## Debt Management (IMF staff report excerpt, _cr07152)

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### Introduction and context
- Jamaica adopted a medium-term program of fiscal consolidation in 2004 to reduce public debt from over 140 percent of GDP to 100 percent by 2009.
- Government aim: raise the central government primary balance to 13¾ percent of GDP during FY 2004/05 (compared to 7⅓ percent two years earlier) and keep it broadly at that level throughout the medium term.
- Public debt currently stands at about 132 percent of GDP (excluding a recent bond amounting to about 3 percent of GDP to pre-finance FY 2007/08 obligations).
- Elections constitutionally required by October 2007; recent poll shows PNP and Jamaica Labor Party enjoying support of 31–32 percent of registered voters.

### Recent developments: growth, inflation, external position, fiscal outturn, financial sector
- Growth
  - Real economic growth for FY 2006/07 estimated at almost 3 percent, up from 2 percent the previous year and 0.4 percent the year before.
  - Growth underpinned by agriculture and tourism.
- Inflation and monetary policy
  - Annual inflation fell to 6 percent, compared to FY 2006/07 target of 9½ percent and a recent high of over 19 percent in September 2005.
  - Bank of Jamaica eased policy: removed special deposit requirements and reduced interest rates in three steps during May–December 2006.
  - Annual base money growth accelerated to 17.3 percent at end-2006, compared to 9.3 percent a year earlier.
- External sector
  - FY 2006/07 current account deficit estimated at 10½ percent of GDP—down from 11½ percent the previous year—due to strengthening exports, robust remittances, and tourism.
  - Nominal bilateral rate vis-à-vis the U.S. dollar depreciated by under 4 percent (year-on-year) during 2006.
  - January 2007 market unsettled ahead of a large government bond redemption; BOJ issued special bills and stepped up foreign exchange sales.
- Fiscal outturn and public finances
  - FY 2006/07 budget deficit target likely missed by a large margin, mostly due to higher expenditures.
  - Expenditures likely exceeded budgeted amounts by at least 1¾ percentage points of GDP, and possibly by as much as 2½ percentage points of GDP.
  - Primary surplus fell to about 8–8¾ percent of GDP.
  - Interest payments likely about ¾ percentage points of GDP higher than budgeted.
  - J$5 billion (0.7 percent of GDP) in capital spending may be underreported; including these could raise the FY 2006/07 deficit by as much as 2¾ percent of GDP above budget.
  - Mid-year expenditure increases added about 1.5 percentage points of GDP to non-interest current expenditures.
- Financial sector and risks
  - Prudential indicators for banks and regulated financial institutions remain sound.
  - Worrying growth of unregulated foreign currency trading schemes promising very high returns.
  - Bank credit to the private sector expanding at double digit rates in real terms annually.
  - Outstanding stock of short-term central bank sterilization bills has increased markedly since 2003.

### Debt structure and sensitivities
- Portfolio composition and sensitivity
  - Public debt almost evenly split between domestic and foreign currency denominations.
  - Variable rate instruments account for about 40 percent of total portfolio (later noted as 60 percent and 70 percent in other parts of the report for domestic debt).
  - About three quarters of debt stock owed to private creditors, including domestic financial system.
  - Over the past two years: share of debt sensitive to exchange rate movements increased by 1½ percentage points; interest-sensitive portion increased by almost 8 percentage points.
- Central bank losses reflect sterilization costs, which have increased since 2003.
- Debt is sensitive to both exchange rate and domestic interest rate changes.

### Medium-term outlook and scenario analysis
- Outlook depends critically on authorities’ commitment to reducing debt; insufficient progress risks reversal after small shocks.
- Staff illustrative scenario
  - With decisive policy action, debt could come down to about 113 percent of GDP by 2012.
  - Raising and maintaining the primary surplus at 10–10½ percent of GDP, combined with fiscal discipline of extra-budgetary entities, would enable gradual reduction in debt ratio.
  - If the primary surplus were higher (as in authorities’ original strategy), debt ratio would be correspondingly lower.
- Shock analyses (Public Debt Sustainability: bound tests; public debt in percent of GDP)
  - Historical: 127.5
  - Baseline: 113.2
  - Growth shock: 116.9
  - Primary balance (PB) shock: 119.9
  - Interest rate shock: 124.1
  - Combined shock: 123.8
  - Contingent liabilities shock: 158.3
- Shock highlights
  - A permanent interest rate shock equal to one-half standard deviation of the historical average would slow debt decline but still leave debt 10 percentage points of GDP lower in five years relative to baseline.
  - A 30 percent weakening of the currency would lead the debt ratio to quickly climb to 170 percent of GDP; thereafter, if other factors remained equal, the debt ratio would resume declining but to a level significantly higher than at present.
- Risks
  - A confidence shock of the magnitude of a 30 percent depreciation could trigger second-round effects that increase debt further.
  - Increased exposure of public debt to interest rate shocks is of particular concern.
  - Financial sector risks include security dealers’ dependence on short-term borrowed household funds and conglomerate exposures.

### Policy discussions and fiscal priorities
- Overarching policy theme: reinvigorate debt reduction strategy while guarding against short-run vulnerabilities.
  - Two key challenges:
    - Seize opportunity afforded by a still benign external environment to build up resistance to shocks.
    - Increase durability of the debt strategy by initiating deep structural reforms to strengthen public finances and foster sustained growth.
- Authorities’ stance
  - Expressed disappointment at FY 2006/07 budgetary outturn but noted need for perspective.
  - Argued measured GDP was significantly underestimated and some debt-related risks exaggerated.
  - Expressed firm commitments to reduce deficit and bring debt ratio down; noted markets demand progress.

### Fiscal consolidation recommendation: raise primary surplus to at least 10 percent of GDP
- Recommendation: raise primary surplus back to at least 10 percent of GDP in FY 2007/08, from 8¾ percent currently.
- Revenue risk: collection of sizeable tax arrears in FY 2006/07 reduced arrears stock and, with numerous specific taxes, implies revenues could decline by up to 1.2 percent of GDP in FY 2007/08 without additional measures.
- Net effort required: raising primary surplus by a further 1.2 percent of GDP implies an effort equivalent to 2.4 percent of GDP.
  - Potential savings: 1.1 percentage points of GDP from one-off Cricket World Cup related spending in FY 2006/07.
  - Offsets: up to 0.7 percent of GDP could be needed to account for as-yet unreported capital spending in the FY 2007/08 budget.
  - Conclusion: measures amounting to just under 2 percent of GDP would likely be required.

### Revenue and expenditure options to fill the gap
- Short-term preference: rely on revenue measures because fundamental expenditure reforms take time.
- Suggested revenue measures:
  - Reduce exempted items from the General Sales Tax.
  - Retire or substantially eliminate discretionary exemptions for imports.
  - Raise specific taxes eroded by inflation.
- Suggested expenditure measures:
  - Administrative steps to keep temporary workers and overtime in check.
  - Possible rollback of a larger portion of FY 2006/07 increase in capital expenditures.
- Authorities’ considerations:
  - Will carefully review proposals; considered premature to set definitive FY 2007/08 deficit position but expected improvement over FY 2006/07.
  - Trimming capital spending seen as challenging due to infrastructure repair needs.
  - Need to balance revenue measures during an election year.
  - Positive assessment of tax administration reforms supported by CARTAC and Fund TA; importance of restructuring tax administration emphasized.

### Public enterprise reform and fiscal risks
- Concern: deterioration in financial positions of perennial loss-makers; data through September 2006 indicated combined deficits of JUTC, the Sugar Company and Air Jamaica amounted to almost 1 percent of GDP more than expected.
- Recommendations and scope:
  - Reduce capital spending by public entities in FY 2007/08 after large expansion over past year.
  - Use concessional PetroCaribe funds currently financing off-budget entities to replace expensive central government debt where feasible.
- Authorities’ actions:
  - Senior management change at JUTC.
  - Initiative underway to divest the Sugar Company.
  - Endorsed comprehensive three-year restructuring plan for Air Jamaica.

### Debt management detailed findings (Box 1 summary)
- Portfolio shift: variable rate debt now accounts for 70 percent of total outstanding domestic currency debt (compared to 50 percent in 2005) and amounts to about 48 percent of GDP currently (an increase of 13 percentage points of GDP since 2005).
- Cost–benefit findings:
  - Aggregate data suggests interest savings from shifting an additional 13 percent of GDP from fixed to variable rate would amount to under 0.1 percent of GDP annually.
  - Closer analysis suggests savings could be less than half that amount.
  - With current 12-month standard deviation of 37 basis points for domestic interest rates, there is approximately a one in six chance that the savings could be undone entirely.
  - Extreme shock example: if interest rates increased suddenly by 18 percentage points as in 2003, initial costs of having shifted 13 percentage points of GDP to variable rate instruments would amount to 2½ percent of GDP annually.
  - Cost of extending fixed-rate maturity: regression estimates suggest increasing fixed-rate maturity by one year cost, on average, between 20 to 30 basis points between 2005 and now.
- Data snapshot (weighted interest rate and maturity)
  - Weighted interest rate (percent): Fixed debt 17.7 (2005) to 14.8 (2007) change -2.9; Variable debt 16.7 (2005) to 14.2 (2007) change -2.5; Difference 1.1 and 0.6.
  - Maturity (years): Fixed rate 5.0 (2005) to 7.7 (2007) change 2.8; Variable rate 10.9 (2005) to 10.5 (2007) change -0.3; Difference (5.9) and (2.8).

