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Jamaica

Author(s):
International Monetary Fund
Published Date:
June 2008
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I. Background

1. Jamaica has long struggled with low economic growth and high public debt. Annual real GDP growth has averaged only 1 percent since 1991. Public debt increased substantially after a banking crisis in the mid-1990s and currently stands at 128 percent of GDP, despite a program adopted in 2004 to reduce it to around 100 percent of GDP by 2009.

2. Economic growth variability is, however, low in Jamaica, with deviations driven more by weather than by external conditions. Since 1993, Jamaica has not grown faster than 2½ percent. On the other hand, the economy has not shrunk on a year-to-year basis either, except during 1997–98 when annual contractions were limited to 1¼ percent. What variability there is in growth appears due to natural disasters. Simple growth correlations with the rest of the Caribbean, Latin America and the United States for 1991–2006 are statistically insignificant.

Cumulative damage from Natural Disasters,

(In percent of annual GDP, 1970-2004)

3. External developments do, nevertheless, have large financial implications for Jamaica. Jamaica has a relatively narrow export base, is very dependent on energy imports and relies heavily on remittances and external market financing. Both in terms of its current account deficit and debt, Jamaica is exceptionally exposed to the vicissitudes of global economic and financial market conditions and sentiments.

4. Developments in Jamaica can, in turn, have a significant influence in the wider Caribbean. Jamaica has the second-largest economy in the Caribbean community (CARICOM). Largely the same set of banks, security dealers and insurance companies operate in these countries. Moreover, the Caribbean Community (CARICOM) adopted a common market this year and is committed to creating a single economic space by 2015. The potential for regional spillovers from Jamaica that already exists can, therefore, be expected to grow further with regional integration.

5. A recent political transition provides an opportunity to reinvigorate reforms but success will require consensus across the political divide. In September, the Jamaica Labour Party (JLP) formed a new government, following a narrow electoral victory over the People’s National Party (PNP), which had continuously held office for 18 years. However, many of the reforms necessary to ensure durable debt reduction are politically difficult and will require broad national support to implement.

6. The new administration’s program to tackle Jamaica’s challenges is being cast in an environment that has notably worsened.

  • Economic growth likely slowed to 1 percent in FY 2007/08 (ending in March), while inflation has surged to 18 percent in recent months. While food and fuel prices explain most of the increase, core inflation has also reached double digits (Box 1).
  • Unregulated investment schemes promising implausibly high returns in excess of 10 percent per month have proliferated. These schemes have the potential to cause social and macroeconomic instability and hurt the financial sector.
  • Reserves declined sharply in 2007 before recovering more recently. The pressures on the exchange rate are due to both a widened current account deficit and capital outflows (see Box 1).
  • Going forward, the deteriorating external environment could have budgetary costs. Revenues from tourism and bauxite exports may be at risk in the slowed global economy, while the global credit crunch and repricing of risk could increase debt service costs (Box 2).

7. As in other countries with very high debt, Jamaica’s public finances severely limit the room for policy maneuverability. Jamaica’s situation has many similarities, but also important differences, with other high debt, middle-income countries, such as Lebanon (Figure 1). Both countries have maintained macroeconomic stability for an extended period despite their persistently high public debt levels (134 percent of GDP in Jamaica, 177 percent of GDP in Lebanon in 2006). An important factor in this regard has been the ability of both countries to rely on the domestic financial system for much of the government’s financing needs. The resulting dependence has, however, also created systemic risks, in that shocks to either the government or the financial sector could quickly transmit to the other and on to the broader economy. Lebanon has a fixed peg, which is credited with helping to maintain financial stability. Jamaica has a flexible exchange rate that has helped to adjust to shocks.

Figure 1.Comparing Jamaica and Lebanon

Sources: Country authorities; and Fund staff estimates.

1/ Based on Debt stocks as of end of March 2007.

2/ Includes debt issued by the Central Government and the Central Bank.

3/ Includes external government guaranteed debt and Petrocaribe.

4/ Jamaican data is for blended spreads while Lebanese data is for sovereign spreads. There is a structural break in the Jamaican series in April 2007.

5/ Excluding grants.

Box 1.Jamaica: Economic Developments in FY 2007/08

Exogenous developments led to weaker growth, higher inflation and a wider current account deficit. On the policy front, the original budget deficit target was revised upwards and interest rates were increased following large reserve losses.

  • Natural disasters mainly explain the fall in real GDP growth by 1½ percent over FY 2006/07. Hurricane Dean and floods caused extensive damage to agriculture. Also, there was a reversal of the one-off increase in tourists diverted from hurricane-affected Mexican destinations in 2006.
  • The recent surge in headline annual inflation is due to supply shocks. Dean added to pressures from rising global food prices. Inflation also accelerated from higher fuel import costs, which are fully passed through to consumers. Some second-round effects of these price changes, as well as a quickened pace of exchange rate depreciation, led to an upward drift in core inflation to 11¾ percent by January 2008.
  • Reserves fell by about a fifth during June-November 2007, due to a combination of external and domestic factors:
    • Weak export growth and rising import prices lie behind the widening of the current account deficit by 3¾ percentage points to 15½ percent of GDP. Food export growth slowed sharply in tandem with the slowing of agricultural production, while bauxite exports suffered from capacity constraints. The net energy import bill, however, rose to 14 percent of GDP, from 12 percent in 2006.
    • Global market turbulence contributed to capital outflows. Global increases in emerging market debt spreads reduced the local currency yield premium on Jamaica’s domestic debt (in comparison to its Eurobonds), encouraging a portfolio shift away from Jamaican-dollar instruments. While hard data is absent, some of the outflows could also be related to unregulated investment schemes (see Box 4).
    • The announcement by the new government of inherited spending commitments outside of the budget also contributed to market unease. The new authorities subsequently presented revised comprehensive estimates to parliament that projected a widening of the FY 2007/08 budget deficit by 1½ percent of GDP after allowing also for some new spending initiatives as well as nonprogrammed revenues.
  • The pressures on the exchange rate led the central bank to increase interest rates by 220 basis points in early 2008, which has helped reserves recover recently. About half of the reserve loss during June–November has been reversed in recent weeks following increases in six-month interest rates to 14.2 percent and the external sale of a large private Jamaican enterprise.

Box 2.Jamaica: Impact of External Economic Slowdowns and Credit Crunches

A look at the historical data shows that the impact of U.S. macroeconomic stress is: (1) small on GDP but (2) larger on the budget, exports, and capital flows.

