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Statement by James Allison Haley, Executive Director for Jamaica, Michael McGrath, Alternate Executive Director, and Trevor Lessard, Advisor, June 17, 2016

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
June 2016
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We thank the staff for their report and their constructive engagement with our Jamaican authorities. While the review of Jamaica’s EFF needed to be reasonably delayed to allow for free and fair democratic elections, the process and its outcome has not changed Jamaica’s strong track record under this program. The elections ushered the Jamaica Labour Party (JLP) into power on a mandate that consisted of unwavering support for the Fund-supported adjustment program and a redoubling of efforts to jumpstart private sector-led growth, which remains disappointing. With the vitality of a new administration and a mandate to deliver strong, sustainable, and job-rich growth, the Government of Jamaica is well positioned to continue the reform agenda. For the eleventh and twelfth reviews all performance criteria and structural benchmarks have been met.

Fiscal Policy and Debt Management

Our authorities remain resolute in maintaining a strong fiscal position, anchored in the extraordinarily high primary surplus of 7 percent of GDP. While arduous, and entailing significant opportunity cost, our authorities believe that fiscal discipline is an important anchor to economic stability and investor confidence. A strong primary balance is also essential in order for Jamaica to meet the Government’s commitment to bring debt-to-GDP down to 60 percent by 2026. Nevertheless, given the overall tightness of the fiscal stance, and the lack of fiscal space, the new Government of Jamaica is placing extra attention on improving the efficiency of public expenditures and making the tax system more growth friendly.

A key plank of the Government’s fiscal strategy is to improve the growth-friendliness of the tax system by deliberately shifting some of the tax burden from productive inputs, particularly labor, to indirect taxation. The 2016/17 budget represents a sizeable move in this direction with the announcement to more than double the exemption threshold for personal income tax from its current level of J$592,800 to J$1,500,096 in a two-step process. With the help of Fund’s TA, the 2016/17 tax reforms will structurally improve the tax system and, in a revenue-neutral way, encourage employment, job creation, and reduce informality in the labor market. Our authorities wish to emphasize that this tax shift is not a one-off action, but is part of a larger effort to improve the efficiency and growth-friendly nature of the tax system. With the help of their international partners, including the Fund, World Bank, and IDB, the authorities intend to systematically and responsibly overhaul the system so that it better incentivize investment and job-creation while still providing the Government of Jamaica the revenue it needs to provide essential public services.

This landmark tax policy shift will be complemented by ongoing efforts to improve debt management, reduce the public sector wage bill to 9 percent of GDP, privatize public entities to reap efficiency gains and lower public debt, and modernize the public sector. Our authorities share staff’s view that unsustainable public sector wages and debt have in the past crowded out critical public investment and eroded investor confidence. They agree that failing to bring the public wage and debt service bills down to sustainable levels will stunt growth, and without robust growth, social consensus for structural reforms will wane.

Generating More Robust Rates of Growth

Our authorities welcome staff’s focus on growth in this year’s Article IV consultation, especially the inclusion of Annex II that examines growth drivers and constraints. Reducing crime, improving the quality of services delivered by the public sector, reducing electricity costs, and improving access to finance are all critical ingredients to growth identified by staff in their Annex and are areas emphasized by the Minister of Finance during his presentation of the budget to Parliament. While recognizing that some, or even most, of the benefits of these reforms will not materialize until later in the medium-to-long term, my authorities are somewhat more optimistic than staff that some of the dividends of structural reforms can be captured more quickly if the government consistently implements its reform agenda and investor confidence continues to build.

Our authorities share staff’s view that delays in implementing these reforms will negatively affect Jamaica’s economic growth prospects, which is why they have created the new Economic Growth Council. The Council has an ambitious goal, to raise GDP growth to 5 percent in four years, which will require a combination of structural reforms, public sector modernization, and the implementation of several large investment projects in energy and infrastructure. To support this work, the Council has been mandated by the Prime Minister to be comprised of public and private sector participants, have a Secretariat to support its work, and will be given the latitude necessary to drive important growth-oriented projects and proposals.

Monetary and Financial Sector Policy

The Bank of Jamaica continues to operate in a complicated environment, anchored in the objective of price stability and a market-determined exchange rate. Our authorities share the view that monetary transmission should be improved and continue to implement technical reforms that will assist in achieving that objective. The Bank of Jamaica also stands ready to further loosen the monetary stance if conditions warrant and if it does not threaten financial stability or exacerbate the problem of increasing dollarization.

Our authorities are disappointed with the slow pace of the discussion on correspondent banking relationships and call on the Fund to play a more active role within the international financial community in resolving this issue, which now affects several dozen

Fund members. While weaknesses in AML/CFT have and will continue to be addressed, it is important to stress that a strong AML/CFT regime is a necessary, but not sufficient, condition for maintaining macro-critical correspondent banking relations. While Jamaica has been less affected than many EMDCs by the trend in globally active banks to scale back their correspondent banking relationships, our authorities are nevertheless aware of the magnitude of the risk and the lack of clarity from regulators and stakeholders on what is required to maintain this important relationship. The Fund can play an important role in advocating on behalf of its many members around the globe that have been affected and highlight how economically costly the loss of banking relationships can be. The Fund is uniquely placed to not only summarize the depth of the problem, but also play a supportive role, along with other bodies and multilateral institutions, in developing solutions. We welcome the commitments in the Managing Director’s Work Plan to deepen our understanding of the causes, and possible solutions, to de-risking and the thoughtful analysis that has been included in the Article IVs of some systemically important jurisdictions. There seems widespread agreement that more work needs to be done and that the discussion in Jamaica’s Article IV, which is narrowly confined to improving AML/CFT and prepare for (risky and untested) interventions by the central bank, will need to be broadened if we are to get at the root of the problem.

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