### Monetary and exchange rate policy guidance
- Primary aim: monetary policy targets price stability above all other objectives.
- Authorities reduced interest rates in FY 2006/07 and accommodated larger base money expansion as inflation declined.
- Mission guidance:
  - Inflation should remain main objective.
  - Flexible use of all instruments would give BOJ greater independence to pursue inflation objectives and accommodate pressures for exchange rate strengthening during capital inflows.
  - Flexibility could limit sterilization costs and avoid incentives for one-way market bets; implies willingness to both increase and decrease interest rates.
  - There could be a case for preemptively increasing rates given unsettled global financial markets.
- Authorities’ concerns: market structure and bank behavior sometimes lead banks to sell foreign exchange to BOJ; frequent sharp movements in key financial variables have significant costs in a small open island economy.
- Exchange rate assessment: current level appeared broadly appropriate from competitiveness considerations; trade-weighted REER and tourism-competitor measures in line with historical levels; exports and tourism earnings performing robustly; current account deficit projected to improve over time as projects bear fruit.

### Financial sector: supervision, risks, reform priorities
- Progress
  - Draft Omnibus Banking Bill incorporates many FSAP recommendations.
  - BOJ preparing for early introduction of Basel II standards and strengthening risk monitoring.
  - Insurance supervisory capacity enhanced by new hires.
  - Progress on regulation of private pension schemes and development of regulations for collective investment schemes.
  - Proceeds of Crime Act passed to strengthen anti–money-laundering legal regime.
- Risks and recommended actions
  - Encourage enhanced supervision of activities vulnerable to interest rate risk.
  - Vigilance against pyramid schemes; strengthen forensic investigation and prosecution capacity.
  - Refine repo margins for security dealers and set new requirements, on average, above current levels as per 2005 FSAP recommendations.
  - Introduce more risk-sensitive capital requirements on security dealers.
  - Prioritize developing and testing crisis management systems.
- Repo sector specifics
  - Securities sector assets amount to half of GDP; liabilities exceed bank deposits.
  - Average annual returns on assets fell to 1.8 percent in year to September 2006, compared to 2.4 percent the previous year.
  - Sector exposed to interest rate and roll-over risk; legal ambiguities over control rights may exacerbate risks.
  - Within Jamaica, 65 percent of securities market accounted for by securities firms belonging to eleven financial conglomerates; securities arm share within conglomerates ranges from 2 percent to 91 percent of total group assets.
  - Six banks account for more than 50 percent of assets in nine Caribbean countries, indicating regional ownership linkages.

### Structural reforms to reinforce the debt strategy
- Need for deep structural reforms to make fiscal strategy robust; limited room for slippage with debt still high.
- Preparatory reforms recommended
  - Tax system: reform and simplify by unifying rates, reducing number of taxes, streamlining allowances and exemptions; review tax incentives due to fiscal costs.
  - Public sector wage and employment: multi-year fundamental reform required after public sector headcount rose by over 40 percent during 1995–2003; wage freeze policies not sustainable without addressing employment.
  - Public entities: consolidate monitoring and reporting of off-budget entities; prepare a fiscal ROSC; assess major fiscal risks from public enterprises; Fund assistance suggested for a consolidated public sector accounting framework.
  - Financial sector: clarify legal framework for repos; empower Financial Services Commission for consolidated supervision and penalties; strengthen inter-agency collaboration and develop protocols for joint on-site inspections; explore regional supervision options.
  - Business environment: review scope for reducing red tape, consolidating and eliminating duplicate requirements, institutions and functions.
- Authorities’ actions: working with Inter-American Development Bank to strengthen business climate; reviewing tax incentives; ongoing efforts to strengthen public enterprises.

### Staff appraisal (summary)
- Successes: robust economic growth, improving current account deficit, sharp reduction in inflation, recovery in revenue collections, progress on financial sector reforms.
- Concerns: substantial breach of FY 2006/07 deficit target and lack of progress in reducing debt; reliance on stop-gap measures like wage freezes.
- Advice: initiate deep reforms while conditions remain benign to deliver sustained and durable debt reduction; reinvigorate the medium-term program adopted in 2004; use upcoming elections to build political consensus for tax system reform, public employment reform, reassessing public sector size and role to foster private sector–led growth and reduce indebtedness.

### Key macroeconomic projections and fiscal indicators (selected staff projections)
- Real GDP (annual percent): 0.4 (2004/05); 2.0 (2005/06); 2.9 (2006/07); 3.0 (2007/08); 3.1 (2008/09); 3.2 (2009/10); 3.2 (2010/11); 3.2 (2011/12)
- Consumer price index (end of period): 13.2; 11.4; 6.6; 6.0; 5.5; 5.2; 5.2; 5.2
- Budgetary revenue (percent of GDP): 31.2 (2004/05); 29.0 (2005/06); 30.1 (2006/07); 28.9 (2007/08); 28.8 (2008/09); 28.5 (2009/10); 28.5 (2010/11); 28.5 (2011/12)
- Primary fiscal balance (percent of GDP): 11.9; 11.1; 8.8; 10.0; 10.2; 10.3; 10.7; 10.9
- Interest payments (percent of GDP): 17.4; 14.7; 13.5; 13.1; 12.8; 11.5; 10.9; 10.1
- Budget balance (percent of GDP): -5.5; -3.6; -4.7; -3.1; -2.6; -1.2; -0.3; 0.7
- Overall fiscal balance (percent of GDP): -8.6; -4.8; -6.1; -4.3; -2.6; -1.9; -0.8; 0.2
- Public debt (percent of GDP): 139.6; 133.0; 134.9; 131.0; 128.0; 124.4; 119.2; 113.2

### Debt sustainability, external sector, and vulnerability indicators (selected)
- Net international reserves (US$ millions): 1,569 (2003/04); 1,915 (2004/05); 2,078 (2005/06); 2,220 (2006/07); Table memorandum projections: 1,902; 2,078; 2,220; 2,300; 2,350; 2,400; 2,450; 2,500 across years.
- Current account (percent of GDP): -7.2; -11.4; -10.5; -9.4; -9.3; -7.1; -5.6; -5.2
- Total gross external debt (percent of GDP): 54.5; 56.4; 54.7; 59.6 (selected entries)
- EMBI secondary market spread (bps, end of period): 551; 405; 301
- Financial sector soundness: Capital adequacy ratio (percent): 14.0; 17.7; 17.9; 16.1; NPLs in percent of total loans: 3.1; 2.7; 2.3; 2.2; Provisions in percent of NPLs: 125.0; 135.7; 131.8; 125.8

### Surveillance, technical assistance, and institutional relations (selected)
- 2007 Article IV consultation discussions held in Kingston during February 5–16, 2007.
- Fund relations: no outstanding purchases or loans; last financial arrangement EFF 12/11/92–03/16/96 totaling SDR$109 million (SDR$77.8 million drawn).
- Technical assistance: CARTAC/FAD mission in September 2006 on Tax and Customs Administration; Fund TA on banking supervision and national accounts methodology in recent years.
- Relations with World Bank: active portfolio as of March 30, 2007 US$139 million; CAS approved May 10, 2005 for up to US$150 million between 2006 and 2009.
- Relations with IDB: outstanding debt as of February 2007 US$636.9 million; IDB country strategy 2006–09 approved August 2006.

### Final recommendations and priorities
- Fiscal policy: aim for a primary surplus of at least 10 percent of GDP in FY 2007/08 and take measures to credibly deliver such a target.
- Public enterprise reform: continue and accelerate restructuring and divestment efforts; improve monitoring and reporting of off-budget entities; consider using PetroCaribe concessional funds to replace expensive central government debt where feasible.
- Revenue measures: reduce GST exemptions, eliminate discretionary import exemptions, raise specific taxes eroded by inflation; prioritize tax administration improvements.
- Expenditure measures: control temporary workers and overtime; reassess capital spending growth and one-off items (e.g., Cricket World Cup related).
- Monetary and exchange rate policy: preserve price stability as main objective; increase flexibility of instruments to limit sterilization costs and improve BOJ independence; be willing to both raise and lower rates as warranted.
- Financial sector: strengthen consolidated supervision, refine repo margins and capital requirements for security dealers, enhance forensic and prosecutorial capacity against pyramid schemes, and prioritize crisis management system development and testing.
- Structural reforms: comprehensive tax reform, multi-year public sector employment and wage reform, consolidated public sector accounting framework, business environment improvements to promote private sector–led growth.

*Source: IMF staff report excerpt (Debt Management section) compiled from _cr07152.*

### 1.     Debt     Management .............................................................................................

### Debt Management

### Introduction and Context
- Jamaica adopted a medium-term program of fiscal consolidation in 2004 to reduce public debt from over 140 percent of GDP to 100 percent by 2009.
- The government aimed to raise the central government primary balance to 13¾ percent of GDP during FY 2004/05 (compared to 7⅓ percent two years earlier) and to keep it broadly at that level throughout the medium term.
- Some progress was made during 2004–05; public debt currently stands at about 132 percent of GDP.
- Excluding a recent bond (amounting to about 3 percent of GDP) to pre-finance FY 2007/08 obligations.
- Elections are constitutionally required by October 2007; a recent poll shows both the PNP and the Jamaica Labor Party enjoying the support of 31–32 percent of registered voters.

