The economic reform program, that began in May 2013, has been a turning
point for Jamaica
. With broad-based social and political support for reforms, the Jamaican
government—over two administrations—has embarked on a path of fiscal
discipline, monetary and financial sector reforms, and wide-ranging
structural improvements to break a decades-long cycle of high debt and low
growth.
Considerable progress has been achieved on macroeconomic policies and
outcomes.
Fiscal discipline—anchored by the Fiscal Responsibility Law—has been
essential to reduce public debt and secure macroeconomic stability.
Employment is at historic highs, inflation and the current account deficit
are modest, international reserves are at a comfortable level, and external
borrowing costs are at historical lows.
Growth and social outcomes, however, have been discouraging.
Economic growth continues to disappoint, averaging only 0.9 percent since
the reforms began. Entrenched structural obstacles, including crime,
bureaucratic processes, insufficient labor force skills, and poor access to
finance, continue to hinder productivity and growth. Moreover, the
agricultural sector’s vulnerability to weather shocks exacerbated rural
poverty in 2015. Not addressing these bottlenecks could pose risks for
continued public support for the government’s policy program.
Structurally reducing the wage bill is critical for the government to
reprioritize spending toward growth-enhancing projects.
More expenditure is needed for infrastructure, citizen security, building
agricultural resilience, health, education, and the social safety net.
Creating the space for such spending will require going beyond temporary
remedies like wage freezes and adjustments to non-wage benefits. It will
require high-quality measures to (i) overhaul the compensation structure to
retain skills and reward performance, (ii) streamline the vast and
inequitable allowances structure, (iii) prioritize key government functions
and shed those activities that the government can no longer afford to
undertake, and (iv) change the capital-labor mix through technology
upgrades, including a better monitoring of (and accountability for)
government spending. Inevitably, these reforms will also lead to a
reduction in the size of the public workforce. Such a holistic approach
will support a durable reduction in the wage bill, without frequent
discordant wage negotiations, and enhance public service delivery with
fewer but better paid public employees.
Improving social outcomes and fostering inclusive growth will require
addressing structural bottlenecks and creating an enabling environment
for the private sector.
Countering both weak social outcomes and escalating crime will take time
but will be essential for sustained growth. In this regard, the evidence
suggests that early childhood education, interventions to improve school
attendance, and skills training for the youth would foster a virtuous cycle
of lower crime, higher wages, stronger growth, and increased economic
opportunity, particularly for the young. Policies to support productive
private investments, including improving lending to smaller businesses and
reducing lending-deposit interest spreads, will help fuel such an upswing.
However, the government must resist the pressure to use scarce public
resources to “pick winners” (including through providing tax incentives).
Instead, the goal should be a uniform, broad-based, and low rate tax
system, a level playing field for business, and harmonized rules for all.
Formalizing the current inflation targeting regime will help entrench
macroeconomic stability and promote growth.
With inflation likely to remain in the lower part of the central bank’s
target range, a looser monetary stance remains appropriate. Meanwhile,
upcoming revisions to the Bank of Jamaica (BOJ) Act—including a clear
mandate for price stability, a reformed governance structure, and a strong
central bank balance sheet—will help institutionalize the inflation
targeting framework. Also, continued development of the foreign exchange
(FX) market, liquidity management and forecasting toolkit, along with
upgrading the BOJ’s communication practices, will improve policy signaling
and enhance credibility. Successful inflation targeting will require a
clear commitment to a flexible and market-determined exchange rate with
limited involvement of the central bank in the currency market. This
implies that FX sales should be confined to disorderly market conditions,
especially given the reductions in the surrender requirements, and buy
auctions should aim to build reserves in a non-disruptive way.
Financial sector stability is a prerequisite for strong and sustained
growth.
Ongoing prudential and supervisory improvements will enhance systemic
stability. While changes to investment limits for non-banks should be
considered, they must be backed by a thorough assessment – including of
appropriate regulations, risk management guidelines, and supervisory
arrangements – to ensure that greater flexibility in non-banks’
asset-liability management practices does not jeopardize financial
stability. Introduction of a Special Resolution Regime for financial
institutions will strengthen the system’s safety net while putting clear
requirements in place for the use of public resources.
Continued reform implementation will not only safeguard hard-won gains
but also deliver stronger growth and job creation
. After 5 years of reforms and tenacious fiscal consolidation, risks from
reform fatigue and loss of social support are high, especially as growth
remains feeble and crime escalates. Addressing some of the entrenched
structural problems that hamper growth is not an overnight task; these
difficult reforms require continued broad-based support and policymakers’
commitment to persevere with the implementation.
The authorities’ program, supported by the IMF’s Stand-By Arrangement
(SBA), remains on track.
All quantitative performance criteria and structural benchmarks for the
review period ending December 2017 have been met. Non-borrowed
international reserves well-exceeded the program target and tax revenues
for FY2017/18 were above the budget’s target (reflecting the payoffs from
revenue administration reforms put in place by the government over the past
few years). The mission reached preliminary staff-level agreement with the
authorities on a package of measures to complete the third review under the
SBA. Consideration by the IMF’s Executive Board is tentatively scheduled
for April 2018. Upon approval, an additional US$233 million would be made
available to Jamaica, bringing the total accessible credit to about
US$1.033 billion. The Jamaican authorities continue to view the SBA as
precautionary, an insurance policy against unforeseen external economic
shocks that are beyond Jamaica’s control.
The IMF team thanks the Jamaican authorities and other interlocutors
for their hospitality and continued candid and constructive
discussions.