## _cr06158

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### Executive summary — background and perspective
- Public debt: about 135 percent of GDP; has averaged between 130–145 percent of GDP since 1997.
- Banking crisis legacy: government assumed financial sector liabilities amounting to about 40 percent of GDP following the 1996 banking crisis.
- Recent fiscal stance: primary surpluses of 11–12 percent of GDP were generated over the past two fiscal years to help meet debt service, requiring high taxation and squeezing non-interest (particularly capital) expenditures.
- Debt composition and risks: mix of local currency and dollar-denominated instruments and significant use of variable rate instruments makes debt sensitive to exchange rate and interest rate changes.
- Seignorage and central bank losses: seignorage averaged about 1 percent of GDP per year; central bank losses in real terms have exceeded base money growth, increasing debt pressures as these losses are taken over by the government.
- Policy framework: medium-term socio-economic policy framework adopted early 2004 aimed to reduce public debt from over 140 percent of GDP in FY 2003/04 to around 100 percent by FY 2008/09; centerpiece was a balanced budget objective for the current fiscal year.

### Recent developments
- Political: Ms. Portia Simpson Miller won the PNP presidency on February 25, 2006; parliamentary elections due by October 2007.
- Shocks and output:
  - Real GDP contracted sharply in late 2004 after Hurricane Ivan; recovery dampened by drought into early 2005 and hurricanes in July–October 2005.
  - Aggregate demand weak: public consumption fell; private demand anemic; base money and broad money declined significantly in 2005 in real terms.
- Inflation and external:
  - Annual headline inflation: 19 percent in September 2005; 13 percent at end-2005. Authorities’ target for FY 2005/06: 9–10 percent.
  - Inflation drivers: agriculture weight in CPI and full domestic pass-through of international oil prices.
  - NIR: increased rapidly through June 2005, then reversed in Q3 2005 as capital outflows led the BOJ to step up interventions.
- Exchange rate and capital flows:
  - J$ depreciated briskly during June–November 2005; real effective appreciation near 10 percent during 2005 due to high inflation.
  - Government tapped global markets at spreads of 420–530 basis points; private inflows strengthened in early 2005.
- Fiscal performance highlights (as presented in source table):
  - FY 2004/05 target budget balance: -3.5 (percent of GDP); actual: -4.9; deviation: -1.5.
  - FY 2005/06 target budget balance: -2.4; nine months actual: -4.5; deviation: -2.1.
  - Revenue and grants: FY 2004/05 target 31.8; actual 30.8; deviation -1.0. FY 2005/06 target 22.6; nine months actual 19.7; deviation -2.8.
  - Tax revenue: FY 2004/05 target 28.8; actual 27.5; deviation -1.4. FY 2005/06 target 20.0; nine months actual 17.6; deviation -2.4.
  - Non-interest expenditure: FY 2004/05 target 17.9; actual 19.1; deviation 1.1. FY 2005/06 target 14.4; nine months actual 13.9; deviation -0.6.
  - Interest: FY 2004/05 target 17.3; actual 16.7; deviation -0.6. FY 2005/06 target 10.6; nine months actual 10.4; deviation -0.2.
  - GDP figures in table: FY 2004/05 GDP 556.2; FY 2005/06 projected budget GDP (J$642.9 bil.); revised projection used for actual J$646.0.
- Financing: government financed gaps successfully, including several Eurobond placements.

### Monetary policy, base money targeting, and outlook
- BOJ actions and outcomes:
  - BOJ aggressively cut interest rates through May 2005; halted rate cuts as inflation accelerated.
  - Strong capital inflows led to rapid reserve increases in H1 2005; reserve build-up was fully sterilized by sales of central bank bills; base money contracted sharply in nominal terms.
  - Jamaican-U.S. interest rate differential narrowed due to U.S. tightening (about 330 basis points since end-2004 noted elsewhere).
- Contribution to base money growth (year-on-year):
  - 2004 Q4 / 2005 Q4 — NIR: 132.4 / 35.9; NDA: -118.1 / -28.9; Net claims on public sector: 33.0 / 18.8; OMO: -133.0 / -63.6; Others (including credit to banks): -18.1 / 15.9; Base money: 14.3 / 7.0.
- Outlook and staff baseline projections:
  - Real GDP growth: 2½ percent expected in FY 2005/06 (based on current trends); government budget assumption was 3¾ percent.
  - Medium-term growth: projected to pick up to 2¾–3¼ percent per year as projects come on stream.
  - If government limits budget deficit to about 1½ percent this year and about ½ percent in FY 2006/07, debt ratio should decline to 100 percent of GDP by FY 2009/10 (one year later than originally envisaged).
- Risks and sensitivities:
  - Shocks lowering growth by 2 percentage points per year relative to baseline add 10 percentage points to the debt-to-GDP ratio by end of projection period.
  - Weaker fiscal effort (by 1½ percent of GDP per year) increases debt-to-GDP by 6¼ percentage points by end of projection period.
  - Gross annual financing needs estimated at 20–25 percent of GDP (over half of GDP if central bank bills are also included).
  - Timing sensitivity: higher interest rates (by 150 basis points) throughout medium term—offset by fiscal measures amounting to 0.4 percent of GDP if taken now; waiting until the end requires measures amounting to 1.8 percent of GDP.

### Fiscal assessment, performance, and recommended measures
- Authorities’ objectives:
  - Committed to limiting temporary deficits and regaining balanced budgets under the 2004 framework; aim to achieve balanced budgets by FY 2007/08.
  - Authorities expected interim deficits: 2–2½ percent of GDP for FY 2005/06 and about 1 percent of GDP in FY 2006/07.
  - Mission view: deficit of about 1½ percent of GDP for FY 2005/06, declining to ½ percent of GDP in FY 2006/07, as more appropriate.
- Revenue issues:
  - Shortfalls reflected policy slippages, declining tax compliance, delayed revenue measures, and real disposable income declines for public sector employees.
  - Effective tax rates declined; production and consumption taxes failed to keep up with inflation despite a 1.5 percentage point statutory increase in the General Consumption Tax.
  - Higher tax rates may have incentivized avoidance and evasion and shifted consumption to nontaxed items.
- Recommended fiscal measures:
  - Comprehensive review of entire expenditure envelope to identify savings.
  - Forceful implementation of arrears-collection program and specific audits; review assessment and return filing procedures.
  - Additional revenue measures likely needed in FY 2006/07, contingent on wage bill outcomes.
  - Expand tax net to include more of the large informal sector through presumptive taxation; introduce a capital gains tax; expand special consumption tax on motor vehicles and adjust specific rates eroded by inflation.
  - Rationalize external tariff regime to simplify structure and raise revenues.
  - Continue comprehensive tax reform to remove exemptions and preferences, unify rates, and increase transparency.
- Concessional external funding use:
  - PetroCaribe concessional loans should not loosen fiscal effort; recommended using concessional financing to offset more expensive borrowing and ensure related activities are reflected in government accounts.
- Expenditure and public sector reforms:
  - Increase public sector productivity, identify and shed excess public employment, and continue restructuring/reform of public enterprises, including closures where necessary.