### Recent Developments: Growth, Inflation, External Position, and Fiscal Outturn
- Growth
  - Real economic growth for FY 2006/07 is estimated at almost 3 percent, up from 2 percent the previous year and 0.4 percent the year before.
  - Growth was underpinned by agriculture and tourism.
- Inflation and Monetary Policy
  - Annual inflation has fallen to 6 percent, compared to the FY 2006/07 target of 9½ percent and a recent high of over 19 percent in September 2005.
  - The Bank of Jamaica (BOJ) steadily eased monetary policy by removing special deposit requirements for banks and reducing interest rates in three steps during May–December 2006.
  - Annual base money growth accelerated to 17.3 percent at end-2006, compared to 9.3 percent a year earlier.
- External Sector
  - The FY 2006/07 current account deficit is estimated at 10½ percent of GDP—down from 11½ percent the previous year—due to strengthening exports, robust remittances, and tourism.
  - The nominal bilateral rate vis-à-vis the U.S. dollar depreciated by under 4 percent (year-on-year) during 2006.
  - Markets became unsettled in January 2007 in anticipation of a large redemption of government bonds; the BOJ issued special bills and stepped up foreign exchange sales.
- Fiscal Outturn and Public Finances
  - The FY 2006/07 budget deficit target was likely missed by a large margin, mostly due to higher expenditures.
  - Revenues increased but fell short of budget targets.
  - Expenditures for the year are likely to have exceeded budgeted amounts by at least 1¾ percentage points of GDP, and possibly by as much as 2½ percentage points of GDP.
  - The primary surplus has fallen to about 8–8¾ percent of GDP.
  - Interest payments are likely to have ended the year about ¾ percentage points of GDP higher than budgeted.
  - J$5 billion (0.7 percent of GDP) in capital spending may be underreported for this year; including these amounts as FY 2006/07 expenditures could lead to a deficit as much as 2¾ percent of GDP higher than originally budgeted.
  - Mid-year expenditure increases added about 1.5 percentage points of GDP to non-interest current expenditures.
- Financial Sector and Risks
  - Prudential indicators for banks and other regulated financial institutions remain sound.
  - A worrying development has been the growth of unregulated foreign currency trading schemes promising spectacularly high returns.
  - Bank credit to the private sector has been expanding at double digit rates in real terms annually.
  - The outstanding stock of short-term central bank sterilization bills has increased markedly since 2003.

### Debt Structure and Sensitivities
- Public debt structure and sensitivity
  - Jamaica’s public debt is almost evenly split between domestic and foreign currency denominations.
  - Variable rate instruments account for about 40 percent of the total portfolio.
  - About three quarters of the debt stock is owed to private creditors, including the domestic financial system (commercial banks, merchant banks, security dealers, and others).
  - Over the past two years, the share of the debt that is sensitive to exchange rate movements increased by 1½ percentage points while the interest-sensitive portion increased by almost 8 percentage points.
- The debt is sensitive to exchange rate as well as domestic interest rate changes.
- Central bank losses reflect the costs of sterilizing reserves, which have increased since 2003.

### Medium-Term Outlook and Scenario Analysis
- Outlook depends critically on the authorities’ commitment to reducing debt; insufficient progress risks a reversal of dynamics after small shocks.
- Staff illustrative scenario
  - With decisive policy action, debt could come down to about 113 percent of GDP by 2012.
  - Raising and maintaining the primary surplus at 10–10½ percent of GDP, combined with fiscal discipline of extra-budgetary entities, would enable gradual reduction in the debt ratio.
  - If the primary surplus were higher (as in the authorities’ original strategy), the debt ratio would be correspondingly lower.
- Shock analyses (Public Debt Sustainability: Bound Tests; public debt in percent of GDP)
  - Historical: 127.5
  - Baseline: 113.2
  - Growth shock: 116.9
  - Primary balance (PB) shock: 119.9
  - Interest rate shock: 124.1
  - Combined shock: 123.8
  - Contingent liabilities shock: 158.3
  - A permanent interest rate shock one-half standard deviation of the historical average would significantly slow the pace of debt decline but still leave debt 10 percentage points of GDP lower in five years (relative to baseline).
  - A 30 percent weakening of the currency would lead the debt ratio to quickly climb to 170 percent of GDP; thereafter, if other factors remained equal, the debt ratio would resume declining but to a level significantly higher than at present.
- Risks
  - A confidence shock of the magnitude of a 30 percent depreciation is unlikely to remain isolated and could prompt further second-round effects placing upward pressure on debt.
  - Recent increased exposure of the public debt to interest rate shocks is of particular concern.
  - Financial sector risks include security dealers’ dependence on short-term borrowed household funds and exposures of conglomerate structures.

### Report on Policy Discussions and Fiscal Policy Priorities
- Overarching policy theme: reinvigorate the debt reduction strategy while guarding against short-run vulnerabilities.
  - Two key challenges:
    - Seize the opportunity afforded by today’s still benign external environment to build up resistance to shocks.
    - Increase the durability of the debt strategy by initiating deep structural reforms to strengthen public finances and foster sustained growth.
- Fiscal policy discussions
  - Authorities expressed disappointment at the FY 2006/07 budgetary outturn but noted the need to keep perspective on slippage and its implications for debt dynamics.
  - Authorities argued that measured GDP was significantly underestimated, and that some debt-related risks were exaggerated.
  - Authorities expressed firm commitments to reduce the deficit and bring the debt ratio down, noting that markets demand progress.

*Source: IMF staff report excerpt (Debt Management section).*

### 18. The mission advised raising the primary surplus back to at least 10 percent of

### _cr07152 - 18. The mission advised raising the primary surplus back to at least 10 percent of

### Fiscal consolidation: target and adjustment magnitude
- Recommendation: raise the primary surplus back to at least 10 percent of GDP in FY 2007/08, from 8¾ percent currently.
- Revenue risk: collection of sizeable tax arrears in FY 2006/07 reduced the arrears stock and, together with numerous specific taxes, implies that revenues could decline by up to 1.2 percent of GDP in FY 2007/08 without additional measures.
- Net effort required: raising the primary surplus by a further 1.2 percent of GDP implies an effort equivalent to 2.4 percent of GDP.
  - Potential savings: 1.1 percentage points of GDP from one-off Cricket World Cup related spending in FY 2006/07.
  - Offsets: up to 0.7 percent of GDP could be needed to account for as-yet unreported capital spending in the FY 2007/08 budget.
  - Conclusion: measures amounting to just under 2 percent of GDP would likely be required.

### Revenue and expenditure options to fill the gap
- Short-term preference: rely on revenue measures because fundamental expenditure reforms (e.g., public employment reform) will take time.
- Suggested revenue measures:
  - Reduce exempted items from the General Sales Tax.
  - Retire or substantially eliminate discretionary exemptions for imports.
  - Raise specific taxes eroded by inflation.
- Suggested expenditure measures:
  - Administrative steps to keep temporary workers and overtime in check.
  - Possible rollback of a larger portion of the FY 2006/07 increase in capital expenditures.
- Authorities’ position:
  - Will carefully review proposals; considered it premature to set a definitive FY 2007/08 deficit position but expected an improvement over FY 2006/07.
  - Trimming capital spending seen as challenging due to infrastructure repair needs.
  - Need to balance revenue measures during an election year.
  - Positive assessment of tax administration reforms supported by CARTAC and Fund technical assistance; importance of restructuring the organizational structure of tax administration emphasized.

### Public enterprise reform and fiscal risks
- Concern: deterioration in financial positions of key perennial loss-makers; available data through September 2006 indicated combined deficits of JUTC, the Sugar Company and Air Jamaica amounted to almost 1 percent of GDP more than expected.
- Recommendations and scope:
  - Reduce capital spending by public entities in FY 2007/08 after large expansion over the past year.
  - Use concessional PetroCaribe funds currently financing off-budget entities to replace expensive central government debt where feasible.
- Authorities’ actions:
  - Senior management change at JUTC.
  - Initiative underway to divest the Sugar Company.
  - Endorsed comprehensive three-year restructuring plan for Air Jamaica.

### Debt management (summary of Box 1)
- Portfolio shift: variable rate debt now accounts for 70 percent of total outstanding domestic currency debt (compared to 50 percent in 2005) and amounts to about 48 percent of GDP currently (an increase of 13 percentage points of GDP since 2005).
- Cost–benefit findings:
  - Aggregate data suggests interest savings from shifting an additional 13 percent of GDP from fixed to variable rate would amount to under 0.1 percent of GDP annually.
  - Closer analysis suggests savings could be less than half that amount.
  - Risk: with current 12-month standard deviation of 37 basis points for domestic interest rates, there is approximately a one in six chance that the savings could be undone entirely.
  - Extreme shock example: if interest rates increased suddenly by 18 percentage points as in 2003, initial costs of having shifted 13 percentage points of GDP to variable rate instruments would amount to 2½ percent of GDP annually.
  - Cost of extending fixed-rate maturity: regression estimates suggest increasing fixed-rate maturity by one year cost, on average, between 20 to 30 basis points between 2005 and now.
- Data snapshot (table highlights):
  - Weighted interest rate (percent): Fixed debt 17.7 (2005) to 14.8 (2007) change -2.9; Variable debt 16.7 (2005) to 14.2 (2007) change -2.5; Difference 1.1 and 0.6.
  - Maturity (years): Fixed rate 5.0 (2005) to 7.7 (2007) change 2.8; Variable rate 10.9 (2005) to 10.5 (2007) change -0.3; Difference (5.9) and (2.8).

