/06 compared to authorities’ balanced budget target, based on higher interest projections and conservative revenue estimates; authorities report preliminary revenue running ahead of budget.
- Public sector debt level: 142 percent of GDP (current level cited by authorities).
- Debt reduction target: around 100 percent of GDP by 2008/09.

### Monetary and exchange rate policy
- Policy objective: maintain a credible and stable market while permitting flexibility, consistent with an emerging market constrained by high debt.
- Turmoil in early 2003 stabilized after Bank of Jamaica intervention; renewed confidence at approximately J$61 to US$1.
- Authorities accept staff recommendation for a flexible and balanced use of monetary and exchange policy to support inflation and NIR objectives, while retaining flexibility.
- Authorities expressed caution about some conclusions in the Selected Issues Paper on Monetary Exchange Rate Policy Mix and note differences of interpretation and data revisions; they are working with staff to incorporate suggested changes.

### Structural reforms and social issues
- Continued structural reform is key across financial sector, labor market, education system, and domestic security.
- Financial sector:
  - Commitment to strengthen regulatory framework and institutional structure.
  - Financial Services Commission at an advanced stage of preparing prudential requirements for securities dealers.
  - Jamaica has requested participation in the joint IMF and World Bank Financial Sector Assessment Program in 2005.
- Budget FY 2004/05 priorities include:
  - Legislation to provide legal status to the Financial Investigations Division (responsible for economic and financial crimes, including fraud, revenue breaches and money laundering).
  - Executing a public education program on pension reform and embarking on phase two of pension reform (including mandatory preservation and portability of pension rights and voluntary indexation of pensions).
- Labor market reforms: ongoing efforts to reduce rigidities and improve the business and investment environment; public sector reform aimed at modern public administration.
- Education: task force established February 2004 to present an action plan for transformation toward a world-class education system.
- Crime reduction is prioritized as critical to economic growth.

### Intensified surveillance request and implementation
- Authorities requested intensified surveillance to monitor implementation of their economic program and to signal progress to creditors and the international community.
- Intensified surveillance envisaged to include frank staff assessments and production of semi-annual reports on progress in meeting quantitative targets.
- This Article IV consultation served as the first part of the intensified surveillance exercise; authorities look forward to the first follow-up mission later in the year.

*Source: _cr04263 - introduction of prudential requirements for securities dealers would help cushion the large (Statement and IMF staff report excerpts).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04263.pdf_