### Monetary and exchange-rate guidance and interactions with fiscal policy
- Mission recommendation on interest rates:
  - Prefer preemptive and gradual increases to confront capital account pressures to avoid abrupt reactive hikes; gradual tightening likely less cumulative and more supportive of growth.
- Authorities’ view:
  - BOJ considered recent portfolio shifts temporary and saw no immediate case for tightening, while remaining ready to adjust rates if warranted.
- Interaction of fiscal and monetary policy:
  - Fiscal policy is driving macro developments including long-term inflation; inflation averaged 9½ percent annually since 1997.
  - Empirical links imply monetary tightening alone has limited impact on long-term inflation without debt reduction.
  - Sterilization undertaken with short-term central bank bills: outstanding stock around 25 percent of GDP with average maturity of four months.
  - External reserves: about US$2 billion or over four months of imports.
- Exchange rate guidance:
  - Greater exchange rate flexibility recommended to absorb shocks and maintain competitiveness.
  - Contain capital outflow pressures mainly through interest rate policy given debt sensitivity to sharp exchange rate swings.
  - Longer-term nominal rate movements should accommodate inflation differentials vis-à-vis trading partners.

### Debt sustainability, projections, and stress tests
- Baseline public sector debt trajectory (public debt in percent of GDP):
  - 2000/01: 132.0; 2001/02: 135.1; 2002/03: 148.0; 2003/04: 143.7; 2004/05: 137.9; 2005/06: 130.3; 2006/07: 122.5; 2007/08: 115.5; 2008/09: 107.8; 2009/10: 99.0; 2010/11: 89.6.
- Change in the debt/GDP ratio (selected years): -4.3; -5.8; -7.6; -7.8; -7.0; -7.7; -8.8 (Table 3 sequence).
- Debt-stabilizing primary balance (mem item): 2.8.
- Gross financing need (Table 9 memo, percent of GDP and US$):
  - Percent of GDP sequence: 23.2; 30.1; 31.0; 29.7; 31.1; 25.7; 23.3; 20.2; 25.1; 22.4; 19.0.
  - In billions of US$: 1.8; 2.4; 2.4; 2.5; 2.8; 2.6; 2.5; 2.3; 3.0; 2.9; 2.6.
- Identified debt-creating flows and primary deficit (selected):
  - Primary deficit (line 4, percent of GDP): -11.5; -7.4; -5.4; -8.1; -9.6; -9.6; -10.4; -11.2; -11.1; -11.6; -11.8.
  - Automatic debt dynamics contribution (line 7): 6.5; 1.2; 16.3; 1.1; 2.5; -0.2; 3.0; 4.5; 3.7; 3.2; 3.1.
- Stress tests:
  - Tests include shocks to growth, interest rates, primary balance, a one-time 30 percent real depreciation in 2006, and contingent liabilities (10 percent of GDP shock in 2006). Combined shocks include permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance.

### Growth strategy and structural policy priorities
- Growth sensitivity: medium-term debt-to-GDP ratio more sensitive to growth variations than to moderate interest rate changes.
- Ongoing high levels of investment indicate high growth potential; policies must ensure investments translate into productivity gains.
- Key structural priorities:
  - Continue tax reform.
  - Improve access to credit.
  - Reduce crime.
  - Strengthen institutional capacity and financial system resilience.
- Financial sector recommendations:
  - Further develop crisis management capacity and consolidated supervision.
  - Strengthen prudential requirements for securities dealers; clarify legal framework for repos.
  - Clarify distinctions among institution types and risk-reward of instruments to the public.
- Data and statistics:
  - Jamaica’s statistics broadly adequate for surveillance; staff encourages upgrades toward SDDS subscription and regular financial surveys including securities dealers.

### Selected economic indicators — highlights (from Table 1 and related tables)
- Real GDP (annual percentage changes): 1.9 (2003/04); 0.4 (2004/05); 3.7 (2005/06); 2.4 (2005/06 Rev.); 2.8 (2006/07 proj.); 3.1 (2007/08 proj.); 3.1 (2008/09 proj.); 3.3 (2009/10 proj.).
- CPI (end of period): 16.8; 13.2; 9.5; 13.0 (Rev.); 10.3; 9.3; 8.0; 8.0.
- Net international reserves (US$ millions): 1,569; 1,902; 2,000; 2,000 (Rev.); 2,000; 2,050; 2,100; 2,150.
- Broad money (percent changes of beginning-of-period broad money): 20.2; 10.3; 15.4; 9.4 (Rev.); 11.1; 14.5; 14.5; 16.3.
- Public debt (percent of GDP): 143.7 (2003/04); 137.9 (2004/05); 130.3 (2005/06 Rev.); 122.5 (2006/07 proj.); 115.5 (2007/08 proj.); 107.8 (2008/09 proj.); 99.0 (2009/10 proj.).
- Government debt (percent of GDP): 136.6; 130.6; 120.6; 113.3; 106.7; 99.5; 91.2.
- Domestic debt (percent of GDP): 84.3; 80.7; 74.6; 69.3; 64.4; 59.1; 53.0.
- External debt (percent of GDP): 52.3; 49.9; 46.0; 44.0; 42.3; 40.4; 38.2.
- Current account (US$ millions): -562; -555; -901 (2005/06 proj.); -852 (2005/06 Rev.); -1,405; -1,254; -1,085; -551.
- Trade balance (US$ millions): -1,832; -2,112; -2,293; -2,553 (Rev.); -3,075; -3,058; -3,013; -2,692.
- Tourism receipts (US$ millions): 1,401; 1,492; 1,612; 1,645 (Rev.); 1,813; 2,002; 2,197; 2,348.
- Bank of Jamaica base money (end-of-period stocks, J$ billions): 32; 36; 42; 48; 46.
- Gross financing need (external, percent of GDP examples): 9.3; 13.7; 24.8; 10.3; 11.5; 10.2; 15.8; 15.8; 14.3; 8.7 (Table 10 sequence).

### Staff appraisal — priority actions (summary)
- Sustained fiscal consolidation to restore a sustainable fiscal path and eliminate temporary deficits sooner if conditions allow.
- Maintain vigilance on monetary and capital account pressures; consider preemptive, gradual tightening where appropriate.
- Advance structural reforms: comprehensive tax reform, financial sector strengthening, public sector productivity improvements, and public enterprise restructuring.
- Spell out contingent fiscal measures in advance to address potential shocks given limited room for maneuver and large gross financing needs.

*Source: Executive Summary (IMF Staff Report).*

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

### Executive Summary

### Background and Perspective
- Jamaica is a large Caribbean economy with a high and persistent public debt burden: public debt currently stands at about 135 percent of GDP and has remained high throughout the past 15 years.
- Historical drivers and consequences:
  - The government assumed financial sector liabilities amounting to about 40 percent of GDP following the 1996 banking crisis.
  - Since 1997 debt has averaged between 130–145 percent of GDP, rendering the economy vulnerable to swings in market sentiment and contributing to high and volatile inflation and low economic growth.
- Fiscal and monetary constraints:
  - Primary surpluses of 11–12 percent of GDP were generated over the past two fiscal years to help meet debt service, requiring high taxation and severely squeezing non-interest expenditures, particularly capital expenditures.
  - The composition of debt (mix of local currency and dollar-denominated instruments and significant use of variable rate instruments) makes the debt sensitive to exchange rate and interest rate changes.
  - Seignorage has averaged about 1 percent of GDP per year; central bank losses in real terms have exceeded base money growth, leading to upward pressures on debt because central bank losses are taken over by the government.
- Policy stance and objectives:
  - Authorities adopted a medium-term socio-economic policy framework in early 2004 aimed at reducing public debt from over 140 percent of GDP in FY 2003/04 to around 100 percent by FY 2008/09. A centerpiece was a balanced budget objective for the current fiscal year.
  - Fund advice has emphasized greater exchange rate flexibility and debt reduction; recent authority policies have been largely consistent with Fund advice.