### Monetary and exchange rate policy
- Primary aim: monetary policy targets price stability above all other objectives.
- Authorities’ actions: reduced interest rates in FY 2006/07 and accommodated a larger expansion in base money as inflation declined.
- Mission’s guidance:
  - Inflation should remain the main objective.
  - Flexible use of all instruments would allow the Bank of Jamaica (BOJ) greater independence to pursue inflation objectives and accommodate pressures for exchange rate strengthening during capital inflows.
  - Flexibility could limit sterilization costs and avoid creating incentives for one-way market bets.
  - Flexibility implies willingness to both increase and decrease interest rates; there could be a case for preemptively increasing rates given unsettled global financial markets.
- Authorities’ concerns: market structure and bank behavior sometimes lead banks to sell foreign exchange to the BOJ; frequent sharp movements in key financial variables have significant costs in a small open island economy.
- Exchange rate assessment: current level of the exchange rate appeared broadly appropriate from competitiveness considerations; trade-weighted real effective exchange rate and tourism-competitor based measures were in line with historical levels; exports and tourism earnings performing robustly; current account deficit projected to improve over time as infrastructure and tourism projects bear fruit.

### Financial sector: supervision, risks, and reform priorities
- Progress:
  - Draft Omnibus Banking Bill incorporates many FSAP recommendations.
  - BOJ preparing for early introduction of Basel II standards and strengthening risk monitoring.
  - Insurance supervisory capacity enhanced by new hiring.
  - Progress on regulation of private pension schemes and development of regulations for collective investment schemes.
  - Proceeds of Crime Act passed to strengthen legal regime to combat money laundering.
- Risks and recommended actions:
  - Encourage continued enhanced supervision of activities vulnerable to interest rate risk.
  - Vigilance against pyramid schemes; strengthen technical capacity for forensic investigations and prosecution where evidence of fraud emerges.
  - Refine repo margins for security dealers and set new requirements, on average, above current levels as per 2005 FSAP recommendations.
  - Introduce more risk-sensitive capital requirements on security dealers to enhance resilience.
  - Prioritize developing and testing crisis management systems.
- Repo sector specifics (Box 2):
  - Securities sector assets amount to half of GDP; liabilities exceeding bank deposits.
  - Repo-driven growth; average annual returns on assets fell to 1.8 percent in the year to September 2006, compared to 2.4 percent the previous year.
  - Sector exposed to interest rate and roll-over risk; legal ambiguities over control rights may exacerbate risks.
  - Within Jamaica, 65 percent of the securities market accounted for by securities firms belonging to eleven financial conglomerates; securities arm share within conglomerates ranges from 2 percent to 91 percent of total group assets.
  - Six banks account for more than 50 percent of assets in nine Caribbean countries, indicating regional ownership linkages.

### Structural reforms to reinforce the debt strategy
- Need: deep structural reforms to make the fiscal strategy robust; limited room for slippage with debt still high.
- Recommended preparatory reforms:
  - The tax system: reform and simplify by unifying rates, reducing number of taxes, and streamlining allowances and exemptions; review tax incentives due to fiscal costs.
  - Public sector wage and employment policies: multi-year plan of fundamental reform required after public sector headcount rose by over 40 percent during 1995–2003; wage freeze policies were not sustainable without addressing employment.
  - Public entities: consolidate monitoring and reporting of off-budget entities; prepare a fiscal ROSC; assess major fiscal risks from public enterprises; Fund assistance for a consolidated public sector accounting framework suggested.
  - Financial sector: clarify legal framework for repos; empower the Financial Services Commission for consolidated supervision and penalties; strengthen inter-agency collaboration and develop protocols for joint on-site inspections; explore regional supervision options with Caribbean counterparts.
  - Business environment: review scope for reducing red tape, consolidating and eliminating duplicate requirements, institutions and functions.
- Authorities’ actions: working with the Inter-American Development Bank to strengthen the business climate; reviewing tax incentives; ongoing efforts to strengthen public enterprises.

### Staff appraisal (summary)
- Notable successes: economic growth robust, current account deficit improving, sharp reduction in inflation, recovery in revenue collections, progress on financial sector reforms.
- Concerns: substantial breach of the FY 2006/07 deficit target and lack of progress in reducing debt; reliance on stop-gap measures like wage freezes.
- Advice: initiate deep reforms while conditions remain benign to deliver sustained and durable debt reduction; reinvigorate the medium-term program adopted in 2004; use upcoming elections as an opportunity to build political consensus for reforms in the tax system, public employment, and reassessment of public sector size and role to foster private sector–led growth and reduce indebtedness.

*Source: _cr07152 - 18. The mission advised raising the primary surplus back to at least 10 percent of*

### 35. The authorities will also need to remain vigilant against vicissitudes in market

### The authorities will also need to remain vigilant against vicissitudes in market conditions and sentiments

### Fiscal policy and public enterprise reform
- The authorities’ commitment to reduce the deficit in FY 2007/08 is welcomed.
- Policy recommendation: aim for a primary surplus of at least 10 percent of GDP and take the measures necessary to credibly deliver on such a target.
- Continue to pursue public enterprise reform.
- Consider Fund technical assistance for:
  - creating a framework to identify risk from off-budget entities,
  - preparing a Fiscal ROSC,
  - putting in place a consolidated public sector accounting framework.

### Monetary policy, exchange rate flexibility, and financial-sector resilience
- Context: limited room for fiscal policy maneuverability in Jamaica reinforces the need for flexible monetary and exchange rate policies and for further strengthening the financial sector.
- The authorities’ readiness to increase interest rates, if and when necessary, is important.
- Benefits of policy action: improving the resiliency of the debt profile and the financial sector to interest rate shocks.

### Financial stability vigilance and crisis preparedness
- Maintain vigilance against the dangers of unregulated speculative investment schemes.
- Strengthen consolidated supervision.
- Prioritize the development and testing of crisis management systems.

*Source: IMF staff discussion in the provided content.*

### 37. It is recommended that the next Article IV consultation take place within the

### 37. It is recommended that the next Article IV consultation take place within the

### Recommendation
- It is recommended that the next Article IV consultation take place within the standard 12-month cycle.

### Key macroeconomic projections and indicators (annual percent changes, staff projections)
- Real GDP: 0.4 (2004/05); 2.0 (2005/06); 2.9 (2006/07); 3.0 (2007/08); 3.1 (2008/09); 3.2 (2009/10); 3.2 (2010/11); 3.2 (2011/12)
- Nominal GDP: 11.0; 17.0; 10.3; 9.4; 9.3; 8.7; 8.5; 8.5
- Consumer price index (end of period): 13.2; 11.4; 6.6; 6.0; 5.5; 5.2; 5.2; 5.2
- Consumer price index (average): 12.7; 15.1; 7.1; 6.3; 6.0; 5.3; 5.2; 5.2
- Exchange rate (end of period, in J$/US$): 0.9; 6.2 (historical entries present; later projections omitted)
- End-of-period REER (percent change, appreciation +): 5.2; 4.1 (later entries omitted)
- Unemployment rate (in percent): 12.2; 11.3 (later entries omitted)

### Fiscal operations — central government (levels and percent of GDP)
- Budgetary revenue (percent of GDP): 31.2 (2004/05); 29.0 (2005/06); 30.1 (2006/07); 28.9 (2007/08); 28.8 (2008/09); 28.5 (2009/10); 28.5 (2010/11); 28.5 (2011/12)
- Budgetary expenditure (percent of GDP): 36.7; 32.7; 34.8; 33.8; 33.8; 33.2; 30.6; 29.6
- Primary expenditure (percent of GDP): 19.4; 18.0; 21.2; 20.7; 20.4; 20.0; 19.6; 19.4
- Interest payments (percent of GDP): 17.4; 14.7; 13.5; 13.1; 12.8; 11.5; 10.9; 10.1
- Budget balance (percent of GDP): -5.5; -3.6; -4.7; -3.1; -2.6; -1.2; -0.3; 0.7
- Primary fiscal balance (percent of GDP): 11.9; 11.1; 8.8; 10.0; 10.2; 10.3; 10.7; 10.9
- Off-budget expenditure (percent of GDP): 3.1; 1.2; 1.4; 1.2; 0.0; 0.6; 0.5; 0.5
- Overall fiscal balance (percent of GDP): -8.6; -4.8; -6.1; -4.3; -2.6; -1.9; -0.8; 0.2
- Public debt (percent of GDP): 139.6; 133.0; 134.9; 131.0; 128.0; 124.4; 119.2; 113.2

### Fiscal central government operations — levels (J$ billions) and projections
- Budgetary revenue and grants: 171.5 (2004/05); 186.7 (2005/06); 219.2 (2006/07 revised); 213.3 (2006/07 staff); 224.1 (2007/08); 244.3 (2008/09); 263.2 (2009/10); 285.6 (2010/11); 309.9 (2011/12)
- Budgetary expenditure: 201.8; 210.0; 238.7; 246.7; 262.4; 281.6; 290.8; 306.0; 321.3
- Primary expenditure: 106.4; 115.6; 146.3; 150.6; 160.4; 172.7; 184.5; 196.6; 211.2
- Interest (total): 95.4; 94.4; 92.4; 92.4; 96.0; 102.0; 108.9; 106.4; 109.4; 110.1 (note detailed domestic/external splits provided)
- Budget balance (J$ billions): -30.2; -23.3; -19.4; -33.4; -24.0; -22.4; -11.4; -2.8; 7.7
- Overall balance (J$ billions): -47.5; -30.8; -29.6; -43.5; -33.1; -22.4; -17.1; -7.9; 2.6

### Public debt composition and projections (levels and percent of GDP)
- Public debt (J$ billions): 767 (2004/05); 855 (2005/06); 957 (2006/07); 1,071 (2007/08); 1,016 (2008/09); 1,086 (2009/10); 1,147 (2010/11); 1,192 (2011/12)
- Government debt (J$ billions): 727; 798; 868; 893; 931; 962; 985; 998
- Domestic debt (J$ billions): 449; 483; 514; 548; 573; 591; 601; 600
- External debt (J$ billions): 278; 315; 354; 345; 358; 371; 384; 398
- Public debt (percent of GDP): 139.6; 133.0; 134.9; 131.0; 128.0; 124.4; 119.2; 113.2
- Foreign-currency denominated share (percent of GDP): examples—US$ linked and foreign currency debt figures provided in detail across years; US$350 million bond issued in March 2007 included in FY 2006/07 debt.