  • U.S. slowdowns have been associated with a worsening of the primary fiscal balance in Jamaica but have not had a very significant economic growth impact. Revenues that are tourism and bauxite-export based would be adversely affected by a U.S. slowdown as would customs receipts. The data suggests that this fiscal counter cyclicality has extended to expenditures. Jamaica’s growth has, however, not been volatile and the impact of slowdowns in the United States may have been further limited by the countercyclical fiscal policies.

Impact of negative shock to US GDP*

(In percentage points)
  • Slowdowns in U.S. GDP growth or credit crunches have, however, been associated with a persistent reduction of capital inflows. An econometric model suggests that a two-standard reduction in U.S. GDP growth, followed by a return to trend levels, has led to declines in capital inflows into Jamaica by about US$170 million, on average, cumulatively over a five-year period. If the subsequent rebound in the U.S. is only to earlier trend rates (rather than levels), the decline in capital inflows into Jamaica almost doubles to US$300 million (a sixth of reserves). Lower credit growth in the United States has had a similar but even larger impact on capital flows.

Reduction in Capital Inflow s to Jamaica

(In millions of U.S. dollars)
  • The same model predicts that while export receipts and remittances can decline sharply, the impact on the overall current account balance is likely to be small, if any. This is because much of Jamaica’s imports are for tourists and would decrease with tourism receipts. Also, a large share of the remittances pay for imported consumer goods by otherwise financially-constrained individuals. Finally, U.S. growth slowdowns have usually led to lower prices for petroleum, a major import for Jamaica.

Chg. in annual current account balance

(US$ mm, RHS)

Historical relationships may, however, not hold in the future. First, the sheer number, variety and frequency of shocks impacting Jamaica means that no single model can accurately capture all the dynamic relationships, so spurious correlations cannot entirely be ruled out. Second, structural breaks limit the models’ predictive powers. In particular, with global financial integration, financial flows may be affected even more now—indeed, the transmission of the U.S. subprime debacle to other financial systems is unprecedented and unpredictable. Third, and most fundamentally, because they treat policies as endogenous, the models do not allow for policy changes to affect predicted outcomes.

However, at 80 percent, Jamaica’s ratio of debt service to fiscal revenue (while lower than Lebanon’s), is still high and a key vulnerability to be addressed.

Jamaica: Debt by Instrument and Variability, 2007

(In percent of total debt)

Jamaica: Base Money and Central Bank Sterilization

Paper (OMO) (In percent of GDP)

II. Policy Discussions

8. Given the vulnerabilities in public finances and the financial system, the discussions focused on four key questions.

  • How can growth be invigorated?
  • What is the appropriate path, pace and means for debt reduction?
  • How can monetary and exchange rate policy help ensure macroeconomic stability in a period of weakening external demand and increased financial volatility?
  • How can financial sector risks be contained in Jamaica and in the region?

A. Economic Growth

9. The authorities are keenly aware that increasing growth has to be part and parcel of the debt reduction strategy. Recognizing that the causality between growth and debt runs in both directions, they hope to bring about a virtuous cycle of lower debt and higher growth by simultaneously tackling both the debt problem and the investment climate.

10. The persistence of low growth in Jamaica is partly a result of resource misallocation caused by high debt. Overall, investment rates are high. In particular, Jamaica has been relatively successful in attracting foreign investment in tourism and bauxite, which, however, are largely shielded from Jamaica-specific risks and have limited backward linkages. Therefore, the “debt overhang” appears not so much to have reduced investment, the usual channel through which debt affects growth, but rather skewed it towards safer but lower-return activities and industries. Cross-country data show such a negative relationship between total factor productivity and debt (Figure 2). Furthermore, given the complementarity between public and private investment, countries with very low public investment, such as Jamaica, appear to grow more slowly, even if private investment remains high.

Figure 2.Jamaica: Growth and Structural Reforms

Sources: World Economic Outlook, IMF; World Bank Doing Business Indicators, World Bank Governance Database; country authorities; and Fund staff estimates.

1/ Developing countries subset.

2/ Percentile rank indicates the percent of countries worldwide that rate below the selected country.

3/ Simple average of ECCU country rankings.

11. The authorities plan to improve the investment climate. They intend to simplify investment procedures, including those related to land purchases; consolidate and streamline other regulatory requirements; and increase efficiency through privatization. With a view to eliminating duplicate functions and institutions, the authorities are also planning to rationalize Jamaica’s over 100 off-budget public entities. The rationalization plan will identify entities that can be merged and those that are to be wound up. Furthermore, tax reform that addresses investors’ concerns features prominently in the authorities’ agenda. According to the World Bank’s Doing Business survey (2008), Jamaica currently ranks 170 out of 178 countries in the difficulties associated with paying taxes because of the complexities of the system and the onerous paperwork.

12. Growth should gradually pick up over the medium term as the reforms yield fruit. Growth is likely to rebound in 2008 to 2¾ percent (broadly in line with the outturn in 2006), particularly if there is no further hurricane damage. However, permanently ratcheting it upwards will require time for the structural reforms as well as debt reduction to take hold. With reforms, growth could eventually reach 3½ percent.

B. Debt Dynamics and Fiscal Policy

13. The authorities emphasized that they remain firmly committed to honoring Jamaica’s contractual obligations. They recognize the benefits, in terms of market access and reduced borrowing costs that Jamaica’s untarnished record of meeting payments brings.

14. Lowering debt will, therefore, require fiscal adjustment. The authorities have approached the United Kingdom to lead an international effort to relieve the debt burden of lower middle-income countries like Jamaica and also asked the World Bank to explore ways to help with the debt. However, any official relief will require substantial time, given the absence of clear precedents. Furthermore, as multilateral and bilateral debt accounts for under 10 percent of the total, the scope for official assistance alone to ease the debt is limited. Thus, while increasing growth will pay dividends over the longer-term, fiscal consolidation will have to remain an integral element of the debt reduction agenda over the medium term.

15. The authorities aim to balance the budget over a three-year period, which could pave the way to reducing debt to about 100 percent of GDP by 2013. The authorities’current plans imply improving the primary surplus by 3½ percent of GDP between now and 2010. With further fiscal consolidation of 1 percent of GDP during 2011–13, debt could come down to around 100 percent of GDP by FY 2012/13 without any official debt relief (Tables 14). However, the implementation of such an adjustment plan does not, by itself, guarantee the desired debt outcome. In particular, if past trends (shocks as well as policy weaknesses) persist, there is only about a 50-percent probability of debt falling below 100 percent of GDP by 2012/13 even with a planned adjustment of broadly the proposed magnitude.