### Recent Developments
- Political developments:
  - Ms. Portia Simpson Miller won the PNP presidency on February 25, 2006 and is expected to be appointed Prime Minister. Parliamentary elections are due by October 2007. The opposition Jamaica Labour Party underwent leadership change in 2005.
- Shocks and output:
  - Real GDP contracted sharply in late 2004 following Hurricane Ivan. Recovery was dampened by a drought into early 2005 and an active hurricane season in July–October 2005 that caused further crop loss, infrastructure damage, and a sharp drop in tourist arrivals.
  - Aggregate demand has remained weak: public consumption has fallen, private demand has been anemic, and demand for money declined—both base money and broad money declined significantly in 2005 in real terms.
- Inflation and external sector:
  - Annual headline inflation reached a high of 19 percent in September 2005, before falling back to 13 percent at end-2005. The authorities’ target for FY 2005/06 was 9–10 percent.
  - Agriculture (heavy weight in the consumer price basket) and full domestic pass-through of international oil prices contributed to the inflation surge.
  - The external current account balance weakened as exports fell (crop damage) and imports rose (higher oil prices). Net international reserves (NIR) increased rapidly through June 2005 but reversed in Q3 2005 as capital outflows led the Bank of Jamaica (BOJ) to step up market interventions.
- Exchange rate and capital flows:
  - After a period of relative stability, the Jamaican dollar depreciated briskly during June–November 2005; depreciation pace moderated thereafter. In real effective terms, due to high inflation, the Jamaican dollar appreciated by nearly 10 percent during 2005.
  - The government successfully tapped global financial markets to finance the budget at spreads of 420–530 basis points; private inflows also strengthened in early 2005.
- Fiscal performance:
  - Fiscal targets have been missed. Hurricane Ivan contributed to failure to achieve revenue and expenditure objectives in FY 2004/05, and revenue shortfalls widened in FY 2005/06.
  - The authorities’ balanced budget objective for FY 2005/06 is out of reach given the revenue shortfalls, although expenditures were kept under tight restraint and capital spending was squeezed.
  - Fiscal table highlights (all values as presented in source table):
    - FY 2004/05 target budget balance: -3.5 (percent of GDP); actual: -4.9; deviation: -1.5.
    - FY 2005/06 target budget balance: -2.4; nine months actual: -4.5; deviation: -2.1.
    - Revenue and grants: FY 2004/05 target 31.8; actual 30.8; deviation -1.0. FY 2005/06 target 22.6; nine months actual 19.7; deviation -2.8.
    - Tax revenue: FY 2004/05 target 28.8; actual 27.5; deviation -1.4. FY 2005/06 target 20.0; nine months actual 17.6; deviation -2.4.
    - Non-interest expenditure: FY 2004/05 target 17.9; actual 19.1; deviation 1.1. FY 2005/06 target 14.4; nine months actual 13.9; deviation -0.6.
    - Interest: FY 2004/05 target 17.3; actual 16.7; deviation -0.6. FY 2005/06 target 10.6; nine months actual 10.4; deviation -0.2.
    - GDP figures used in table: FY 2004/05 GDP 556.2; FY 2005/06 projected budget GDP (J$642.9 bil.); revised projection used for actual J$646.0.
  - Financing: Despite shortfalls, the government financed the gap successfully, including through several Eurobond placements.

### Outlook and Policy Discussions
- Fiscal policy:
  - Authorities remain determined to limit temporary fiscal deficits and regain a balanced budget over the medium term under the 2004 medium-term framework.
  - Fund staff suggested eliminating deficits sooner if the economy improves and urged continued fiscal consolidation to lower the debt ratio toward the targeted around 100 percent of GDP by FY 2008/09.
- Monetary and exchange rate policy:
  - With the interest rate differential vis-à-vis the United States having narrowed, staff advised preemptive action to confront pressures in the capital account.
  - The Fund has advocated greater exchange rate flexibility to absorb shocks and maintain competitiveness; the authorities have allowed greater movement in recent years.
- Structural policies to enhance growth and reduce vulnerabilities:
  - Staff encouraged continuation of structural reforms, including taxation reform and financial sector strengthening.
  - The authorities noted the FSAP’s favorable assessment of steps taken so far and their intention to continue with reforms.

### Staff Appraisal (summary of main points)
- The combination of a crushing public debt (around 135 percent of GDP), vulnerability to shocks, and limited policy flexibility underscores the importance of sustained fiscal consolidation and structural reforms.
- Priority policy actions include:
  - Restoring a sustainable fiscal path and eliminating temporary deficits sooner if conditions allow.
  - Maintaining vigilance on monetary and capital account pressures and using preemptive measures where appropriate.
  - Advancing structural reforms—tax reform and financial sector strengthening—to support growth and reduce vulnerabilities.

*Source: Executive Summary (IMF Staff Report).*

### 8.      Monetary policy has been geared at containing inflation by targeting base money

### 8.      Monetary policy has been geared at containing inflation by targeting base money

### Monetary policy actions and outcomes
- The BOJ aggressively cut interest rates through May 2005; subsequently halted rate cuts as inflation accelerated.
- Strong capital inflows led to a rapid increase in foreign reserves during the first half of the year.
- Reserve build-up was fully sterilized by sales of central bank bills; base money contracted sharply in nominal terms during the period.
- The Jamaican-U.S. interest rate differential has continued to narrow due to successive rounds of monetary tightening in the United States.
- Authorities considered the base money management framework successful in reducing inflation since 1996 and ascribed recent developments largely to exogenous factors.

### Contribution to Base Money Growth (year-on-year)
- 2004 Q4 / 2005 Q4
  - NIR 132.4 / 35.9
  - NDA -118.1 / -28.9
  - Of which:
    - Net claims on public sector 33.0 / 18.8
    - OMO -133.0 / -63.6
    - Others (including credit to banks) -18.1 / 15.9
  - Base money 14.3 / 7.0
- Source: Jamaican authorities.

### Outlook for FY 2005/06 and the medium term
- Context and objectives:
  - Government’s medium-term socio-economic policy framework (adopted early 2004) aims to reduce public debt from over 140 percent of GDP in FY 2003/04 to around 100 percent by FY 2008/09.
  - Achievement of targets predicated on: (i) absence of shocks to production; (ii) increase in confidence and sustained fall in interest rates; (iii) containment of the wage bill in nominal terms; and (iv) maintenance of a high primary surplus.
- Staff baseline projections:
  - Real GDP growth of 2½ percent is expected in FY 2005/06 (based on current trends).
  - The budget underpinned growth assumption was 3¾ percent.
  - Growth projected to pick up to 2¾–3¼ percent per year over the medium term as projects (especially hotels and bauxite) come on stream.
  - If government limits budget deficit to about 1½ percent this year and about ½ percent in FY 2006/07, debt ratio should decline to 100 percent of GDP by FY 2009/10 (a year later than originally envisaged).
- Risks and sensitivities:
  - Shocks lowering growth by 2 percentage points per year relative to baseline will add 10 percentage points to the debt-to-GDP ratio by the end of the projection period.
  - A weaker fiscal effort (by 1½ percent of GDP per year) will increase the debt-to-GDP ratio by 6¼ percentage points by the end of the projection period.
  - Sustained high rate hikes could render the 100 percent debt-to-GDP objective out of reach by FY 2009/10.
  - Gross annual financing needs estimated at 20–25 percent of GDP (over half of GDP if central bank bills are also included).
- Timing of fiscal measures:
  - Higher interest rates (by 150 basis points) throughout the medium term: offset by fiscal measures amounting to 0.4 percent of GDP if taken now; waiting until the end requires measures amounting to 1.8 percent of GDP.
  - Similar timing sensitivity applies to shocks affecting the primary balance.
- Policy implication:
  - Important for the government to spell out contingent measures in advance if faced with further shocks.