### Monetary sector and Bank of Jamaica (stocks, flows, and ratios)
- Net international reserves (in millions of US$): 1,569 (2003/04); 1,915 (2004/05); 2,078 (2005/06); 2,220 (2006/07); 2,300 (2007/08) (Table 5 memorandum: matches Table 1 projections: 1,902; 2,078; 2,220; 2,300; 2,350; 2,400; 2,450; 2,500)
- Base money (J$ billions end-period): 36.2; 41.6; 43.6; 50.1; 55.2
- Currency in circulation (J$ billions end-period): 21.2; 24.6; 26.3; 31.3; 34.0
- Broad money (M3, end-period, J$ billions): 125; 139; 154; 173; 193
- Credit to private sector (J$ billions end-period): 80; 93; 106; 133; 155
- M3 velocity: 2.6; 2.6; 2.8; 2.7; 2.7

### External sector and balance of payments (US$ millions, staff projections)
- Current account balance: -644 (2004/05); -1,166 (2005/06); -1,127 (2006/07); -1,058 (2007/08); -1,109 (2008/09); -895 (2009/10); -753 (2010/11); -736 (2011/12)
- Trade balance: -2,124; -2,716; -2,858; -2,872; -3,160; -3,180; -3,248; -3,458
  - Exports (f.o.b.): 1,567; 1,809; 2,085; 2,149; 2,124; 2,155; 2,226; 2,271
  - Imports (f.o.b.): 3,691; 4,524; 4,943; 5,022; 5,284; 5,336; 5,474; 5,729
    - Fuel (c.i.f.): 987; 1,558; 1,535; 1,574; 1,661; 1,707; 1,768; 1,818
    - Exceptional imports (incl. FDI-related): 316; 273; 661; 521; 549; 391; 304; 354
- Services (net): 570; 643; 742; 845; 955; 1,110; 1,246; 1,372
  - Travel (tourism receipts series and tourism receipts noted separately): Travel totals and tourism receipts provided (e.g., tourism receipts 1,457; 1,619; 1,799; 1,930; 2,088; 2,258; 2,426; 2,606)
- Income (net): -599; -682; -776; -861; -815; -831; -857; -857
- Current transfers (net): 1,508; 1,589; 1,766; 1,830; 1,911; 2,007; 2,107; 2,208
- Capital and financial account (net): 977; 1,342; 1,269; 1,138; 1,159; 945; 803; 786
- Net international reserves (levels, US$ millions): 1,902; 2,078; 2,220; 2,300; 2,350; 2,400; 2,450; 2,500
- Current account (percent of GDP): -7.2; -11.4; -10.5; -9.4; -9.3; -7.1; -5.6; -5.2
- GDP (US$ millions): 8,949; 10,183; 10,698; 11,261; 11,937; 12,622; 13,346; 14,112

### Vulnerability indicators and financial sector metrics
- Real GDP growth (percent): 1.9 (2003/04); 0.4 (2004/05); 2.0 (2005/06); 2.9 (2006/07)
- CPI inflation (period average, percent): 12.9; 12.7; 15.1; 7.1
- Short-term interest rate (percent): 16.0; 13.5; 13.0; 12.8
- EMBI secondary market spread (bps, end of period): 551; 405; 301
- Gross international reserves (US$ billion): 1.6; 1.9; 2.4; 2.5
- GIR in percent of ST debt at remaining maturity: 327.7; 352.6; 679.6; 435.8
- Net international reserves (US$ billion): 1.6; 1.9; 2.1; 2.2
- Total gross external debt (percent of GDP): 54.5; 56.4; 54.7; 59.6
- Net FDI inflows (percent of GDP): 7.1; 6.0; 6.0; 7.0
- Public sector overall balance (percent of GDP): -9.9; -8.6; -4.8; -6.1
- Primary balance (percent of GDP): 11.0; 11.9; 11.1; 8.8
- Debt-stabilizing primary balance (percent of GDP): 10.0; 9.0; 5.0; 3.6
- Public sector gross debt (PSGD, percent of GDP): 144; 140; 133; 135
- Financial sector: Capital adequacy ratio (percent): 14.0; 17.7; 17.9; 16.1; NPLs in percent of total loans: 3.1; 2.7; 2.3; 2.2; Provisions in percent of NPLs: 125.0; 135.7; 131.8; 125.8
- FX deposits held by residents (percent of total deposits): 38.1; 38.8; 39.5; 37.8
- Public sector debt held by financial sector (percent of total FS assets): 32.7; 25.0; 24.2; 20.0
- Credit to private sector (percent change): 40.0; 20.0; 20.0; 30.0

### Debt sustainability analysis (public sector and external)
- Baseline public sector debt path (public debt percent of GDP): 133.3 (2001/02 historical baseline entry), then projections showing public sector debt: 134.9 (2006/07); 131.0 (2007/08); 128.0 (2008/09); 124.4 (2009/10); 119.2 (2010/11); 113.2 (2011/12)
- Change in debt/GDP ratio: -4.2; -6.5; 1.9; -4.0; -3.0; -3.6; -5.2; -6.0 (annual sequence corresponding to 2001/02 onward)
- Identified debt-creating flows and contributions (examples):
  - Primary deficit (percent of GDP): -7.4; -5.2; -9.3; -8.7; -9.9; -7.4; -8.9; -10.2; -9.7; -10.1; -10.4
  - Automatic debt dynamics (percent of GDP contribution): 3.2; 14.4; 5.0; 4.9; 0.1; 2.0; 2.6; 3.0; 2.8; 2.7; 2.4
  - Contribution from interest rate/growth differential (percent): 1.2; 3.2; -3.6; 4.1; -4.8; 2.0; 2.6; 3.0; 2.8; 2.7; 2.4
  - Contribution from exchange rate depreciation (percent): 2.0; 11.2; 8.6; 0.8; 4.9; ... (later entries omitted)
- Public sector gross financing requirement (percent of GDP): 29; 33; 27; 24 (table line shows series across years)
- External debt baseline and projection (external debt percent of GDP): 53.6; 49.8; 54.5; 56.4; 54.7; 59.6; 57.8; 58.2; 58.1; 57.0; 55.8
- External debt-to-exports ratio (percent): 134.3; 126.4; 123.4; 130.7; 131.8; 134.3; 130.7; 134.5; 135.3; 133.2; 131.5
- Gross external financing need (US$ billions): 1.1; 1.9; 0.9; 1.1; 1.7; 1.5; 1.6; 1.8; 1.2; 1.0; 1.4
- Scenario and sensitivity analyses presented (interest-rate shock, CA shock, growth shock, real depreciation shock, combined shocks), including bound tests on external debt as percent of GDP (figures and descriptions provided in the source).

### Memoranda and specific notes
- Fiscal years run from April 1 to March 31.
- Public debt is defined as central government debt including debt assumed from public entities, plus guaranteed public entity debt, plus PetroCaribe debt. For FY 2006/07, the debt includes US$350 million bond issued for prefinancing (March 2007).
- Cash-flow savings from the PetroCaribe agreement with Venezuela are managed by an extrabudgetary Fund that lends to both budgetary and off-budget entities.
- BoJ special issue bonds: accrued interest treatment and payment timing changes are noted (interest capitalized and paid via issuance; beginning in 2008/09 central government pays concurrently, resulting in two payments in FY 2008/09).
- Several tables include staff projections starting from FY 2006/07; projections assume approximately 0.7 percent of GDP in capital expenditure in FY 2006/07 are carried over to FY 2007/08.
- Tables report detailed breakdowns by domestic/external, official/commercial, and PetroCaribe components of debt; detailed banking sector exposures and off-budget items are provided.

