Jamaica: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 17, 2021
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- Published: November 17, 2021
Macro-financial progress and COVID-19 shock
- Jamaica made sustained progress before the pandemic: fiscal deficit reduced from 11 percent of GDP in 2009 to a surplus; public debt fell from 142 percent of GDP to 94 percent; inflation and the current account deficit declined.
- Institutional reforms: Fiscal Responsibility Law, move to inflation targeting, greater exchange rate flexibility, strengthened financial oversight; recent passage of amendments to the Bank of Jamaica Act and legislation to establish a Fiscal Council.
- Pandemic impact and policy response:
- Real GDP shrank by 10 percent during the initial Covid-19 shock.
- Early 2020 lockdown contained cases but caused severe economic contraction.
- Government suspended the fiscal rule for one year and temporarily reduced the primary balance target from 6½ to 3½ percent of GDP.
- Increased spending on health and social protection; reduced the GCT rate.
- Central bank injected liquidity and encouraged bank loan moratoria.
- Buffers built pre-crisis and calibrated policies prevented a follow-up fiscal, financial, or balance of payments crisis.
Recovery and near-term outlook
- Tourism rebounded to near 70 percent of pre-crisis levels despite two Covid-19 waves in 2021.
- Real GDP in 2021Q2 was 14.2 percent higher than the same quarter a year earlier.
- Growth projections:
- 8¼ percent in FY2021/22
- 3½ percent in FY2022/23
Risks to the outlook
- Main risk: Covid-19 — a third wave is abating; one million people have received at least one dose; further waves domestically or abroad could disrupt tourism, trade, and capital flows.
- Inflationary risks:
- Year-on-year inflation rose to 8.2 percent in September (above BOJ target range of 4-6 percent).
- Global food and energy price increases, import prices and shipping costs due to supply-chain shortages.
- Other risks: natural disasters; uncertain duration of global inflationary pressures.
- Upside risk: faster pace of vaccinations domestically and abatement of the pandemic in Jamaica’s main tourism markets.
Rebuilding fiscal buffers and public debt strategy
- Debt target: government’s goal to reduce debt to 60 percent of GDP by 2027/28 is appropriate.
- Current fiscal position:
- Public debt increased to 109 percent of GDP as a result of the crisis.
- For FY 2022/23 the government aims at an overall fiscal surplus of about 0.3 percent of GDP (same as in FY 2021/22).
- Running fiscal surpluses of about 1 percent of GDP in FY 2023/24 and beyond would ensure smooth progress to the debt target.
- Debt dynamics and fiscal space:
- Lower debt and debt service payments would create fiscal space for contingent and long-term pressures and buffers for natural disasters.
- Public debt and interest payments expected to decline faster as maturing bonds from the 2010 and 2013 debt exchange operations are paid down.
- Publication of a longer-term fiscal framework showing how the debt reduction will be achieved would increase credibility.
- Expenditure composition and pressures:
- New public sector compensation system effective FY 2022/23 will standardize wages but add to the wage bill.
- Wage bill already one of the highest in the region; rises in the wage bill risk crowding out other expenditure.
- Recommendation: reassess government roles/responsibilities, increase efficiency, and consider reductions in public workforce size to offset wage costs.
- Funding growth-enhancing priorities:
- Significant infrastructure needs; more resources needed for disaster resilience, police and crime prevention, and health (hospital beds and doctors per person relatively low).
- Options to free resources: re-orientation of existing expenditure, reducing exemptions to raise revenue, lowering the wage bill, and relying on declining debt and interest payments over the medium term.
- Lower debt and interest payments would create scope to scale up social spending in health and education.
- Efficiency of existing expenditure:
- Spending on primary and secondary education is in line with regional peers, but test scores and years of schooling are relatively low.
Monetary policy and inflation
- Inflation developments:
- Expectation: inflation to increase to 8.8 percent at end-2021 and then recede to 6.7 percent at end-2022.
- Significant risks that inflation may be higher if global inflationary pressures last longer or pass-through is stronger.
- BOJ policy action:
- BOJ raised policy rates by 100 bp. (to 150 bp) effective October 1.
- Further tightening may be needed depending on inflation developments to anchor expectations and bring inflation within the target range by end-2023.
- Monetary policy remains accommodative in real terms as the policy interest rate in real terms continued to decline in 2021.
Financial sector resilience and supervision
- Soundness indicators:
- Capital Adequacy Ratio at end-2020 was 14.3 percent (regulatory minimum 10 percent).
- NPLs have remained below 3 percent.
- Non-deposit taking institutions are more than sufficiently capitalized, profitable and stable.
- BOJ’s macroprudential assessment suggests financial sector risks are contained.
- Supervisory gaps and risks:
- Financial sector dominated by complex conglomerates operating in multiple jurisdictions; headquarters in jurisdictions with differing oversight practices.
- Concentrated ownership, related party and large group exposures, off-balance sheet positions create contagion risks.
- Need for legislative framework for a special resolution regime for orderly resolution of distressed financial institutions, and for group-wide supervision.
- Continued advancement needed in data gathering and analytics on inter-institution linkages and cross-border exposures.
- AML/CFT:
- Further strengthening of the AML/CFT regime and swift implementation of the action plan agreed with the FATF will support exit from the FATF grey list and strengthen correspondent banking relationships.
- A recently adopted national risk assessment provides better understanding of ML/TF risks and will help address priorities identified with the FATF.
Removing supply-side constraints to boost growth
- Long-run growth record:
- Average growth in 2010-19 was 0.6 percent.
- Real GDP per capita is at the same level as in 1970.
- In the last 25 years, growth exceeded 2 percent only twice.
- Growth-accounting diagnosis:
- Low growth is due to declining productivity despite relatively high investment and rising employment-to-population ratio; total factor productivity has declined.
- Structural contributors to weak growth:
- Decline of traditional export industries (sugar, bananas, textiles) after loss of preferential access; aluminum and bauxite lost market share.
- Supply-side constraints: low human capital, high crime, infrastructure deficiencies (logistics and energy), high production costs (electricity costs are the fourth highest in the world), limited SME access to finance, cumbersome cross-border trade and tax compliance, relatively high import tariffs, and competitors with enhanced U.S. market access via Free Trade Agreements.
- Policy priorities to remove constraints:
- Make education and training more effective and better linked to labor demand.
- Upgrade infrastructure, logistics, and digitalization.
- Contain crime and shift energy sources toward renewables.
- Enhance governance and reduce vulnerabilities to corruption.
- Increase SME access to finance and simplify business procedures, particularly customs clearance.
- Advocate a bolder CARICOM approach to open trade policies and broader economic integration.
We thank the Jamaican authorities for very candid and friendly discussions.
Jamaica: Staff Concluding Statement of the 2021 Article IV Mission — November 17, 2021.