### Fiscal policy assessment and recommendations
- Authorities’ stance and near-term fiscal path:
  - Authorities remain committed to achieving a balanced budget over the medium term and to bringing about a steady decline in the debt ratio; aim to achieve balanced budgets by FY 2007/08.
  - Interim deficits likely: in the range of 2–2½ percent of GDP for FY 2005/06 and about 1 percent of GDP in FY 2006/07 (authorities’ expectation).
  - Mission viewed deficit of about 1½ percent of GDP for FY 2005/06, declining to ½ percent of GDP in FY 2006/07, as more appropriate.
- Revenue performance and drivers:
  - Revenue shortfall reflected policy slippages, declining tax compliance, delayed implementation of revenue measures, and real disposable income declines for public sector employees.
  - Effective rates of taxation declined; production and consumption taxes failed to keep up with inflation despite a 1.5 percentage point increase in the statutory rate for the General Consumption Tax.
  - Increase in tax rates may have incentivized avoidance and evasion and switched consumption to nontaxed items.
- Recommended fiscal measures:
  - Comprehensive review of the entire expenditure envelope to identify savings.
  - Forceful implementation of arrears-collection program and specific audits to improve compliance; review assessment and return filing procedures.
  - Additional revenue measures likely needed in FY 2006/07, contingent on wage bill outcomes.
  - Expand the tax net to include more of the large informal sector through:
    - Presumptive forms of taxation;
    - Introduction of a capital gains tax;
    - Expansion of the special consumption tax on motor vehicles and adjustments to other specific rates eroded by inflation.
  - Rationalize the external tariff regime to simplify structure and raise revenues.
  - Continue comprehensive tax reform to remove exemptions and preferences, unify rates, level the playing field, and increase transparency.
- Use of concessional external funding:
  - PetroCaribe concessional loans should not loosen the fiscal effort; mission recommended using concessional financing to offset more expensive borrowing and ensure related activities are reflected in government accounts.
- Structural reforms:
  - Increase public sector productivity and reform public enterprises.
  - Identify and shed excess public employment to create savings for wage structure rationalization.
  - Continue restructuring and reform of public enterprises, including closures as necessary to avoid adding to the debt burden.

### Monetary and exchange rate policy guidance
- Policy challenges:
  - Recent shocks and global changes made monetary policy difficult given fiscal dominance and growth concerns.
  - Policy geared at containing monetary impulses to inflation while seeking a sustainable reduction in interest rates consistent with market expectations.
- Mission recommendation on interest rates:
  - Preference for preemptively and gradually increasing interest rates to confront pressures in the capital account to avoid abrupt, large and sustained reactive rate hikes.
  - Gradual pre-emptive tightening likely to be of less cumulative magnitude, easier to unwind, and more supportive of growth over the longer run than reactive hikes.
  - Gradualism would allow domestic financial entities time to adjust portfolios and reduce liquidity and interest rate risk exposure.
- Authorities’ view:
  - BOJ believed recent portfolio shifts were temporary (reflecting inflation concerns and seasonally lower foreign exchange earnings, exacerbated by hurricanes) and that a case for tightening was not yet made.
  - Noted sharp declines in monthly inflation and early data pointing to a stronger-than-anticipated tourist season.
  - BOJ remains ready to adjust rates if warranted and emphasized policy flexibility.
- Interaction of fiscal and monetary policy:
  - Mission reinforced that fiscal policy is the driving force behind macro developments, including long-term inflation.
  - Inflation averaged 9½ percent annually since 1997.
  - Empirical link between inflation and debt suggests:
    - (i) Monetary tightening likely to have only limited impact on long-term inflation if not accompanied by debt reduction;
    - (ii) Sustained sterilized purchases of foreign exchange may be ineffective in containing inflation because attendant debt accumulation would eventually weaken or offset the sterilization impact.
  - Sterilization undertaken with short-term central bank bills, outstanding stock currently stands at around 25 percent of GDP with average maturity of four months.
  - External reserves currently stood at about US$2 billion or over four months of imports.
- Exchange rate guidance:
  - Over the longer term, exchange rate flexibility will continue to be required.
  - Mission recommended containing pressures for capital outflows mainly through interest rate policy, given sensitivity of debt dynamics to sharp swings in the exchange rate.
  - Longer-term movements of the exchange rate should reflect fundamental developments in the real sector.
  - External competitiveness (real effective exchange rate) has eroded recently due to high inflation relative to trading partners; longer-term nominal rate movements should accommodate inflation differentials vis-à-vis trading partners.

*Source: Jamaican authorities; and Fund staff estimates.*

### Box 1. Influence of Public Debt on Inflation

### Box 1. Influence of Public Debt on Inflation

### Channels linking public debt and inflation
- Inflation is affected not only by current and past money supply but also expectations about future fiscal policy, which affects future income or perceptions of current wealth.
- One channel: the public’s expectation of future monetization of public debt. Changes in such expectations affect current money demand and hence the current price level.
- Another channel: the wealth effect of holding government debt—aggregate demand would increase and thereby affect the price level if the public considers its holdings of government debt as real wealth.
- Notes and references:
  - Sargent, T. J., and N. Wallace (1981), “Some Unpleasant Monetary Arithmetic,” Quarterly Review, Fall, Federal Reserve Bank of Minneapolis.
  - Often called the fiscal theory of the price level.

### Cross-country empirical evidence
- Sample and scope:
  - Empirical analysis covers 71 country experiences for up to 43 years (see accompanying Selected Issues paper).
- Key findings:
  - Increases in public debt are strongly and significantly associated with higher inflation in developing countries, after controlling for changes in money supply, exchange rates, and output as well as output gap.
  - The debt–inflation relationship is weak in inflexible exchange rate regimes and does not hold in major advanced economies.
  - Public debt growth is more inflationary in high debt countries than in low debt countries.
    - On average, a 10 percentage point higher debt-to-GDP ratio is associated with a 1 percentage point higher elasticity of inflation to debt growth.
- Empirical illustration (Jamaica):
  - Jamaica: Impulse Response of Inflation to Money and Debt is based on a one-year lag VAR, covering annual data for 1980-2004.
  - Chart elements referenced:
    - Correlations Between Inflation (t) and Debt Growth (t-1)
    - Debt-GDP Ratios (averages within sample periods)
    - Impulse response horizon: "The number of years after a one percent increase in reserve money and debt"
    - Variables: Debt; Reserve money; Percentage changes in CPI

### Implications for policy and analysis
- Interpretation:
  - Expectations about the future fiscal stance and perceived wealth effects from government debt can influence current inflation through money demand and aggregate demand channels.
  - The inflationary impact of public debt is context-dependent—stronger in developing and high-debt countries and attenuated under inflexible exchange rate regimes and in major advanced economies.
- Empirical considerations:
  - Analyses should control for money supply, exchange rates, output, and output gap when assessing debt–inflation links.
  - Heterogeneity across countries (debt levels, exchange rate regimes, advanced vs developing status) is crucial to understanding the magnitude and significance of the relationship.

*Source: _cr06158 - Box 1. Influence of Public Debt on Inflation*

### 40.      Ensuring robust economic growth is crucial to the authorities’ macroeconomic

### 40.      Ensuring robust economic growth is crucial to the authorities’ macroeconomic

### Growth and debt dynamics
- Ensuring robust economic growth is crucial to the authorities’ macroeconomic strategy.
- The medium-term debt-to-GDP ratio is more sensitive to historical variations in growth projections than it is to moderate changes in interest rates.
- Jamaica is exposed to adverse natural events and changes in financial market sentiments.
- Given very limited room in the debt reduction strategy to accommodate growth variations and risks, policies to foster growth and further reduce vulnerabilities must remain high priority.
- Ongoing high levels of investment indicate high growth potential, but policies must remain strong for these investments to translate into greater productivity and efficiency.