Table 1.Jamaica: Selected Economic Indicators 1/
Prel. Est.Projections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13
(Annual percentage changes)
GDP, prices, and employment
Real GDP0.42.02.41.02.72.83.13.33.5
Nominal GDP10.917.010.013.220.412.811.610.49.8
Consumer price index (end of period)13.211.28.018.111.59.37.56.36.0
Consumer price index (average)12.814.87.412.117.29.78.36.86.1
Exchange rate (end of period, in J$/US$)61.565.367.6
End-of-period REER (percent change, appreciation +)5.24.1–1.8
Unemployment rate (in percent)12.211.610.8
(In percent of GDP)
Government operations
Budgetary revenue31.229.029.931.230.031.031.531.832.0
Budgetary expenditure36.632.735.535.735.033.531.529.728.4
Primary expenditure19.318.021.823.021.621.019.719.519.5
Interest payments17.414.713.812.713.412.411.810.28.9
Budget balance–5.4–3.7–5.6–4.5–5.0–2.50.02.13.6
Of which: primary fiscal balance11.911.08.18.28.410.011.812.312.5
Off-budget expenditure 2/3.11.21.71.30.31.00.70.50.3
Overall fiscal balance–8.6–4.8–7.3–5.8–5.3–3.5–0.71.63.3
Public debt 3/139.6133.0134.3128.3122.4120.3115.2108.3100.5
External sector
Current account balance–7.5–11.6–11.7–15.4–13.4–11.4–9.6–8.1–7.0
Of which: exports of goods, f.o.b.17.517.820.820.821.121.321.221.622.0
Of which: imports of goods, f.o.b.41.244.448.249.948.447.646.946.545.9
Net international reserves (in millions of US$)1,9022,0782,3291,8991,7061,7672,0322,1392,358
(Changes in percent of beginning of period broad money)
Money and credit
Net foreign assets7.51.74.2–4.0–1.6
Net domestic assets2.76.96.625.218.0
Of which: credit to the central government0.5–5.6–3.56.74.6
Broad money10.38.610.821.216.4
Velocity (ratio of GDP to broad money)2.62.82.82.62.7
Memorandum items:
Nominal GDP (in billions of J$)5506437078019641,0871,2141,3401,472
Exchange rate (average, J$/US$)61.463.266.3
Sources: Jamaican authorities; and Fund staff estimates and projections.

Fiscal years run from April 1 to March 31. Authorities’ budgets presented according to IMF definitions.

Includes debt issued to BOJ to cover its cash losses, and debt related to off-budget projects financed initially by the private sector.

Including PetroCaribe debt.

Sources: Jamaican authorities; and Fund staff estimates and projections.

Fiscal years run from April 1 to March 31. Authorities’ budgets presented according to IMF definitions.

Includes debt issued to BOJ to cover its cash losses, and debt related to off-budget projects financed initially by the private sector.

Including PetroCaribe debt.

Table 2.Jamaica: Summary of Central Government Operations(In billions of Jamaican dollars)
Prel. Est.Projections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13
Budgetary revenue and grants171.5186.7211.3249.7289.0337.2382.1426.7471.0
Tax153.0165.7192.5225.2260.3303.8344.8385.5425.8
Nontax14.420.317.321.425.129.232.636.039.5
Grants4.20.71.53.13.64.24.65.15.6
Budgetary expenditure201.4210.4251.2286.1337.6363.8382.4398.3418.4
Primary expenditure106.0116.0153.9184.1208.0228.8238.8261.2286.8
Wage and salaries63.563.178.786.798.1107.4112.7121.9133.9
Other expenditure32.140.848.064.873.381.084.192.9102.0
Capital expenditure10.412.027.232.736.640.542.046.450.9
Interest 1/95.494.497.3102.0129.5134.9143.6137.2131.6
Budget balance-29.9-23.7-39.9-36.4-48.6-26.6-0.328.352.6
Of which: primary budget balance65.570.757.465.680.9108.3143.2165.5184.2
Off-budget expenditure17.37.411.910.32.610.98.76.44.3
BoJ cash losses 2/13.47.411.98.72.610.98.76.44.3
Deferred financing 3/3.90.00.01.60.00.00.00.00.0
Overall balance-47.2-31.2-51.8-46.8-51.2-37.6-9.021.948.3
Financing47.231.251.846.851.237.69.0-21.9-48.3
External financing8.920.7-27.3-17.416.715.715.314.914.5
Domestic Financing37.110.562.535.334.521.9-6.3-36.9-62.8
Banking system1.0-11.9-8.016.814.08.310.98.76.4
Other36.122.470.518.420.513.6-17.3-45.6-69.2
Divestment + deposit drawdown1.30.016.628.90.00.00.00.00.0
Sources: Jamaican authorities and Fund staff estimates and projections.

Due to changes in procedures, in FY 2008/09 there are two payments to BoJ on account of debt issued by the central government to compensate for the costs of the 1990s financial crisis.

Refers to operating losses of the BoJ not covered by the BoJ Special Issue Bonds.

Debt issued upon assuming public investment projects carried out by the private sector.

Sources: Jamaican authorities and Fund staff estimates and projections.

Due to changes in procedures, in FY 2008/09 there are two payments to BoJ on account of debt issued by the central government to compensate for the costs of the 1990s financial crisis.

Refers to operating losses of the BoJ not covered by the BoJ Special Issue Bonds.

Debt issued upon assuming public investment projects carried out by the private sector.

