Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: IMF Approves $1.27 Billion Loan for Jamaica

February 4, 2010

  • 27-month deal to help Jamaican economy
  • Focus on social spending for most needy
  • Policy reforms and debt exchange to break cycle of budget crises

The IMF approved a $1.27 billion loan to support Jamaica’s plan to recover from mounting government debt, weak economic growth, and the effects of the global economic crisis, the international organization announced on February 4.

IMF Approves $1.27 Billion Loan for Jamaica

Stall in Kingston, Jamaica, where reform program supported by IMF loan aims for sustained strong economic growth (photo: Newscom)

GLOBAL ECONOMIC CRISIS

The money will help Jamaica, a Caribbean country of 2.8 million people, implement its two-year plan, which includes

• Reform of the public sector to substantially reduce the large budget deficit

• A debt strategy to reduce debt servicing costs

• Reforms to the financial sector to reduce risks.

“The planned legislative and regulatory reforms will help reduce systemic risks to the financial system and strengthen the overall resilience of the economy to shocks,” said IMF Deputy Managing Director Takatoshi Kato.

With the plan in place, the IMF predicts growth rates in Jamaica to increase from -3 ½ percent in 2009 to ½ percent by late 2010, and to rise to 2 percent in 2011.

Jamaica’s economy has deteriorated in recent years, in part due to the effects of the global economic crisis. In addition, the country’s large debt burden has magnified the fallout from the global crisis by limiting the scope of government to implement policies to cushion the negative impact.

Sharp falls of 60 percent in bauxite and aluminum production and exports, and a sharp decline in the amount of funds sent by Jamaicans living abroad, have led to a contraction in the economy. At the same time, with limited financing options, the government has had to raise taxes to offset falling revenues.

Economic reforms are needed to put the public finances on sound footing, and establish the basis for sustained strong economic growth. Jamaica’s economic program demonstrates its commitment to meeting these challenges.

Focus on social spending

While certain kinds of government spending, such as wages in the public sector, will be reined in, the government plans to increase spending on better targeted social programs by 25 percent. A school feeding program, which provides breakfast and lunches to children, will benefit from this increase.

The government will also increase the amount of cash transfers to lower-income groups through the Programme of Advancement through Health and Education, known in Jamaica as the PATH.

Reforms to target the root of the problem

In order to make sure Jamaica’s recovery is sustainable in the long run, the plan also includes a number of reforms in key areas, including

• Tax policy: to improve collection and administration

• The public sector: to reduce costs and increase efficiency

• Fiscal responsibility legislation: to improve budget planning, and public financial management, and make the government more accountable

Stability in the financial sector to reduce risks

Part of the Jamaican plan includes reducing the amount of money the government is spending to pay the interest bill on its debt. Since most of Jamaica’s debt is held by financial institutions in the country, a key part of the plan helps to ensure that these institutions, should they need it, have access to cash to help shore up their liquidity. Half the money from the IMF will be made available immediately in large part to help finance a special fund for this purpose.

Other reforms in the financial sector will increase the amount of capital held by financial institutions and strengthen the supervision of the financial system by regulators. All these initiatives are designed to maintain a solid and stable banking system for Jamaicans.