*Source: Jamaican authorities; and Fund staff estimates and projections (compiled from the provided IMF staff report tables).*

### APPENDIX I.  BACKGROUND AND SUMMARY OF APPENDICES

### APPENDIX I.  BACKGROUND AND SUMMARY OF APPENDICES

### Discussions
- The 2007 Article IV consultation discussions were held in Kingston during February 5–16, 2007.
- The mission met with Finance Minister Omar Davies, Governor Derick Latibeaudiere, Financial Secretary Colin Bullock, other senior officials, representatives of the private sector, and the opposition.
- The staff team comprised:
  - Sanjaya Panth (Head)
  - Jinqqing Chai, Chris Faircloth and Rafael Romeu (all WHD)
  - Piyabha Kongsamut (PDR)
  - Ms. Atkinson (WHD) joined for the final discussions
  - Mr. Fried (Executive Director) and Ms. Morgan (OED) also joined

### Exchange arrangement
- Jamaica has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current transactions.
- Beginning September 17, 1990, the external value of the Jamaican dollar has been determined in an interbank market operated by commercial banks.
- The exchange regime is classified by the Fund as a managed float with no pre-determined path.
- At January 31 (year implied in text), the Jamaican dollar was trading at around J$67 to the U.S. dollar.
- The surrender requirement for authorized foreign exchange dealers and cambios requires surrender of 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), effected based on the previous day’s average selling rate (referred to as “surrender rates”).
- In 2004, the surrender rates resulted in cross rates between the U.S. dollar and the Canadian dollar and between the U.S. dollar and the pound sterling differing periodically (for more than five days) by more than 1 percent from the midpoint spot exchange rates in their principal markets. That broken cross rate is no longer apparent; therefore, there is no evidence that a multiple currency practice arises from the surrender requirement.

### Fund relations, resources, and financial arrangements
- Outstanding purchases or loans: None.
- Last financial arrangement: Extended Fund Arrangement (EFF) for the period 12/11/92 to 03/16/96 totaling SDR$109 million (of which SDR$77.8 million was drawn).
- The post of the resident representative in Jamaica was closed in August 1997.

Key table items (as presented):
- I. Membership Status: Joined: February 21, 1963; Article VIII
- II. General Resources Account (SDR Million / % Quota):
  - Quota: 273.50 / 100.00
  - Fund holdings of currency: 273.55 / 100.02
  - Reserve position: 0.00 / 0.00
- III. SDR Department (SDR Million / % Allocation):
  - Net cumulative allocation: 40.61 / 100.00
  - Holdings: 0.17 / 0.42
- IV. Outstanding Purchases and Loans: None

Latest financial arrangements (type, approval date, expiration date, Amount Approved (SDR Million), Amount Drawn (SDR Million)):
- EFF: Dec. 11, 1992 — Mar. 16, 1996 — 109.13 — 77.75
- Stand-By: Jun. 28, 1991 — Sep. 30, 1992 — 43.65 — 43.65
- Stand-By: Mar. 23, 1990 — May 31, 1991 — 82.00 — 82.00

Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
- Principal Charges/Interest forthcoming by year:
  - 2007: 1.29
  - 2008: 1.73
  - 2009: 1.72
  - 2010: 1.73
  - 2011: 1.73
- Total (per year): 1.29, 1.73, 1.72, 1.73, 1.73

- VII. Implementation of HIPC Initiative: Not Applicable
- VIII. Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

### Statistical issues and technical assistance
- Data provision to the Fund is adequate for surveillance purposes despite weaknesses in national accounts and the lack of producer price and international investment position (IIP) data.
- Efforts under way:
  - Improve national accounts, including updating the base year.
  - Revise CPI weightings.
  - Begin compiling IIP data; this effort is supported by the Caribbean Regional Technical Assistance Center (CARTAC) and the European Union.
- Recent technical assistance:
  - In 2006, a CARTAC/FAD mission evaluated tax and customs administration performance and prepared recommendations to strengthen operations of the Jamaica Tax Administration.
  - The Fund has provided TA on banking supervision and national accounts methodology in recent years.

Technical assistance summary (department and dates/purpose as listed):
- FAD: September 2006 — Tax and Customs Administration
- 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

### Relations with the World Bank Group
- As of March 30, 2007, the active portfolio of the Bank stood at US$139 million, of which US$53 million remains undisbursed.
- The Country Assistance Strategy (CAS) for Jamaica was approved by the WB Executive Board on May 10, 2005.
- The CAS proposes financial assistance of up to US$150 million between 2006 and 2009 in support of:
  - (i) accelerating inclusive economic growth,
  - (ii) improving human development and opportunity,
  - (iii) preventing and reducing crime.
- CAS support includes lending, analytical, and technical assistance and coordination with IFC and MIGA for infrastructure, financial sector, services, and related support.
- Planned analytical work includes: Poverty Assessment, Financial Sector Assessment Program (jointly with the IMF), Country Fiduciary Assessment (jointly with the Inter-American Development Bank), and a Diagnostic of the Investment Climate.

Selected World Bank projects (approval date and original amount):
- Jamaica Reform of Secondary Education Project II — approved March 2003 — US$39.8 million
- Jamaica HIV/AIDS Prevention and Control Project — approved August 2002 — US$15 million
- Jamaica Social Safety Net Project — approved February 2002 — US$40 million
- Jamaica National Community Development Project — approved April 2003 — US$15 million
- Jamaica Inner City Basic Services for the Poor Project — approved March 2006 — US$29.3 million

Project objectives and components (high-level):
- Reform of Secondary Education Project II: improve quality and equity of secondary education; expand access to upper secondary; strengthen central ministry and regional offices; finance school improvement grants, centrally coordinated activities, access to upper secondary, and support ministry/regional implementation.
- HIV/AIDS Prevention and Control Project: support Jamaica’s HIV/AIDS National Strategic Plan through expansion of preventive programs, strengthening treatment/care/support for PLWHA, and strengthening multisectoral capacity.
- Social Safety Net Project: transform social safety net into fiscally sound, efficient system; finance conditional grants to eligible poor children, pregnant/lactating mothers, elderly poor, disabled and destitute adults; strengthen institutional capacity; support enrollment mechanisms and IT systems; provide technical assistance for scoring formula and monitoring/evaluation.
- National Community Development Project: provide basic services and temporary employment to poorest groups via JSIF subprojects; finance demand-driven community infrastructure; technical assistance and training for JSIF; goods for supervision and monitoring.
- Inner City Basic Services for the Poor Project: improve quality of life in 12 inner-city areas and poor urban informal settlements for over 60,000 residents through infrastructure, microfinance access, land tenure regularization, community capacity building, and public safety enhancements.

Economic and sector work and regional studies:
- Country Economic Memorandum (2003–2004) focused on accelerating inclusive economic growth.
- Public Expenditure Review (2004–2005) examined expenditure allocation priorities and public sector reform.
- Growth and competitiveness study for the Caribbean completed.
- Ongoing/prepared work: Poverty Assessment; Country Fiduciary Assessment (with IDB); Diagnostic of Investment Climate.
- Regional studies planned or ongoing: Crime, Violence and Social Exclusion; Social Protection Strategy Review for the Caribbean; Migration, Remittances and the Diaspora; additional studies on pension reform, health financing, infrastructure and financial sectors.

Financial relations (selected figures, in millions of U.S. dollars):
- Project original amounts / available disbursed / outstanding:
  - National Community Development Project: 15.0 / 2.5 / 12.5
  - JM - Reform of Secondary Education Project II: 39.8 / 7.3 / 5.2*  (*Project restructured.)
  - JM – Inner City Basic Services for the Poor Project: 29.3 / 28.4 / 0.9
  - HIV/AIDS Prevention and Control Project (Second Phase): 15.0 / 3.0 / 7.6
  - Social Safety Net Project: 40.0 / 12.1 / 26.8
  - Total: 139.10 original; 53.3 available; 53.0 disbursed/outstanding (as presented)

Disbursements and Debt Service (Fiscal Year Ending June 30) — Actual and projections (selected rows as presented):
- Total disbursements (by year): 2000: 65.1; 2001: 97.6; 2002: 82.4; 2003: 85.0; 2004: 11.3; 2005: 8.5; 2006: 21.7; 2007 (projection): 10.9
- Repayments (by year): 2000: 70.1; 2001: 56.9; 2002: 45.7; 2003: 44.9; 2004: 47.4; 2005: 43.4; 2006: 39.7; 2007 (projection): 34.1
- Net disbursements (by year): 2000: -5.0; 2001: 40.7; 2002: 36.7; 2003: 40.1; 2004: -36.1; 2005: -34.9; 2006: -17.9; 2007 (projection): -23.1
- Interest and fees (by year): 2000: 22.8; 2001: 21.6; 2002: 20.3; 2003: 21.9; 2004: 18.9; 2005: 17.5; 2006: 20.5; 2007 (projection): 21.6

### Relations with the Inter-American Development Bank (IDB)
- As of February 2007, Jamaica’s outstanding debt to the IDB stood at US$637 million, of which US$607 million were public sector loans and US$30 million were loans to the private sector.
- In August 2006, the IDB approved a new country strategy for the 2006–09 period. Principal areas of focus are:
  - (i) private sector development;
  - (ii) value for money;
  - (iii) reducing vulnerability to natural disasters.

### Last Article IV Consultation and surveillance
- Jamaica is under intensified surveillance whereby staff monitor the implementation of the economic strategy formulated by the authorities without reaching prior understandings with the Fund.
- The last Article IV consultation was completed by the Executive Board on March 24, 2006 (IMF Country Report Nos. 06/158 and 06/157).
- Interim staff reports prepared for information of the Executive Board between Article IV consultations include IMF Country Report Nos. 06/324, 05/219, and 05/61.