### Policy recommendations to boost growth and reduce vulnerabilities
- Continue with tax reform.
- Improve access to credit.
- Reduce crime.
- Further strengthen institutional capacity to withstand adverse changes in global conditions and sentiments.

### Financial system resilience and statistics
- Authorities are encouraged to continue to strengthen the resilience of the financial system and upgrade their statistical systems.
- The FSAP has identified a number of areas to follow up on progress made to-date.
- Specific supervisory and crisis-preparedness actions advised:
  - Further develop crisis management capacity.
  - Improve consolidated supervision.
  - Enhance measures to strengthen prudential requirements for securities dealers.
  - Continue to clarify the legal framework for repos.
  - Clarify to the public distinctions among different types of institutions and the relative risk-reward mix of diverse financial instruments.
- On data and standards:
  - Jamaica’s statistics are broadly adequate for surveillance.
  - Staff encourages continuing to upgrade statistical systems toward eventual subscription to the SDDS.
  - Authorities could start regularly producing financial surveys including securities dealers.

### Risks, time horizon, and implementation imperative
- The next two to three years will be critical for the authorities to secure rising and sustainable living standards for Jamaica.
- Interlinkages exist between high debt, low growth and high inflation.
- Resolute implementation of ambitious fiscal policies should, barring unexpected developments, eventually lead to a virtuous cycle of improving living standards, low inflation and reduced debt.
- Repeated or sustained deviations from the narrowly feasible path risk an unraveling of the strategy, especially given the large gross financing needs.
- The room for maneuverability remains limited; commitments to policies are encouragingly strong.

*Source: _cr06158 - 40.*

### 43.      It is proposed that the next Article IV consultation be held on the standard 12-

### _cr06158 - 43.      It is proposed that the next Article IV consultation be held on the standard 12-

### Article IV timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Selected economic indicators (highlights from Table 1)
- Real GDP: 1.9 (2003/04); 0.4 (2004/05); 3.7 (2005/06); 2.4 (2005/06 Rev.); 2.8 (2006/07 proj.); 3.1 (2007/08 proj.); 3.1 (2008/09 proj.); 3.3 (2009/10 proj.)
- Nominal GDP (annual percentage changes): 18.9; 12.1; 16.1; 16.1 (Rev.); 13.9; 12.4; 12.2; 11.6
- Consumer price index (end of period): 16.8; 13.2; 9.5; 13.0 (Rev.); 10.3; 9.3; 8.0; 8.0
- Unemployment rate: 11.8 (2003/04); 12.2 (2004/05)
- Net international reserves (in millions of US$): 1,569; 1,902; 2,000; 2,000 (Rev.); 2,000; 2,050; 2,100; 2,150
- Broad money (changes in percent of beginning of period broad money): 20.2; 10.3; 15.4; 9.4 (Rev.); 11.1; 14.5; 14.5; 16.3
- Memorandum: Nominal GDP (in billions of Jamaican dollars): 497; 556; 643; 646 (Rev.); 736; 827; 928; 1,035
- Exchange rate (end of period, J$/US$): 60.8; 61.5 (2004/05)

### Government operations and fiscal stance (from Table 1 and Table 2)
- Budgetary revenue (in percent of GDP): 29.4 (2003/04); 30.8 (2004/05); 31.2 (2005/06 Rev.); 29.1 (2005/06); 28.1 (2006/07 proj.); 28.1 (2007/08 proj.); 28.1 (2008/09 proj.); 28.1 (2009/10 proj.)
- Budgetary expenditure (in percent of GDP): 36.0; 35.7; 31.2; 31.5 (Rev.); 31.5; 31.1; 30.2; 29.1
- Primary expenditure (in percent of GDP): 18.2; 19.1; 17.6; 17.9 (Rev.); 18.1; 18.1; 18.1; 18.1
- Interest payments (in percent of GDP): 17.8; 16.7; 13.6; 13.6 (Rev.); 13.4; 13.0; 12.1; 11.0
- Budget balance (in percent of GDP): -6.6; -4.9; 0.0; -1.5 (Rev.); -0.5; 0.0; 0.8; 1.9
- Overall fiscal balance (in percent of GDP): -9.7; -7.1; -2.5; -3.9 (Rev.); -2.9; -1.8; -1.0; 0.5
- Central government operations (in billions of Jamaican dollars, Table 2):  
  - Budgetary revenue and grants: 145.5 (2003/04); 171.3 (2004/05); 204.5 (2005/06); 187.7 (2005/06 Rev.); 206.6 (2006/07 proj.); 232.3 (2007/08 proj.); 260.6 (2008/09 proj.); 290.8 (2009/10 proj.)  
  - Budgetary expenditure: 178.3; 198.8; 204.5; 203.5 (Rev.); 231.4; 257.5; 280.5; 301.5  
  - Primary expenditure: 90.1; 106.0; 116.9; 115.9 (Rev.); 133.1; 149.7; 167.9; 187.4  
  - Interest: 88.2; 92.8; 87.6; 87.6 (Rev.); 98.3; 107.8; 112.6; 114.1
- Off-budget expenditure and issuance of debt to the BOJ (Table 2): Off-budget expenditure: 15.3; 12.0; 16.1; 16.1 (Rev.); 17.8; 14.5; 16.8; 14.3. Issuance of debt to the BOJ: 11.5; 8.2; 16.1; 16.1 (Rev.); 16.1; 14.5; 16.8; 14.3

### Public debt and debt composition (Table 3 and Table 9 excerpts)
- Public debt (in percent of GDP): 143.7 (2003/04); 137.9 (2004/05); 130.3 (2005/06 Rev.); 122.5 (2006/07 proj.); 115.5 (2007/08 proj.); 107.8 (2008/09 proj.); 99.0 (2009/10 proj.)
- Government debt (in percent of GDP): 136.6; 130.6; 120.6; 113.3; 106.7; 99.5; 91.2
- Domestic debt (in percent of GDP): 84.3; 80.7; 74.6; 69.3; 64.4; 59.1; 53.0
- External debt (in percent of GDP): 52.3; 49.9; 46.0; 44.0; 42.3; 40.4; 38.2
- Public debt (in billions of Jamaican dollars, Table 3): 71; 127; 167; 184; 290; 195; 551; 1,000; 1,025 (note: table structure lists debt stock across columns)
- Total debt (in billions of US$) (Table 3 memorandum): 11.7; 12.5; 12.8; 12.8; 12.7; 12.6; 12.4
- Public debt adjusted for PetroCaribe agreement (Table 3 memorandum): .........130.3; 124.0; 118.2; 111.6; 103.8
- Change in the debt/GDP ratio: -4.3; -5.8; -7.6; -7.8; -7.0; -7.7; -8.8 (Table 3)

### Bank of Jamaica and monetary aggregates (Tables 4 and 5)
- Bank of Jamaica net international reserves (in millions of US$): 1,340; 1,569; 1,902; 2,000; 2,000 (Table 4 memorandum)
- Base money (end-of-period stocks, in billions of J$): 32; 36; 42; 48; 46 (Table 4)
- Net foreign assets (Table 5, end-of-period stocks, in billions of J$): 88; 102; 116; 136; 127
- Liabilities to private sector (M3, end-of-period stocks, in billions of J$): 159; 191; 210; 243; 230
- Money supply (M2, end-of-period stocks, in billions of J$): 107; 125; 139; 164; 152
- M3 velocity (mem): 2.6; 2.6; 2.6; 2.6; 2.8