Table 3.Jamaica: Summary of Central Government Operations(In percent of GDP)
Prel. Est.Projections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13
Budgetary revenue and grants31.229.029.931.230.031.031.531.832.0
Tax27.825.827.228.127.027.928.428.828.9
Nontax2.63.22.52.72.62.72.72.72.7
Grants0.80.10.20.40.40.40.40.40.4
Budgetary expenditure36.632.735.535.735.033.531.529.728.4
Primary expenditure19.318.021.823.021.621.019.719.519.5
Wage and salaries11.69.811.110.810.29.99.39.19.1
Other expenditure5.86.46.88.17.67.56.96.96.9
Capital expenditure1.91.93.84.13.83.73.53.53.5
Interest 1/17.414.713.812.713.412.411.810.28.9
Budget balance-5.4-3.7-5.6-4.5-5.0-2.50.02.13.6
Of which: primary budget balance11.911.08.18.28.410.011.812.312.5
Off-budget expenditure3.11.21.71.30.31.00.70.50.3
BoJ cash losses 2/2.41.21.71.10.31.00.70.50.3
Deferred financing 3/0.70.00.00.20.00.00.00.00.0
Overall balance-8.6-4.8-7.3-5.8-5.3-3.5-0.71.63.3
Budgetary principal payment24.321.823.313.015.414.416.218.118.2
Domestic18.916.614.98.310.712.614.814.214.2
External5.45.18.44.64.61.71.43.94.0
Memorandum items:
Deposit draw-down (in percent of GDP)0.00.02.33.00.00.00.00.00.0
Public debt 4/139.6133.0134.3128.3122.4120.3115.2108.3100.5
of which: cumulative PetroCaribe debt0.00.12.34.16.58.810.812.313.6
Gross financing (in percent of GDP)32.926.630.618.820.717.817.016.515.0
GDP (in billions of J$)5506437078019641087121413401472
Sources: Jamaican authorities and Fund staff estimates and projections.

Due to changes in procedures, in FY 2008/09 there are two payments to BoJ on account of debt issued by the central government to compensate for the costs of the 1990s financial crisis.

Refers to operating losses of the BoJ not covered by the BoJ Special Issue Bonds.

Debt issued upon assuming public investment projects carried out by the private sector.

Including debt assumed from public entities, plus guaranteed public entity debt, plus PetroCaribe debt.

Sources: Jamaican authorities and Fund staff estimates and projections.

Due to changes in procedures, in FY 2008/09 there are two payments to BoJ on account of debt issued by the central government to compensate for the costs of the 1990s financial crisis.

Refers to operating losses of the BoJ not covered by the BoJ Special Issue Bonds.

Debt issued upon assuming public investment projects carried out by the private sector.

Including debt assumed from public entities, plus guaranteed public entity debt, plus PetroCaribe debt.

Table 4.Jamaica: Summary of the Public Debt 1/
Prel. Est.Projections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13
(In billions of Jamaican dollars)
Public debt stock768856950102711801308139814511478
Government debt72779886691310131087112711321111
Domestic449483514560613644646617562
Of which: US$ linked85777579869196100103
External278315352353400443481515549
Official128121125122132142149154160
Commercial150194227230267302333361389
PetroCaribe external debt0116346599134168203
Government guaranteed debt41576781102121137151165
External3248566886101114125136
Domestic8912131620232628
Domestic currency debt373415451494543572573543487
Foreign currency debt310364424454551644730809888
US$ linked debt85777579869196100103
(In percent of GDP)
Public debt stock139.6133.0134.3128.3122.4120.3115.2108.3100.5
Government debt132.2124.1122.5114.0105.0100.092.984.575.5
Domestic 2/81.775.172.770.063.659.253.246.038.2
Of which: US$ linked15.512.010.69.98.98.47.97.47.0
External50.549.049.844.041.540.839.738.437.3
Official23.218.817.615.313.713.012.211.510.9
Commercial27.330.132.228.827.727.727.426.926.4
PetroCaribe external debt 3/0.00.12.34.26.89.111.012.613.8
Government guaranteed debt7.48.99.510.110.611.211.311.311.2
External5.87.57.98.58.99.39.49.39.2
Domestic1.51.41.61.61.61.81.91.91.9
Domestic currency debt67.864.563.761.756.352.647.240.533.1
Foreign currency debt56.356.660.056.757.259.260.160.360.3
US$ linked debt15.512.010.69.98.98.47.97.47.0
Change in the debt/GDP ratio-1.9-6.61.3-6.0-5.9-2.1-5.1-6.9-7.8
Memorandum items:
Total debt (US$ billion)12.513.114.114.515.315.916.216.115.9
Of which: foreign currency debt5.05.66.36.47.17.88.49.09.5
Government guaranteed debt issues (US$ million)0280315129164115907070
GDP (J$ billion)5506437078019641087121413401472
Sources: Jamaican authorities, Fund staff estimates and projections.

Central government debt including debt assumed from public entities, plus public guaranteed debt, plus PetroCaribe debt. Cash-flow savings from the PetroCaribe agreement with Venezuela are managed by an extrabudgetary fund that lends to both budgetary and off-budget entities.

In 2008/09 includes a projected debt takeover from the Sugar Company of Jamaica amounting to J$11.7 billion. Starting in 2009/10 includes annually 0.3 percent of GDP for contingencies and assumed domestic debts.

Total PetroCaribe lending to the central government amounts to 1.2 percent of GDP (including project lending and holdings of government bonds). A consolidation of Petrocaribe and central government debt would result in a debt-to-GDP ratio estimate as of end of FY 2007/08 of 127.1 percent. The projections do not incorporate any assumptions about further lending to the central government by the Petrocaribe Fund.

Sources: Jamaican authorities, Fund staff estimates and projections.

Central government debt including debt assumed from public entities, plus public guaranteed debt, plus PetroCaribe debt. Cash-flow savings from the PetroCaribe agreement with Venezuela are managed by an extrabudgetary fund that lends to both budgetary and off-budget entities.

In 2008/09 includes a projected debt takeover from the Sugar Company of Jamaica amounting to J$11.7 billion. Starting in 2009/10 includes annually 0.3 percent of GDP for contingencies and assumed domestic debts.

Total PetroCaribe lending to the central government amounts to 1.2 percent of GDP (including project lending and holdings of government bonds). A consolidation of Petrocaribe and central government debt would result in a debt-to-GDP ratio estimate as of end of FY 2007/08 of 127.1 percent. The projections do not incorporate any assumptions about further lending to the central government by the Petrocaribe Fund.

Public Debt / GDP

(Primary surplus of 12.2 percent of GDP, on average, by 2012)

Alternative policies

Average Primary Surplus / GDP by 2012, in percent

1/ Assuming real GDP grow s by 2 percent per year

16. The risks and uncertainties in reaching the debt target have arisen, in significant part, from shocks to financial and fiscal variables. For example, weakened investor confidence in 2003 led to a sharp drop in the exchange rate and a higher debt-to-GDP ratio. Similarly, fiscal revenues are sensitive to external developments—more so than GDP (see Box 2). And, frequent natural disasters, for which no contingencies are built in, have led to expenditure overruns.

