1. My authorities wish to express their appreciation to the staff for their comprehensive assessment of developments in Jamaica during the recent Article IV consultations. They value the relationship with the Fund and welcome the IMF’s assessment of Jamaica’s overall macro-economic program. They believe that following a fairly challenging period recently, there is clear evidence that the economy has stabilized, and the basis for a period of sustained growth and renewed confidence has been laid. They acknowledge, however, that important challenges remain, particularly, a reduction of the fiscal imbalances over the medium term and an improvement in the debt dynamics.
Recent Economic Developments and Outlook
2. Evidence of unanticipated economic challenges emerged early in 2003, when wider than projected fiscal deficits developed. External market developments around the same time necessitated the use of net international reserves (NIR) to meet maturing debt, creating uncertainty in the foreign exchange market. The result was a depreciation of the Jamaican dollar (J$) – bottoming out at J$70 to US$1. Monetary policy intervention, (a hike in interest rates) an indexed bond offer and moral suasion by the Prime Minister stabilized the market at about J$60 to US$1.
3. Despite these difficulties there were positive signs in the real economy, as the agriculture, mining and tourism sectors began to rebound. Following adverse weather events in recent years which significantly disrupted output, the agriculture sector grew by 5.7 percent in 2003. In the mining sector, international prices for alumina were higher than my authorities had projected and plants were close to full capacity. Tourism rebounded; visitor arrivals surpassed pre-9/11 levels and new highs were established in the long-term visitor, cruise-ship passenger and total visitor expenditure categories. With these developments overall real growth was 2.0 percent in FY 2003/04.
4. The medium term outlook is positive. Planned expansions in tourism and mining – 5000 new hotel rooms over five years will be added through investment of nearly US$600m, and around US$700m investment in new capacity in the bauxite/alumina sector will lay the foundation for higher growth. These investments, complemented by a program of infrastructure development, and timely implementation of the structural and fiscal reform agenda form the basis of the country’s economic program going forward.
Fiscal Policy and Debt
5. My authorities acknowledge that the fiscal deficit is higher than desirable, and at current levels, the debt needs to be reduced. With this in mind, they have embarked on a program to eliminate the deficit by FY 2005/06, and gradually reduce the debt to more manageable levels through the creation of small fiscal surpluses. Achieving the fiscal and debt targets will require a substantial fiscal effort – a primary surplus in the range of 14 percent of GDP, however, my authorities are committed to this, and are pursuing complementary policy options.
6. Through a sustained tax effort which includes continued reform of the tax system to widen the base and increase efficiency, stepped-up efforts to collect arrears, and along with anticipated grants, total revenue inflows are expected to average around 32 percent of GDP - up from 28.1 percent in FY 2002/03. My authorities are currently undertaking a comprehensive review of the tax system, which is slated for completion in the fall of 2004 and should assist in further improvements to the system. On the expenditure side, the authorities are committed to tighter management, and halting the rate of growth of the wage bill. A memorandum of understanding (MOU) with the major trade unions was signed in February 2004; public sector salary increases will be kept below inflation, and public sector employment will be capped through 2006.
7. Based on higher interest expenditure projections, and more conservative revenue collection estimates, the staff projects a small overall deficit in FY 2005/06 compared to the authorities’ balanced budget target. My authorities remain confident; preliminary estimates show revenue running ahead of budget, suggesting that a sustained collection effort will have significant yields and with the implementation of tax reform measures over the next two years, should enhance revenues. At any rate, the authorities have committed to take any necessary corrective action early, should signs of a deficit emerge.
8. The current level of public sector debt - 142 percent of GDP - is high. My authorities agree with the staff that at existing levels this represents a significant risk to the economy. However, the authorities’ exemplary record in meeting its debt obligations has yielded credibility and going forward, the aim is to reduce current debt levels through high primary surpluses and then sustain small overall fiscal surpluses. This will help reduce existing levels, albeit not as aggressively as might be desired. Nonetheless, the target reduction to around 100 percent of GDP by 2008/09 is substantial, but achievable as the debt reduction and the resulting lower interest payments become mutually reinforcing.