### Resident representative
- The post of the resident representative was closed in August 1997.

*Appendix I. Jamaica—Fund Relations (As of February 28, 2007) — source document content*

### Appendix III. JAMAICA—Relations with the Inter-American Development Bank

### Appendix III. JAMAICA—Relations with the Inter-American Development Bank

### Membership and overall engagement
- Jamaica joined the Inter-American Development Bank (IDB) in 1969.
- Since accession, the IDB has approved 95 loans (78 projects) to Jamaica amounting to US$1.8 billion and 179 technical cooperation operations totaling US$59.6 million.
- IDB assistance has supported infrastructural, environmental, and social sector projects aimed at enhancing human resource and absorptive capacity and strengthening the foundation for private sector-led growth.
- The IDB has supported reforms to strengthen the institutional and regulatory environment.

### Outstanding debt and share of external debt (as of February 2007)
- Outstanding debt to the IDB: US$636.9 million total.
  - Public sector: 606.9
  - Private sector: 30.0
- IDB outstanding debt represents 11 percent of public external debt and one-half of multilateral debt.
- The IDB’s share of total public external debt has declined since 2003.

### IDB portfolio composition and disbursement (as of February 2007)
- Bank portfolio: 10 investment loans valued at US$217.8 million; 28 non-reimbursable technical cooperations (TC) valued at US$13.0 million.
- Disbursement status:
  - Forty-three percent of the IDB project funds have been disbursed.
  - Fifty-two percent of the TC funds have been disbursed.
  - Remaining available for disbursement: some US$130.5 million.

- Table of major ongoing projects (reported values preserved):
  - Projects in execution: Number 10, Amount (US$m.) 217.8, Percent Disbursed 43
  - Private sector loans: Number 1, Amount (US$m.) 5.0, Percent Disbursed 0
  - IIC loans: Number 1, Amount (US$m.) 10.0, Percent Disbursed 35
  - TCs in execution: Number 28, Amount (US$m.) 13.0, Percent Disbursed 52

### Project implementation performance and fiscal constraints
- Growing government current expenditures—particularly on interest payments and wages and salaries—have crowded out capital expenditures.
- Reduction in the government’s investment program caused budgetary allocations to IDB-supported projects to fall short during 2002/03 to 2004/05, slowing project execution, extending project lifetimes, delaying or preventing achievement of development objectives, and increasing the ratio of project administration and financial costs to disbursements.

- Number of projects by implementation progress category (annual counts preserved):
  - 2002: Highly Satisfactory 0, Satisfactory 10, Unsatisfactory 3, Very unsatisfactory 0, TOTAL 13
  - 2003: Highly Satisfactory 0, Satisfactory 7, Unsatisfactory 6, Very unsatisfactory 0, TOTAL 13
  - 2004: Highly Satisfactory 0, Satisfactory 6, Unsatisfactory 7, Very unsatisfactory 0, TOTAL 13
  - 2005: Highly Satisfactory 0, Satisfactory 7, Unsatisfactory 4, Very unsatisfactory 2, TOTAL 13
  - 2006: Highly Satisfactory 0, Satisfactory 7, Unsatisfactory 3, Very unsatisfactory 0, TOTAL 10

### Portfolio rationalization and cancellations
- To align the IDB portfolio with available fiscal space, the government and IDB rationalized the portfolio through partial loan cancellations while trying to minimize impact on development objectives.
- October 2004: agreed cancellations totaling US$49.8 million from nine out of 13 projects.
- 2006: further partial cancellations of US$10 million.
- FY2006/07: government capital expenditures increased and IDB-supported projects received better budget allocations, improving project implementation pace.

### IDB country strategy, 2006–09
- Approved August 2006.
- De-emphasizes public sector investment lending due to fiscal space constraints; instead focuses on policy-based lending, grant modalities, and lending to the private sector.
- Principal areas of focus:
  - (i) private sector development;
  - (ii) value for money;
  - (iii) reducing vulnerability to natural disasters.

### Net loan flows and cash flows (2003–2007; US$ million)
- Loan disbursements (a): 2003 26.4; 2004 80.8; 2005 12.8; 2006 25.9; 2007 62.4
- Repayments (principal) (b): 2003 52.7; 2004 52.3; 2005 51.2; 2006 64.1; 2007 70.0
- Net loan flow (a–b) (c): 2003 -26.3; 2004 28.5; 2005 -38.4; 2006 -38.2; 2007 -7.7
- Interest and charges (d): 2003 31.2; 2004 29.1; 2005 29.8; 2006 28.0; 2007 31.3
- Net cash flow (c–d) (e) (includes subscriptions): 2003 -58.5; 2004 -2.7; 2005 -73.6; 2006 -70.6; 2007 -42.4
- Note: 2007 figures are projected.

### Projected debt service to IDB, 2007–11 (Millions of U.S. dollars equivalent)
- 2007: Principal 70.0; Interest 31.3; Total 101.3
- 2008: Principal 70.0; Interest 30.4; Total 100.4
- 2009: Principal 67.1; Interest 28.1; Total 95.2
- 2010: Principal 62.4; Interest 25.0; Total 87.4
- 2011: Principal 50.1; Interest 22.3; Total 72.4

*Source: IMF staff compilation from IDB and Jamaican authorities documents contained in Appendix III.*

### 7. The authorities’ efforts to regularize the budget recording and reporting

### 7. The authorities’ efforts to regularize the budget recording and reporting

### Progress and objectives
- The authorities’ efforts to regularize budget recording and reporting procedures are welcome and should continue.
- The provision made in the FY 2007/08 budget for past expenditures undertaken through special financing schemes exemplifies the authorities’ existing commitment to fiscal transparency.
- The experience highlights the potential benefits of:
  - carrying out a thorough review of fiscal standards and codes;
  - creating a framework to identify risk from off-budget entities;
  - putting in place a stronger consolidated public sector accounting framework.

### Key fiscal figures (central government operations, in billions of Jamaican dollars)
- Budgetary revenue and grants: 171.5 (2004/05); 186.7 (2005/06 Staff Rpt.); 213.3 (2006/07 Rev.); 211.6 (2006/07 Staff Rpt.); 224.1 (2007/08 Budget); 243.1 (4/11/07)
- Tax: 153.0; 165.7; 193.3; 192.5; 204.2; 221.9
- Nontax: 14.4; 20.3; 16.7; 17.3; 17.4; 17.9
- Grants: 4.2; 0.7; 3.2; 1.8; 2.5; 3.3
- Budgetary expenditure: 201.8; 210.4; 246.7; 251.7; 262.4; 265.6
- Primary expenditure: 106.4; 116.0; 150.6; 154.9; 160.4; 164.2
- Wage and salaries: 63.5; 63.1; 78.2; 78.7; 86.7; 88.5
- Other expenditure: 32.1; 40.8; 49.3; 49.1; 52.7; 49.3
- Capital expenditure: 10.8; 12.0; 23.2; 27.2; 21.0; 26.3
- Interest: 95.4; 94.4; 96.0; 96.8; 102.0; 101.5
  - Domestic: 75.3; 71.5; 69.2; 70.3; 71.1; 70.5
  - Current: 72.6; 65.4; 64.4; 65.5; 65.3; 64.7
  - BoJ special issue bonds 1/: 2.6; 6.1; 4.8; 4.8; 5.8; 5.8
  - External: 20.1; 22.9; 26.8; 26.5; 30.9; 31.0
- Gap: 0.0; 0.0; 0.0; 0.0; 14.3; 0.0
- Budget balance: -30.2; -23.7; -33.4; -40.1; -24.0; -22.6
- Primary balance (of which): 65.2; 70.7; 62.6; 56.7; 78.0; 78.9
- Off-budget expenditure: 17.3; 7.4; 10.1; 10.1; 9.0; 9.0
  - BoJ cash losses 2/: 13.4; 7.4; 10.1; 10.1; 7.4; 7.4
  - Deferred financing 3/: 3.9; 0.0; 0.0; 0.0; 1.6; 1.6
- Overall balance: -47.5; -31.2; -43.5; -50.2; -33.1; -31.6
- Financing: 47.5; 31.2; 43.5; 50.2; 33.1; 31.6
  - External financing: 7.8; 20.7; 13.3; 13.3; -21.0; -21.0
  - Domestic financing: 38.5; 10.5; 30.3; 37.0; 54.1; 52.6
    - Banking system: 1.0; -11.9; 4.0; 4.0; 38.7; 38.7
    - Others: 37.5; 22.4; 26.2; 33.0; 15.4; 13.9
- Divestment: 1.3; 0.0; 0.0; 0.0; 0.0; 0.0

Notes on presentation and recording:
- Footnotes in the source explain treatment of BoJ Special Issue bonds, BoJ operating losses, debt from deferred financing facilities, and recent changes in how authorities incorporate deferred financing in budget presentations. Authorities are undertaking a review of historical data to ensure consistency between presentations.