17. Past efforts at reducing debt have also not succeeded because the necessary fiscal structural reforms have been lacking. The central government budget process is weak, as evidenced by the spending commitments outside the budget (see Box 1). There has also been inadequate control over scores of insufficiently transparent off-budget public entities that both help finance, and are financed by, the central government. Although the entities’ accounts are published, they are not presented consistently in a way that is amenable to formulating and assessing the overall direction of fiscal policy. And, fundamental reform of public employment has been lacking, resulting in periodic upward spikes of the wage bill (paragraph 20).

Fiscal Targets and Outcomes

(In percent of GDP)

18. To address some of the fiscal management issues, the authorities are considering adopting fiscal responsibility legislation but other steps are also needed. Codifying good budget management practice is useful but in the mission’s view, it will be equally important to retain fiscal flexibility in a shock-prone economy like Jamaica’s. Furthermore, given the frequent deviations from targets and revision of accounts, the capability to monitor and enforce a fiscal responsibility law needs to be built. It may be helpful to prepare first a fiscal ROSC to identify specific necessary reforms. Similarly, given the increases in debt due to off-budget entities, it is important to enhance the capacity to assess fiscal risk from public enterprises and monitor fiscal policy at the general government level. Strengthened debt management can also assist the authorities’ debt reduction effort as can limiting use of PetroCaribe savings by off-budget entities and using them instead to substitute for more expensive central government debt.

19. The authorities’ planned revenue and public enterprise reforms will help reduce debt over the long term. The tax reforms (paragraph 11), while primarily aimed at simplifying the system, are expected to increase tax collections, as are ongoing efforts supported by the Fund and CARTAC to strengthen tax administration. With Fund TA, the authorities are also planning to review tax exemptions. Furthermore, privatizing loss-makers, in particular Air Jamaica and the Sugar Company, will limit off-budget debt creation, which has been significant in recent years.

20. Even with these initiatives, however, expenditure measures will be needed. Nonwage primary expenditures have increased by 4 percent of GDP in the last two years. Also, the past practice of seeking temporary wage freezes from unions in return for a commitment not to retrench has proved unsustainable, with the wage bill rebounding upon the agreements’ expiration. The authorities are committed to public employment reform, to improve efficiency and allow for skilled public servants to be paid more adequately. However, such reforms necessarily take time to design and implement and do not normally yield large savings for some time. In the interim, the authorities are seeking to include a clause requiring efficiency improvements in the new agreement being discussed with unions to cover FY 2008/09–2009/10.

Primary Expenditures

(In percent of GDP)

21. It will be important to make a strong start with the fiscal adjustment. In particular, raising the primary surplus by around 1–1½ percent of GDP in FY 2008/09 can help build credibility and smooth the adjustment profile. Furthermore, in the current context of rising inflation and a widening current account deficit, fiscal consolidation would help the BOJ maintain stability and safeguard reserves. Rolling back now the increases in spending associated with the Cricket World Cup in FY 2006/07 and elections the following year has, in particular, the merit of making the adjustment more durable.

22. The authorities, however, do not see scope for a significant adjustment until FY 2009/10. The FY 2008/09 budget is still being formulated but the authorities do not consider it feasible to undertake significant expenditure reductions currently. The primary surplus (according to Fund staff definitions) is expected to remain broadly unchanged in FY 2008/09 (see Table 5). The authorities stress the need for investment and other pro-growth spending initiatives in the new budget. Furthermore, they point out that designing and implementing comprehensive reforms will necessarily require time. Noting the repeated deviations from budget targets in the past, they feel it more important, in terms of gaining credibility, to aim for a realistic budget target and achieve it than to be more ambitious and disappoint expectations.

Table 5.Jamaica: Alternative Fiscal Presentations FY 2008/09–FY 2010/11
Prel. Est. 2007/082008/092009/102010/11Prel. Est. 2007/082008/092009/102010/11
(In J$ billion)(In percent of GDP)
Authorities’ presentation
Overall balance-44.8-43.7-27.0-0.3-5.6-4.5-2.50.0
Divestment4.50.00.00.00.60.00.00.0
Overall balance excl. divestment-49.3-43.7-27.0-0.3-6.2-4.5-2.50.0
Interest102.4123.8134.9143.612.812.812.411.8
Primary balance53.080.1107.9143.26.68.39.911.8
IMF presentation
Overall balance excl. divestment-36.4-48.6-26.6-0.3-4.5-5.0-2.50.0
Interest 1/102.0129.5134.9143.612.713.412.411.8
Primary balance65.680.9108.3143.28.28.410.011.8
Adjustments to primary balance 2/
Authorities’ primary balance presentation53.080.1107.9143.26.68.39.911.8
plus deferred financing3.90.80.40.00.50.10.00.0
plus consolidated fund3.00.00.00.00.40.00.00.0
plus PetroCaribe2.90.00.00.00.40.00.00.0
plus debt takeovers2.70.00.00.00.30.00.00.0
IMF primary balance presentation65.680.9108.3143.28.28.410.011.8
Memorandum item:
GDP, in J$ billion800.5964.01087.31214.0

Interest payments to the BoJ paid with government securities are recorded at the time of the securities’ issuance. Starting in 2008/09, the government pays interest to the BoJ concurrently, as opposed to through debt issuance the following fiscal year. This results in two interest payments to the BoJ in 2008/09 in the IMF presentation.

In the IMF presentation, expenditures are recorded in the year of execution. The authorities’ presentation includes expenditures executed in earlier fiscal years. For FY 2007/08, such amounts are J$12.5 billion; for FY 2008/09, such amounts are J$0.8 billion; and in FY 2009/10, such amounts are J$0.4 billion.

Interest payments to the BoJ paid with government securities are recorded at the time of the securities’ issuance. Starting in 2008/09, the government pays interest to the BoJ concurrently, as opposed to through debt issuance the following fiscal year. This results in two interest payments to the BoJ in 2008/09 in the IMF presentation.

In the IMF presentation, expenditures are recorded in the year of execution. The authorities’ presentation includes expenditures executed in earlier fiscal years. For FY 2007/08, such amounts are J$12.5 billion; for FY 2008/09, such amounts are J$0.8 billion; and in FY 2009/10, such amounts are J$0.4 billion.

C. Monetary and Exchange Rate Policy

23. The key challenge currently is to stem capital outflows and reduce external vulnerabilities more generally while maintaining internal balance. Reserve losses cannot be sustained indefinitely. The staff’s balance of payments projections assume that a significant portion of the government’s external debt service falling due in FY 2008/09 is refinanced through new borrowing. To the extent that this does not take place, reserve losses would be even larger—the authorities could usefully develop contingency plans to deal with any rollover pressures. Also, missing data on private sector obligations argues for caution in determining the appropriate level of reserves to target and adds urgency to reduce the current account deficit and stem capital outflows.