Monetary and Exchange Rate Policy
9. Broadly, Jamaica’s exchange rate policy is to maintain a credible and stable market – price and financial system stability - while permitting flexibility, consistent with an emerging market economy constrained by high debt. The turmoil in the foreign exchange market in early 2003 and its subsequent stability following the intervention by the Bank of Jamaica (BOJ) has lent credibility to the authorities’ monetary policy framework and resulted in renewed confidence in the J$. At current levels - approximately J$61 to US$1 - the authorities agree with the staff that this appropriately reflects market conditions.
10. The authorities intend to retain flexibility in the conduct of exchange rate policy and accept broadly the staff’s recommendation of a flexible and balanced use of monetary and exchange policy in support of the inflation and NIR objectives. At the same time, however, the authorities remain cautious about some of the conclusions reached in the Selected Issues Paper on Monetary Exchange Rate Policy Mix – e.g. that in the Jamaica case, an alternative monetary policy mix that pays less attention to smoothing the path of the exchange rate, and more to the impact of the policy mix on output, could have resulted in reduced output and inflation volatility.
11. Chapter IV of the Selected Issues paper provides some useful insights into the conduct of monetary policy in Jamaica in recent years. However, my authorities believe that there are differences of interpretation on policy in certain areas, as well as data revisions that are not adequately reflected in the paper. In this regard, they are working with the staff to incorporate suggested changes to the paper.
Structural Reforms and Social Issues
12. My authorities recognize that the continuation of ongoing structural reform efforts in the areas of the financial sector, the labor market, the education system, and domestic security will be key to sustaining growth and competitiveness over the medium term. They are committed to further strengthening the financial sector regulatory framework through continued enhancements in the legislative framework and strengthening the overall institutional structure. In particular, the Financial Services Commission is at an advanced stage of preparation of prudential requirements for securities dealers. In addition, Jamaica has requested participation in the joint IMF and World Bank Financial Sector Assessment Program in 2005.
13. The budget for FY 2004/05 outlined further priorities in this area including –
Legislation to provide legal status to the Financial Investigations Division. This new Division of the Ministry of Finance and Planning is responsible for all matters relating to economic and financial crimes, including fraud, breaches against revenue statutes and money laundering.
Executing a public education program on pension reform and embarking on phase two of pension reform which, will, among other issues, deal with mandatory preservation and portability of pension rights and voluntary indexation of pensions.
14. My authorities are committed to and continue to make progress in reducing rigidities in the labor market with a view to enhancing the business and investment environment. In the public sector, they are implementing an ambitious reform program aimed at developing a modern public administration based on optimal use of resources, as detailed in Chapter I of the Selected Issues paper.
15. In February 2004, a task force was established to review and initiate a transformation of Jamaica’s education sector and to present an action plan consistent with the creation of a world-class education system geared toward generating human capital and producing the skills required for competing successfully in the global economy. My authorities are also cognizant that tackling crime is especially critical to advancing economic growth and tackling the issue is a priority.
16. Having established what they believe to be a credible economic program aimed at reducing the fiscal imbalances, debt reduction and sustained growth, my Jamaican authorities believe that they can benefit from closer dialogue with the Fund through more frequent and intensified surveillance. The intensified surveillance would serve the dual purpose of monitoring the progress on the implementation of the economic program and, at the same time, provide some “signaling” to Jamaica’s creditors and the rest of the international community.
17. My authorities have full and complete ownership of the program. They envision that the intensified surveillance will involve a frank assessment by the Fund staff of their economic program and the production of semi-annual reports – on Jamaica’s progress in meeting the program’s quantitative targets. This Article IV consultation has fulfilled the first part of the intensified surveillance exercise and my authorities look forward to the first follow-up mission later this year.