### Balance of payments and external sector (Table 6 and Table 10 excerpts)
- Current account (in millions of US$): -562 (2003/04); -555 (2004/05); -901 (2005/06 proj.); -852 (2005/06 Rev.); -1,405 (2006/07 proj.); -1,254 (2007/08 proj.); -1,085 (2008/09 proj.); -551 (2009/10 proj.)
- Trade balance (in millions of US$): -1,832; -2,112; -2,293; -2,553 (Rev.); -3,075; -3,058; -3,013; -2,692
  - Exports (f.o.b., in millions of US$): 1,467; 1,556; 1,739; 1,700 (Rev.); 1,756; 1,745; 1,884; 1,918
  - Imports (f.o.b., in millions of US$): 3,299; 3,668; 4,302; 4,254 (Rev.); 4,831; 4,803; 4,897; 4,611
  - Fuel imports: 838; 966; 1,239; 1,355; 1,487; 1,546; 1,608; 1,642
  - Tourism receipts (mem/ tourism receipts in Table 6): 1,401; 1,492; 1,612; 1,645 (Rev.); 1,813; 2,002; 2,197; 2,348
- Services (net, millions of US$): 597; 628; 657; 737 (Rev.); 806; 989; 1,154; 1,346
- Income (net, millions of US$): -566; -578; -720; -647 (Rev.); -779; -855; -928; -918
- Current transfers (net, millions of US$): 1,239; 1,507; 1,455; 1,612 (Rev.); 1,642; 1,670; 1,702; 1,713
- Capital and financial account (net, millions of US$): 791; 888; 1,000; 950 (Rev.); 1,405; 1,304; 1,135; 601
- Overall balance/change in NFA (millions of US$): 229; 333; 989; 805 (Rev.); 50; 50; 50
- Memorandum: Net international reserves (in weeks of imports of GNFS): 17; 18; 18; 17; 16; 15; 16; 17

### Debt sustainability framework and projections (Table 9 and Table 10 excerpts, Figures)
- Baseline public sector debt trajectory (public debt in percent of GDP): 132.0 (2000/01); 135.1 (2001/02); 148.0 (2002/03); 143.7 (2003/04); 137.9 (2004/05); 130.3 (2005/06); 122.5 (2006/07); 115.5 (2007/08); 107.8 (2008/09); 99.0 (2009/10); 89.6 (2010/11)
- Change in public sector debt (line 2): -1.9; 1.7; 11.6; -4.2; -6.0; -10.0; -7.3; -6.6; -7.2; -8.3; -8.9
- Identified debt-creating flows (line 3): -10.4; -6.2; 10.9; -7.0; -7.1; -9.8; -7.5; -6.7; -7.4; -8.4; -8.7
- Primary deficit (line 4, percent of GDP): -11.5; -7.4; -5.4; -8.1; -9.6; -9.6; -10.4; -11.2; -11.1; -11.6; -11.8
- Revenue and grants (line 5, percent of GDP): 29.1; 27.0; 28.1; 29.4; 30.8; 29.1; 28.1; 28.1; 28.1; 28.1; 28.1
- Primary (noninterest) expenditure (line 6, percent of GDP): 17.7; 19.6; 22.7; 21.3; 21.2; 19.4; 17.7; 16.9; 16.9; 16.5; 16.3
- Automatic debt dynamics (line 7, percent of GDP contribution): 6.5; 1.2; 16.3; 1.1; 2.5; -0.2; 3.0; 4.5; 3.7; 3.2; 3.1
- Contribution from interest rate/growth differential (line 8): 4.7; 1.2; 3.3; -4.5; 1.8; -4.8; -1.4; 0.5; 0.6; 0.8; 0.9
- Debt-stabilizing primary balance (Table 9 header): 2.8 (mem item)
- Gross financing need (Table 9 memo, in percent of GDP and in US$): 23.2; 30.1; 31.0; 29.7; 31.1; 25.7; 23.3; 20.2; 25.1; 22.4; 19.0 — in billions of US$: 1.8; 2.4; 2.4; 2.5; 2.8; 2.6; 2.5; 2.3; 3.0; 2.9; 2.6
- Scenario with no policy change (constant primary balance) in 2005-2010: public debt percent of GDP path: 130.3 (2005/06); 111.8; 106.5; 100.8; 94.5; 88.0 (2009/10)
- External debt (Table 10 baseline external debt in percent of GDP): 46.0 (2000/01); 50.7; 54.8; 54.4; 55.7; 51.8 (2005/06); 49.3; 47.0; 44.6; 41.9
- Change in external debt (Table 10): 5.1; 4.8; 4.1; -0.4; 1.3; -3.9; -2.5; -2.3; -2.4; -2.7
- Gross external financing need (in billions US$ and percent of GDP, Table 10): 0.7 (2000/01); 1.1; 1.9; 0.9; 1.0; 1.0; 1.7; 1.8; 1.7; 1.1 — in percent of GDP: 9.3; 13.7; 24.8; 10.3; 11.5; 10.2; 15.8; 15.8; 14.3; 8.7

### Vulnerability indicators and financial sector (Table 8 highlights)
- Real GDP growth (percent): 0.9 (2003/04); 2.2 (2002/03); 1.9 (2003/04); 0.4 (2004/05); 2.4 (2005/06)
- CPI inflation (period average): 8.0; 6.5; 12.9; 12.7; 15.5
- Short-term interest rate (percent): 14.3; 33.4; 16.0; 13.5; 13.0
- Gross international reserves (GIR) in US$ billion: 2.0; 1.4; 1.6; 1.9; 2.0
- Total gross external debt (percent of GDP): 50.7; 54.8; 54.5; 55.7; 51.8
- Public sector overall balance (percent of GDP): -6.1; -10.8; -9.7; -7.1; -3.9
- Primary balance (percent of GDP): 7.8; 7.3; 11.2; 11.7; 12.1
- Public sector gross debt (percent of GDP): 132; 146; 144; 138; 130
- Financial sector: Capital adequacy ratio (percent): 19.7; 15.4; 14.0; 17.5; 18.7. NPLs in percent of total loans: 6.1; 3.8; 3.1; 2.7; 2.5

### Stress test summaries (from figures and accompanying notes)
- Debt sustainability bound tests consider shocks to growth, interest rates, primary balance, exchange rate depreciation (one-time 30 percent real depreciation in 2006), and contingent liabilities (10 percent of GDP shock in 2006).
- Combined shocks include permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance.
- Figures present baseline and historical scenarios, with boxes showing average projections for variables; ten-year historical averages are shown.