24. Fiscal and financial sector considerations, however, pose constraints on the policy choice set. Interest rate hikes will weaken financial institutions; in particular, security dealers holding fixed-rate debt. Monetary tightening also imposes greater debt-service costs on the budget, especially given the shift in debt management practices in recent years toward favoring variable rate instruments. On the other hand, currency depreciation can fuel inflation and increases the debt-to-GDP ratio.

25. A moderate interest rate increase is advisable, while letting the Jamaican dollar find its level in the face of pressures. The recent period of stability in the foreign exchange market appears related, in part, to the inflows associated with the external sale of a major private enterprise, and so could be temporary. With the recent reduction of interest rates in the United States, a further moderate tightening in Jamaica may, in the end, suffice to contain further capital outflows and moderate inflation. At the same time, however, the current value of the Jamaican dollar is not far from its equilibrium, limiting the likelihood of a sustained fall in the exchange rate (Box 3). The greater durability of the fiscal deficit to exchange rate movements than to interest rate changes also argues against an unduly costly defense of the exchange rate.

26. The authorities stand ready to increase interest rates further if conditions warrant. They emphasized that relative to the United States, where short-term interest rates have been declining, their stance already embodies significant tightening. Furthermore, they consider the recent interest rate hikes in Jamaica and brief nominal appreciation in December as signals of their readiness to flexibly use all of their instruments, in both directions, to achieve their policy objectives. They note, however, the need to keep in mind that sharp movements in the exchange rate have significant costs in a small open economy. The public, in particular, remains wary of financial volatility, as reflected in the low level of monetization in Jamaica.

Box 3.Jamaica: Exchange Rate Assessment

Jamaica’s exchange rate regime is a managed float. The current level of the real effective exchange rate (REER) in Jamaica is broadly in line with fundamentals.

  • The current level of the real exchange rate is, within a margin of error, in line with the equilibrium. Applying to Jamaica the coefficients of a cross-country cross-time study by the Fund’s Consultative Group on Exchange Rate Issues (CGER), the REER was about 6½ percent above the equilibrium in 2007, within the standard forecast error of 12 percent. The CGER, however, did not include Jamaica in its sample, or explicitly account for tourism-related productivity differentials and terms of trade—both of which a model estimated by Cashin and Pineda (2008) that also includes Jamaica in the sample does. Coefficients from the latter study suggest Jamaica’s REER is 2 percent above the equilibrium.

CGER

Jamaica: Equilibrium REER, 1980-2007

1/ Bands are the confidence intervals at the 90 percent level of confidence.

  • The current account deficit is expected to fall to its equilibrium level over the medium term. Its level now reflects the impact of shocks, which the economy is in the process of adjusting to. Again, using the coefficients from the CGER exercise, Jamaica’s expected 2012/13 current account deficit is in line with the calculated equilibrium of 7 percent of GDP. Cashin and Pineda confirm this finding in their sample.
  • Competitiveness indicators suggest the level of the exchange rate is appropriate. Jamaica’s market share of Caribbean tourism has been increasing and a manufacturing unit-labor-cost-based measure of the real exchange rate has been broadly stable, despite the recorded decline in manufacturing exports.

Jamaica: Market Share in Caribbean Region’s Tourism 1/

1/ Data for 2007 are from January to July 2007.

Jamaica: Manufacturing Competitiveness

D. Financial Sector

27. Notwithstanding the generally positive bank soundness indicators, the financial system is at risk, including from unregulated investment schemes. Households have reportedly borrowed, in part, from banks to fund investments in these schemes. In this context, near 30-percent annual increases in bank credit growth are worrisome. The authorities note, however, that the collateral underlying bank credit to investors should limit risks to the financial system.

Money and Credit

(In percent, 12. month change)
Jamaica: Banking System Indicators 1/
200420052006Dec.

2007
Loans to Deposits50.155.056.263.5
NPL to Total Loans3.02.92.62.3
Capital Adequacy Ratio16.719.017.015.9
Pre-tax Profit Margin22.126.524.826.7

Commercial banks, building societies, merchant banks/finance companies and credit unions.

Commercial banks, building societies, merchant banks/finance companies and credit unions.

28. The authorities have requested Fund technical assistance to strengthen the legal and regulatory framework for unregulated schemes. The Financial Services Commission (FSC) has issued cease and desist orders to some entities, which has met with a series of court challenges. The authorities want to adapt international best practice to prevent schemes that are not in the public interest, while ensuring that legitimate investments can proceed (Box 4). Consistent with this request, the TA mission has recommended that the authorities focus on actions to prevent the flow of new money and safeguard already-invested funds in the schemes; adopt a regulatory framework for private investment clubs; and, strengthen existing regulations and enforcement powers.

29. The weaker environment highlights the importance of addressing potential blind spots in financial sector monitoring and supervision. Analytical information to quantify a variety of market risks for security dealers is limited—absence of information on external borrowings is particularly worrisome, given the risks of margin calls. Risks could also transmit from dealers to banks (or vice versa) in conglomerates that comprise both banks and dealers. However, the current segmented supervisory structure (between the BOJ and the FSC); gaps in apportioning responsibilities across supervisory agencies; and, insufficient technical collaborations risk creating supervisory gaps for the system as a whole.

30. Strengthening supervision is also a regional priority. Unregulated investment schemes operating out of Jamaica are reportedly active elsewhere in the Caribbean. Furthermore, the same set of financial conglomerates dominate the Caribbean (Figure 3) and with regional integration, are likely to become organized less along purely jurisdictional lines. Regional supervisors will, therefore, be challenged to ensure that blind zones that can let shocks spread easily from one Caribbean country to another do not emerge.

Figure 3.Caribbean: Financial Sector

Sources: Country authorities; and Fund staff estimates.

Box 4.Jamaica: Unregulated Investment Schemes and the Macroeconomy

  • There are currently over 35 unregulated alternative investment schemes. The Caribbean Policy Research Institute (CAPRI), an independent think-tank, estimates that total investments in the schemes amount to 12½–25 percent of GDP.
  • The schemes have common characteristics: (i) promised monthly returns of at least 10 percent; (ii) restrictions on withdrawals; and (iii) referrals of new members by existing clients.
  • These attributes, however, are also common to Ponzi schemes, which inevitably collapse. Ponzi schemes do not undertake productive investments but use funds from newcomers to pay earlier entrants. Over time, however, the amounts due to old investors eventually exceed the new money the scheme can attract. Assuming, for example, a monthly return of 10 percent and roll-over rate of 30 percent, new investments would need to grow continuously by 30 percent per month, on average, just to keep up with payments.