### Key fiscal ratios (central government, in percent of GDP)
- Budgetary revenue and grants: 31.2 (2004/05); 29.0 (2005/06 Staff Rpt.); 30.1 (2006/07 Rev.); 29.8 (2006/07 Staff Rpt.); 28.9 (2007/08 Budget); 31.3 (4/11/07)
- Tax: 27.8; 25.8; 27.3; 27.1; 26.3; 28.6
- Nontax: 2.6; 3.2; 2.4; 2.4; 2.2; 2.3
- Grants: 0.8; 0.1; 0.5; 0.3; 0.3; 0.4
- Budgetary expenditure: 36.7; 32.7; 34.8; 35.5; 33.8; 34.2
- Primary expenditure: 19.4; 18.0; 21.2; 21.8; 20.7; 21.2
- Wage and salaries: 11.6; 9.8; 11.0; 11.1; 11.2; 11.4
- Other expenditure: 5.8; 6.4; 7.0; 6.9; 6.8; 6.4
- Capital expenditure: 2.0; 1.9; 3.3; 3.8; 2.7; 3.4
- Interest: 17.4; 14.7; 13.5; 13.7; 13.1; 13.1
  - Domestic: 13.7; 11.1; 9.8; 9.9; 9.2; 9.1
  - Current: 13.2; 10.2; 9.1; 9.2; 8.4; 8.3
  - BoJ special issue bonds 1/: 0.5; 0.9; 0.7; 0.7; 0.7; 0.7
  - External: 3.7; 3.6; 3.8; 3.7; 4.0; 4.0
- Gap 3/: 0.0; 0.0; 0.0; 0.0; 1.8; 0.0
- Budget balance: -5.5; -3.7; -4.7; -5.7; -3.1; -2.9
- Primary balance: 11.9; 11.0; 8.8; 8.0; 10.0; 10.2
- Off-budget expenditure: 3.1; 1.2; 1.4; 1.4; 1.2; 1.2
  - BoJ cash losses 2/: 2.4; 1.2; 1.4; 1.4; 1.0; 1.0
  - Deferred financing 3/: 0.7; 0.0; 0.0; 0.0; 0.2; 0.2
- Overall balance: -8.6; -4.8; -6.1; -7.1; -4.3; -4.1
- Budgetary principal payment: 24.3; 21.8; 17.4; 17.4; 13.1; 13.1
  - Domestic: 18.9; 16.6; 14.7; 14.7; 8.8; 8.8
  - External: 5.4; 5.1; 2.7; 2.7; 4.3; 4.3
- Memorandum:
  - Deposit draw-down (in percent of GDP): 0.00; 0.0; 2.3; 2.3; 3.1; 3.1
  - Public debt 4/: 139.6; 133.0; 134.9; 134.7; 131.0; 130.6
    - Of which: cumulative PetroCaribe debt: ...; 0.1; 2.1; 2.1; 4.1; 4.1
  - Gross financing (in percent of GDP): 32.9; 26.6; 23.5; 24.5; 17.3; 17.1
  - GDP (in billions of J$): 550; 643; 709; 709; 776; 776

### IMF Executive Board assessment (Public Information Notice, PIN No. 07/50 — May 4, 2007)
- Background and near-term developments:
  - Real GDP growth: just under 3 percent in FY 2006/07 (up from 2 percent the previous year and 0.4 percent the year before).
  - Annual consumer price growth: fell to 6½ percent at end-FY 2006/07 (target was 9½ percent; recent high was 19 percent in September 2005).
  - Current account deficit: estimated to have strengthened by 1 percent of GDP in FY 2006/07 to 10½ percent of GDP.
  - Net international reserves: built up sharply through 2006 and remain broadly at historical highs.
- Fiscal outcomes and public debt:
  - Fiscal targets for FY 2006/07 were missed by a wide margin; budgetary expenditures for 2006/07 estimated to have exceeded fiscal targets by 2½ percent of GDP.
  - Public debt stands at about 132 percent of GDP (excluding a recent bond to pre-finance FY 2007/08 obligations).
- Monetary and financial sector:
  - Bank of Jamaica eased monetary policy during FY 2006/07: removed special deposit requirements on banks and reduced interest rates in three steps during May–December, to 12 percent on six-month instruments.
  - Financial sector soundness indicators for regulated entities remain robust; anecdotal evidence of an apparent rise in unregulated investment schemes promising very high returns.
- Executive Directors’ views and recommendations:
  - Commended authorities for policy successes: strong growth in 2006/07, declining current account deficit trend, sharply reduced inflation, recovery in revenue collections.
  - Expressed concern about substantial breach of deficit target in FY 2006/07 and limited progress in reducing very high debt burden.
  - Considered need for fundamental reinvigoration of the medium-term macroeconomic program adopted in 2004 and broad political consensus to carry reforms through.
  - Recommended:
    - foster private sector-led growth to reduce debt burden;
    - reform the tax system and pursue civil service reforms to improve efficiency;
    - improve the business environment to raise growth and employment impact of private investment;
    - additional tax and expenditure actions to secure budgetary objectives (noting revenue targets are challenging to meet by administrative improvements alone);
    - continue consolidating the operations of off-budget entities into a single unified framework to improve fiscal control and transparency;
    - pursue public enterprise reform and strengthen framework to formulate and assess overall fiscal policy direction;
    - prepare a fiscal Report on the Observance of Standards and Codes (ROSC), request Fund technical assistance to improve public financial management, and put in place a consolidated public sector accounting framework;
    - increase monetary and exchange rate flexibility to allow the Bank of Jamaica greater independence in pursuing inflation objectives, given fiscal dominance;
    - increase vigilance over speculative investment schemes, strengthen consolidated supervision, and prioritize development and testing of crisis management systems.
- Directors welcomed progress in financial sector reforms and the authorities’ efforts to improve the resilience of the debt profile to interest rate shocks.

### Authorities’ statement (Statement by Jonathan Fried, Executive Director for Jamaica and Murna Morgan, Senior Advisor — April 30, 2007)
- Agreement with staff that fiscal and debt sustainability is the overarching challenge.
- Recent economic performance:
  - Inflation rate dropped to 6.6 percent in 2006/07 (projected 9 percent), lower than 11.4 percent in 2005/06 and 13.2 percent in 2004/05.
  - Economic activity expanded by 2.5 percent in 2006 (highest in 11 years); unemployment declined.
  - External accounts improved marginally; international reserves grew.
  - Budgeted fiscal target was not met.
- Fiscal policy and debt:
  - 2006/07 central government deficit realized at 5.7 percent (significantly higher than budgeted).
  - Revenue underperformed relative to budget projections; expenditure above budget due to public sector wage increases, interest payments, capital expenditure (Cricket World Cup related activities and road works), and allocation for Caribbean Catastrophic Risk Insurance Facility.
  - Authorities explained front-loading of agreed two-year wage adjustment under MOU II to retain skilled professionals; expect a reduction in the rate of growth in wages in 2007/08.
  - Authorities note generation of double digit primary surpluses averaging 10 percent over past five years as demonstration of fiscal discipline, while acknowledging trade-offs with capital expenditure.
- Monetary and exchange rate policy:
  - Bank of Jamaica and staff agree on need for flexibility and increased independence to pursue inflation objective.
  - BOJ interventions limited to smoothing fluctuations and providing liquidity; no predetermined exchange rate path targeted.
  - Variable rate debt accounts for 60 percent of domestic debt; BOJ holds that rate changes must correct genuine disequilibria.
  - BOJ judged January 2007 FX market instability as transitory and did not see need for preemptive rate increases; current stance consistent with achieving programmed core inflation.
  - Jamaica pre-financed 2007/08 external borrowing with a new 32-year bond with a yield of 8.125 percent in March 2007.
- Financial sector and structural reforms:
  - Authorities will continue efforts to ensure effective regulation of the financial sector, improve legislative framework and institutional structure.
  - BOJ advancing payments system reform and establishment of a central securities depository for fixed income securities to be operated by BOJ.
  - Structural reform program advancing in financial sector, tax administration, public administration, labor market and business environment.
  - Tax reform: consolidation of payroll deductions in 2007/08 to simplify and improve efficiency; education to receive increased share of consolidated collections.
  - Public enterprises reform: restructuring Air Jamaica, Jamaica Urban Transit Company, and Sugar Company of Jamaica; business plans implemented for loss reduction; divestment process for Sugar Company ongoing.
  - Business environment: program to assist small- and medium-size domestic enterprises using Petrocaribe funds via development banks; technical assistance in business planning and product development; continued steps to streamline government agencies and delegate appropriate authority; Development and Investment Manual prepared with USAID support.

*Source: _cr07152 - 7. The authorities’ efforts to regularize the budget recording and reporting*

### Conclusion

### Conclusion

### Medium-term growth prospects and challenges
- Jamaica’s medium-term growth prospects are positive but there are many challenges.
- These are daunting, but they are not insurmountable.

### Authorities’ commitment and policy stance
- My authorities have demonstrated their willingness and preparedness to make significant and sometimes painful decisions.
- They remain steadfast in their commitment to fiscal sustainability, particularly through improvements to the debt dynamics, to place Jamaica on a path to long-term sustained economic development.

### Fiscal program and objectives
- The 2007/08 budget and the medium-term programs are designed to return the fiscal balance and debt to a downward path.

### Credibility, confidence, and policy priorities
- Jamaica places a high value on its hard-earned credibility, and the confidence of the local and international markets and investment community in general.
- Accordingly, the authorities will continue to pursue policies and programs aimed at:
  - enhancing macroeconomic stability,
  - infrastructure development, and
  - improved global competitiveness,
  as a basis for expanding growth and raising the standard of living of Jamaicans.

*Source: Conclusion (IMF country report content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07152.pdf_