*Source: Jamaican authorities; Fund staff estimates, projections, and analyses contained in the provided IMF Country Report tables and figures.*

### APPENDIX I

### APPENDIX I

### I. Membership and General Resources
- Membership status: Joined: February 21, 1963; Article VIII
- Quota: 273.50 SDR Million (100.00 percent)
- Fund holdings of currency: 273.55 SDR Million (100.02 percent)
- Reserve position: 0.00 SDR Million (0.00 percent)
- Holdings exchange rate: (not specified in source)

### II. SDR Department
- Net cumulative allocation: 40.61 SDR Million (100.00 percent)
- Holdings: 0.00 SDR Million (0.01 percent)

### III. Outstanding Purchases and Loans
- None

### IV. Latest Financial Arrangements (approved amounts and drawings)
- EFF: Approval Date Dec. 11, 1992; Expiration Mar. 16, 1996; Amount Approved 109.13 SDR Million; Amount Drawn 77.75 SDR Million
- Stand-By: Approval Date Jun. 28, 1991; Expiration Sep. 30, 1992; Amount Approved 43.65 SDR Million; Amount Drawn 43.65 SDR Million
- Stand-By: Approval Date Mar. 23, 1990; Expiration May 31, 1991; Amount Approved 82.00 SDR Million; Amount Drawn 82.00 SDR Million

### V. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Charges/Interest:
  - 2006: 1.23
  - 2007: 1.23
  - 2008: 1.24
  - 2009: 1.23
  - 2010: 1.23
- Principal:
  - (no principal scheduled in table)
- Total:
  - 2006: 1.23
  - 2007: 1.23
  - 2008: 1.24
  - 2009: 1.23
  - 2010: 1.23

### VI. Implementation of HIPC Initiative
- Not Applicable

### VII. Exchange Rate Arrangements
- Since September 17, 1990, the external value of the Jamaican dollar has been determined in an interbank market operated by commercial banks.
- The Jamaican dollar has depreciated significantly since then, though not in a uniform trend.
- At January 31 (year not specified in this appendix), it was trading at around J$65 to the U.S. dollar.
- Surrender requirement: authorized foreign exchange dealers and cambios are required to surrender at least 5 percent–but not more than 10 percent–of their purchases of U.S. dollars, Canadian dollars and pound sterling to the Bank of Jamaica (BOJ).
  - The surrender requirement is effected based on the previous day’s average selling rate for the U.S. dollar, the Canadian dollar and the pound sterling against the Jamaican dollar (referred to as “surrender rates”).
- Observation in 2004: surrender rates had resulted in the cross rates between the U.S. dollar and the Canadian dollar and between the U.S. dollar and the pound sterling to differ periodically (for more than 5 days) by more than 1 percent from the midpoint spot exchange rates for those two currency pairs in their principal markets.
  - While such differences were observed in 2004 leading to a finding that a multiple currency practice arose, the previously identified broken cross rate arising from the currency surrender requirement is no longer apparent since this time.
  - Therefore, there is no evidence that a multiple currency practice arises from the surrender requirement.

### VIII. Last Article IV Consultation and Program Relations
- Jamaica is on the standard 12-month consultation cycle.
- Last Article IV consultation completed by the Executive Board on August 2, 2004 (IMF Country Report No. 04/263).
- Interim staff reports prepared for the Executive Board in-between consultations: IMF Country Report Nos. 05/61 and 05/219.
- A Financial Sector Assessment Program has been completed and awaits review by the Executive Board.

### IX. Technical Assistance (department, dates, purpose)
- MAE:
  - May 1995: Review of deposit insurance scheme
  - October–December 1995: Banking supervision
  - February–June 1996: Banking supervision
  - September 1996: Banking crisis and restructuring
  - October 1996: Banking supervision
  - February 1997: Central bank accounting
  - May 1997: Banking supervision
  - August 1997: Banking supervision
  - January 1998: Banking supervision
  - April 1998: Public debt management
  - May 1998: Financial sector restructuring
  - April 2001: Banking supervision
  - January 2002: Banking supervision
- STA:
  - September 1996: Multisector statistics assessment
  - July 2002: Organization of Statistics Office

### X. Resident Representative
- The post of the resident representative was closed on August 1997.

*Source: _cr06158 - APPENDIX I (as of December 31, 2005).*

### APPENDIX III

### APPENDIX III

### Major Ongoing Projects (Table 2)
- Projects in execution: 143; Amount (US$m.): 49.6; Percent Disbursed: 34.7
- TCs in execution: 22; Amount (US$m.): 9.9; Percent Disbursed: 27.4
- Projects in pipeline: 17; Amount (US$m.): 279.0; Percent Disbursed: Not applicable
- TCs in pipeline: 7; Amount (US$m.): 2.4; Percent Disbursed: Not applicable

### Disbursement and Repayment Flows, 1997–2004 (Table 3)
- a. Loan disbursements (US$ million):
  - 1997: 50.4
  - 1998: 47.1
  - 1999: 75.0
  - 2000: 124.8
  - 2001: 21.4
  - 2002: 133.0
  - 2003: 26.5
  - 2004 (Proj.): 51.4
- b. Repayments (principal) (US$ million):
  - 1997: 35.2
  - 1998: 29.3
  - 1999: 40.8
  - 2000: 41.5
  - 2001: 36.8
  - 2002: 45.0
  - 2003: 53.5
  - 2004 (Proj.): 51.3
- c. Net loan flow (a–b) (US$ million):
  - 1997: 15.2
  - 1998: 17.8
  - 1999: 34.2
  - 2000: 83.3
  - 2001: -15.4
  - 2002: 88.0
  - 2003: 27.0
  - 2004 (Proj.): 0.1
- d. Interest and charges (US$ million):
  - 1997: 29.7
  - 1998: 30.5
  - 1999: 31.9
  - 2000: 34.0
  - 2001: 38.1
  - 2002: 37.1
  - 2003: 38.4
  - 2004 (Proj.): 40.4
- e. Net cash flow (c–d) (US$ million):
  - 1997: -14.5
  - 1998: -12.7
  - 1999: 2.3
  - 2000: 49.3
  - 2001: -53.5
  - 2002: 50.90
  - 2003: -65.4
  - 2004 (Proj.): -40.3

- Observational finding: "It can be observed that the net cash flow to Jamaica has been overwhelmingly negative during that period. This situation is expected to persist into the foreseeable future, given existing limitations on further borrowing from the IDB, as a result of the country’s high debt ratio and fiscal constraints."

### Projected Loan Repayments, 2004–08 (Table 4)
- Principal (Millions of U.S. dollars equivalent):
  - 2004: 55.3
  - 2005: 55.9
  - 2006: 72.0
  - 2007: 78.2
  - 2008: 80.6
- Interest (Millions of U.S. dollars equivalent):
  - 2004: 36.0
  - 2005: 37.8
  - 2006: 38.3
  - 2007: 35.4
  - 2008: 31.8
- Total (Millions of U.S. dollars equivalent):
  - 2004: 91.4
  - 2005: 93.7
  - 2006: 110.3
  - 2007: 113.6
  - 2008: 112.4

*Source: _cr06158 - APPENDIX III*

### 4.      Revenues improved moderately in January, while revised budget estimates recently

### 4.      Revenues improved moderately in January, while revised budget estimates recently

### Revenue performance (January and FY 2005/06)
- The authorities collected 88 percent of their originally targeted revenues for January, up from an average of 82½ percent during the fourth quarter of 2005.
- Persistent weaknesses in revenue performance imply the overall deficit for FY 2005/06 is likely to be somewhat higher, and the primary surplus lower by 0.8 percent of GDP, than had been envisaged in the staff report.
- Although uncertainties about the final fiscal outcome for FY 2005/06 remain on account of the pattern of strong seasonal revenue pick-up at the end of the fiscal year, recent developments underscore the staff’s call for greater ambition in setting the FY 2006/07 budget targets.

### Expenditure developments and revised budget estimates
- Monthly expenditures remained broadly in line with budgeted amounts.
- Revised budget estimates recently approved by parliament envisage an increase in wages and salaries and other non-interest recurrent expenditures for the year as a whole by J$5.1 billion (0.8 percent of GDP), broadly in line with the projections in the staff report.
- The effect on the overall balance of the increased expenditures has been partially offset by lower-than-envisaged domestic interest payments.