Required New Investment 1/

(in J$ millions)

1/ IMF staff calculations. Assumes that all investments in the first six months of the scheme’s operation are fully rolled over.

  • The macroeconomic impact is difficult to discern but could be significant. On the surface, the schemes do not appear to be causing banking disintermediation as deposit and credit growth have been robust recently. Furthermore, following a 9 percent shift from household deposits to enterprises (which the schemes are likely to be classified as by individual banks) during 2001–05, deposit shares have remained broadly stable. Security dealers, however, do report losing customers to the schemes (analytical data on dealers is lacking). Indeed, to shield themselves from a possible freeze of their assets, the schemes could be exporting funds under their management abroad, which would be consistent with the weakening of the exchange rate and reserve losses. In the balance of payments, net unidentified private inflows are estimated to have decreased by US$0.6 billion in FY 2007–08. The counterpart to the loss of reserves could be security dealers’ liabilities to the public (rather than banks’ liabilities), which are not included in the monetary survey.
  • The schemes could have larger macroeconomic implications in future. The collapse of pyramid schemes equivalent to about 50 percent of GDP in Albania in the late 1990s led to a sharp depreciation and increased inflation, as well as a large-scale civil disorder and a 2 percentage point fall in output. CAPRI considers the risk of social unrest limited in Jamaica because investors are middle-to-high income and appear aware of the risks. A collapse in personal wealth can, nevertheless impact on GDP. Assuming, for example, that the wealth effect on consumption is in the range of 3 to 6 percent and the marginal propensity to consume is 0.7 (broadly similar to the United States), the full loss of investments could reduce output by about 2¼–4½ percent of GDP.

III. Staff Appraisal

31. The new authorities have ambitious plans to address the policy imperatives they inherited along with a much more difficult environment. Jamaica’s disappointing high-debt and low-growth experience accentuates the hazards it now faces in a world where growth in the United States, its largest economic partner, has slowed; lending risks have been repriced; and credit conditions have tightened. The new authorities are keenly aware that under these circumstances, securing continued economic stability and placing Jamaica on an improved growth trajectory require steadfast commitment to debt reduction. They also recognize the importance of taking difficult monetary and exchange rate policy actions when necessary, and strengthening financial sector resilience.

32. The broad nature of the authorities’ debt and fiscal agenda is welcome and fiscal adjustment plans should be fleshed out. A multiplicity of factors has helped perpetuate the debt problem in the past; ranging from weaknesses in assigning fiscal responsibility to poor budget design, execution and monitoring; from financially hemorrhaging public enterprises to faustian wage bargains that neither yielded efficiency nor allowed public workers always to be paid adequately; from a grossly inefficient tax system to insufficiently transparent fiscal accounting practices. The new authorities have indicated that they are planning to address these issues. They have also underscored their intention to pursue a broader structural reform agenda, strengthen government effectiveness, and eliminate the budget deficit over the medium-term—to that end, it would be important to identify specific measures to increase revenues and reduce spending.

33. The authorities’ commitments to monetary and exchange rate flexibility and to addressing unregulated investment schemes are encouraging. The use of all of its tools can help the central bank navigate through the current external turbulence and rising domestic price pressures. As regards the financial sector, ensuring that the core remains sound and limiting fraudulent activities, which could have important macroeconomic spillovers, are always important, but they could be critical now in the changed environment.

34. The priority now is for the government to give concrete shape to all its initiatives. The broad and ambitious character of the government’s plans are appropriate, given the nature and scale of Jamaica’s economic challenges. This same large scope of the plans, however, means that they have not all been fully fleshed out yet. The official international community can help provide appropriate technical and financial assistance as the authorities build domestic consensus behind their initiatives. The authorities will, however, also have to remain mindful that financial markets will be keenly monitoring the demonstration not only of their policy intentions, but also of the implementation.

35. Striking the right balance between realism and ambition remains key. A strong fiscal adjustment effort now, along with publicizing a comprehensive economic legislative agenda and timetable would be reassuring. They would reinforce the seriousness the authorities attach to their plans. Improving the fiscal primary surplus by 1–1½ percent of GDP now would also demonstrate Jamaica’s capacity to adjust rapidly to a deteriorating external environment, so as to ensure continued macroeconomic stability. The authorities are, however, also right in that realism in setting budget targets is important to dispel the past record of missed objectives.

36. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 6.Jamaica: Summary Balance of Payments(In millions of U.S. dollars)
Prel. Est.Projections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13
Current account-671-1,186-1,253-1,770-1,742-1,559-1,385-1,234-1,124
Trade balance-2,124-2,716-2,929-3,341-3,551-3,577-3,696-3,774-3,839
Exports (f.o.b.)1,5671,8092,2202,3872,7502,9123,0463,2883,550
Imports (f.o.b.)3,6914,5245,1495,7276,3016,4896,7427,0627,388
Fuel (cif)9871,5581,6702,0202,5042,5752,6652,7792,910
Exceptional imports (including FDI-related)316281698651577579619685719
Other2,3882,6852,7813,0573,2203,3353,4573,5983,759
Services (net)5706435994706267569331,0791,198
Transportation-182-290-451-556-557-573-604-645-685
Travel1,1781,3721,5981,5781,7711,9532,2092,4502,659
Of which: tourism receipts1,4571,6191,8801,8742,0822,2782,5492,8063,032
Other services-426-439-548-553-588-624-672-727-776
Income (net)-626-702-715-917-964-1,035-1,046-1,094-1,176
Current transfers (net)1,5081,5891,7932,0172,1472,2972,4252,5552,693
Government (net)1751301441427684888888
Private (net)1,3331,4591,6491,8752,0712,2122,3372,4682,605
Capital and financial account1,0041,3621,5041,3401,5491,6201,6501,3411,343
Capital account (net)2-31-5-5-1-1-1-1
Financial account (net)1,0021,3661,5031,3441,5541,6211,6511,3411,344
Direct investment (net) 3/5386087761,2767927721,403830874
Central government (net)260334-413-251225197182169159
Other official (net) 1/2/82227346359538473434396379
Of which: PetroCaribe12231230374358344326309
Government refinancing deposits-250-1003500000
Private (net)204197893-390-1180-368-54-68
Net inflows to commercial banks127216179-19800000
Other flows 4/78-19715-193-1180-368-54-68
Overall balance/change in NFA (+ increase)333177251-431-19361265107219
Memorandum items:
Net international reserves1,9022,0782,3291,8991,7061,7672,0322,1392,358
(in weeks of imports of GNFS)181717131010111112
Current account (in percent of GDP)-7-12-12-15-13-11-10-8-7
Exports of goods (in percent change)715237156588
Imports of goods (in percent change)12231411103455
Tourism receipts (in percent change)41116011912108
GDP (in millions of U.S. dollars)8,94910,18310,67311,48813,02013,64514,38115,19916,109
Sources: Jamaican authorities; and Fund staff estimates.