### Fiscal outcomes and projections (Table 1: Jamaica: Summary of Central Government Operations, In billions of Jamaican dollars)
- Budget (original):  
  - Budgetary revenue and grants: 204.5  
  - Tax: 182.5  
  - Nontax: 17.8  
  - Grants: 4.2  
  - Budgetary expenditure: 204.5  
  - Primary expenditure: 116.9  
  - Wage and salaries: 61.4  
  - Other expenditure: 38.2  
  - Capital expenditure 1/: 17.3  
  - Interest: 87.6  
  - Budget balance: 0.0  
  - Primary balance: 87.6
- SM/06/101Rev. (revised):  
  - Budgetary revenue and grants: 187.7  
  - Tax: 167.9  
  - Nontax: 18.0  
  - Grants: 1.7  
  - Budgetary expenditure: 203.5  
  - Primary expenditure: 115.9  
  - Wage and salaries: 63.1  
  - Other expenditure: 41.9  
  - Capital expenditure 1/: 10.9  
  - Interest: 87.6  
  - Budget balance: -15.8  
  - Primary balance: 71.8
- Proj. (projection):  
  - Budgetary revenue and grants: 182.0  
  - Tax: 164.6  
  - Nontax: 16.0  
  - Grants: 1.4  
  - Budgetary expenditure: 200.5  
  - Primary expenditure: 115.8  
  - Wage and salaries: 63.2  
  - Other expenditure: 41.6  
  - Capital expenditure 1/: 11.0  
  - Interest: 84.7  
  - Budget balance: -18.5  
  - Primary balance: 66.2
- Memorandum items:  
  - Budget balance (in percent GDP): 0.0, -2.4, -2.9  
  - Primary balance (in percent GDP): 13.6, 11.1, 10.3  
  - GDP (in billions of J$): 643, 646, 646
- Source note: 1/ Budget column includes deferred financing from previous years.

### Macro context and Executive Board assessment — key findings
- Economic shocks and recovery:
  - Real GDP contracted sharply in late 2004 following Hurricane Ivan; subsequent output recovery was dampened by poor agriculture performance and hurricanes during July–October 2005.
  - Agricultural recovery is described as firmly underway and tourist arrivals have picked up strongly in recent data.
- Inflation and exchange rate:
  - Consumer prices reached 13¼ percent at end-2004, peaked at 19 percent in September 2005, and fell to 12.4 percent in February (year not explicitly restated in this excerpt).
  - Changes in international oil prices are fully reflected at the retail pump in Jamaica.
  - The Jamaican dollar depreciated briskly during June–November 2005 and continued to weaken during February–March, 2006; in real effective terms the Jamaican dollar appreciated by 9 percent on average during 2005 given high inflation.
- External sector and reserves:
  - External current account balance weakened due to crop damage and higher oil-driven imports; capital flows reversed in second half of 2005.
  - Net international reserves (NIR) increased rapidly through June 2005, before reversing in the third quarter of 2005; reserves have fallen modestly in recent months.
- Monetary policy and interest rates:
  - Monetary policy aimed at containing inflation and engendering sustainable reduction in interest rates; Jamaican-U.S. interest rate differential narrowed by about 330 basis points since end-2004.
  - Reserve build-up was fully sterilized by sales of central bank bills.
- Fiscal performance and debt:
  - Fiscal targets have been missed; Hurricane Ivan largely responsible for FY 2004/05 misses and revenue shortfalls widened in FY 2005/06.
  - Spending restraint was maintained, with capital expenditures squeezed further.
  - Budgetary shortfalls financed successfully, including through placements of several Eurobonds.
- Executive Directors’ overall assessment:
  - Jamaica experienced major natural disasters and external shocks since late 2004, slowing output growth, raising inflation, weakening the current account, and reducing revenue collection.
  - Given extraordinarily high public debt, authorities have very limited room for policy maneuver; ambitious fiscal consolidation and prudent debt management are required.
  - Directors urged achieving a balanced budget as soon as feasible and avoiding recurring fiscal slippages; most Directors felt fiscal objectives should be more ambitious and encouraged targeting a balanced budget for FY 2006/07 if the economy improves more than envisaged.
  - Directors noted limited scope for postponing infrastructure and social programs and encouraged contingency planning for further shocks.

### Policy recommendations and structural priorities
- Fiscal policy and revenue measures:
  - Achieve a balanced budget as soon as feasible and avoid recurring fiscal slippages.
  - Pursue ambitious fiscal consolidation and a prudent debt management strategy to reduce the debt-to-GDP ratio.
  - Use new concessional debt to replace costlier financing, instead of expanding the overall expenditure envelope.
  - Consider measures to broaden the tax base, eliminate exemptions and preferences, and pursue tax delinquents more vigorously.
- Expenditure and public sector reforms:
  - Maintain expenditure discipline; medium-term fiscal outlook depends critically on wage negotiations.
  - Increase productivity of the public sector and reform public enterprises to limit the debt burden from off-budget entities.
- Monetary and exchange-rate policy:
  - Conduct careful monetary and exchange-rate policies; a gradual, preemptive tightening of monetary policy may better support fiscal and growth objectives than an accommodative, reactive approach.
  - Maintain a flexible exchange rate regime to safeguard external competitiveness.
- Structural reforms and financial sector:
  - Accelerate structural reforms to ensure high levels of investment translate into productivity gains and improved business environment.
  - Implement comprehensive tax reforms to create a level playing field and increase transparency.
  - Improve access to credit, enhance labor market flexibility, and strengthen law and order.
  - Strengthen financial supervision and oversight of financial conglomerates; tighten prudential requirements for securities dealers.
  - Continue to upgrade statistical systems (with a view to subscribing to the Special Data Dissemination Standard) and expand financial surveys to cover nonbank entities.
  - Address remaining gaps in the AML/CFT framework.

### Selected economic indicators (highlights from "Jamaica: Selected Economic Indicators")
- Real GDP (annual percentage changes): 2000/01: 0.8; 2001/02: 0.9; 2002/03: 2.2; 2003/04: 1.9; 2004/05: 0.4
- Consumer price index (end of period): 2000/01: 6.4; 2001/02: 7.6; 2002/03: 6.2; 2003/04: 16.8; 2004/05: 13.2
- Budgetary revenue (percent of GDP): 2000/01: 29.1; 2001/02: 27.0; 2002/03: 28.1; 2003/04: 29.4; 2004/05: 30.8
- Budgetary expenditure (percent of GDP): 2000/01: 33.6; 2001/02: 32.6; 2002/03: 35.7; 2003/04: 36.0; 2004/05: 35.7
- Interest payments (percent of GDP): 2000/01: 16.0; 2001/02: 13.4; 2002/03: 14.9; 2003/04: 17.8; 2004/05: 16.7
- Budget balance (percent of GDP): 2000/01: -4.5; 2001/02: -5.6; 2002/03: -7.6; 2003/04: -6.6; 2004/05: -4.9
- Public debt (percent of GDP): 2000/01: 132.0; 2001/02: 135.1; 2002/03: 148.0; 2003/04: 143.7; 2004/05: 137.9
- Current account balance (percent of GDP): 2000/01: -6.7; 2001/02: -9.2; 2002/03: -15.2; 2003/04: -6.8; 2004/05: -6.1
- Net international reserves (in millions of US$): 2000/01: 1,286; 2001/02: 1,942; 2002/03: 1,340; 2003/04: 1,569; 2004/05: 1,902
- Nominal GDP (in billions of Jamaican dollars): 2000/01: 347; 2001/02: 380; 2002/03: 418; 2003/04: 497; 2004/05: 556
- Exchange rate (end of period, J$/US$): 2000/01: 45.7; 2001/02: 47.6; 2002/03: 56.2; 2003/04: 60.8; 2004/05: 61.5

*Source: IMF staff report excerpt and Public Information Notice (PIN) No. 06/43; IMF Executive Board conclusions on the 2005 Article IV Consultation with Jamaica.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06158.pdf_