In 2006/07 and beyond, consists of borrowing by public entities guaranteed by the government.

Includes counterpart to the inflow for the government’s pre-financing in 2005/06.

In 2007/08 includes the Petrojam sale ($65 million) and the first payment for the sale of Lascelles rum factory ($420 million). The second payment for Lascelles ($580) is included in 2010/11.

A large part of the proceeds (in two installments) for the sale of Lascelles rum factory (privately owned) are assumed to be held abroad.

Sources: Jamaican authorities; and Fund staff estimates.

In 2006/07 and beyond, consists of borrowing by public entities guaranteed by the government.

Includes counterpart to the inflow for the government’s pre-financing in 2005/06.

In 2007/08 includes the Petrojam sale ($65 million) and the first payment for the sale of Lascelles rum factory ($420 million). The second payment for Lascelles ($580) is included in 2010/11.

A large part of the proceeds (in two installments) for the sale of Lascelles rum factory (privately owned) are assumed to be held abroad.

Table 7.Jamaica: Summary Accounts of the Bank of Jamaica 1/
2004/052005/062006/07Prel. Est.

2007/08
Proj.

2008/09
(In billions of Jamaican dollars)
End-of-period stocks 1/
Net international reserves118136158135131
Net domestic assets-76-92-106-74-63
Net claims on public sector959797105113
Of which: on central government 2/7855455670
Net credit to commercial banks-13-11-11-11-13
Net credit to other financial institutions-1-1-1-1-1
Open market operations-144-157-166-134-118
Other items net (incl. valuation adj.)-14-20-25-32-43
Base money4244526169
Currency in circulation2426313641
Liabilities to commercial banks1817212528
Fiscal year flows 1/
Net international reserves22.117.922.2-22.8-3.5
Net domestic assets-16.7-15.9-14.032.111.4
Net claims on public sector19.31.70.27.98.3
Of which: on central government 2/9.3-22.7-9.910.714.0
Net credit to commercial banks1.11.70.0-0.4-1.9
Net credit to other financial institutions-0.10.0-0.3-0.2-0.2
Open market operations-35.6-13.5-8.332.015.5
Other items net (incl. valuation adj.)-1.4-5.9-5.6-7.3-10.3
Base money5.52.08.29.27.9
Currency in circulation2.92.75.05.04.7
Liabilities to commercial banks2.5-0.73.34.23.2
(Change in percent of beginning-of-period M3)
Net international reserves61.142.951.044.0-5.7
Net domestic assets-46.0-38.2-32.161.918.6
Net claims on public sector53.44.10.415.313.6
Net credit to commercial banks3.04.10.1-0.8-3.1
Net credit to other financial institutions-0.30.0-0.8-0.3-0.3
Open market operations-98.3-32.4-19.161.725.4
Other items net (incl. valuation adj.)-3.8-14.1-12.7-14.0-16.9
Base money15.14.718.817.812.9
Currency in circulation8.16.411.49.77.6
Liabilities to commercial banks7.0-1.77.58.25.3
Memorandum items:
Change in net claims on the central government1.7-3.5-1.41.31.5
(percent of GDP)
Net international reserves (U.S. millions)1,9152,0762,3351,8991,706
Sources: Bank of Jamaica; and Fund staff estimates.

Fiscal year runs from April 1 to March 31.

Includes net unclassified and BoJ operating loss from the previous fiscal year.

Sources: Bank of Jamaica; and Fund staff estimates.

Fiscal year runs from April 1 to March 31.

Includes net unclassified and BoJ operating loss from the previous fiscal year.

Table 8.Jamaica: Summary Monetary Survey 1/
2004/052005/062006/07Prel. Est. 2007/08Proj. 2008/09
(In billions of Jamaican dollars)
End-of-period stocks 1/
Net foreign assets116120130120115
Net domestic assets94108123187242
Net claims on public sector179191194206214
Of which: central government 2/148136128145159
Open market operations-110-116-124-108-87
Credit to private sector93106139183220
Of which: foreign currency3336476279
Other 3/-68-73-85-94-105
Liabilities to private sector (M3)210229253307357
Money supply (M2)139154175205238
Foreign currency deposits717578102119
Fiscal year flows 1/
Net foreign assets14.43.79.6-10.2-4.8
Net domestic assets5.214.515.063.855.1
Net claims on public sector 2/13.812.52.812.18.3
Of which: central government1.0-11.9-8.016.814.0
Open market operations-26.9-5.7-8.716.621.1
Credit to private sector13.013.132.644.037.5
Of which: foreign currency5.93.510.514.616.9
Other 3/5.3-5.4-11.7-8.8-11.7
Liabilities to private sector (M3)19.618.224.653.650.3
Money supply (M2)14.514.221.829.533.1
Foreign currency deposits5.13.92.924.117.2
(Change in percent of beginning-of-period M3)
Net foreign assets7.51.74.2-4.0-1.6
Net domestic assets2.76.96.625.218.0
Net claims on public sector 2/7.25.91.24.82.7
Of which: central government0.5-5.6-3.56.74.6
Open market operations-14.1-2.7-3.86.56.9
Credit to private sector6.86.214.317.412.2
Of which: foreign currency3.11.74.65.85.5
Other 3/2.8-2.6-5.1-3.5-3.8
Liabilities to private sector (M3)10.38.610.821.216.4
Memorandum items:
Monetary base (J$ Millions)41.643.651.857.765.3
M3/monetary base5.15.24.95.25.2
Net foreign assets (US$ Millions)18951841192115421438
M3 velocity2.62.82.82.62.7
Sources: Bank of Jamaica; and Fund staff estimates and projections.

Fiscal year runs from April 1 to March 31.

Includes Bank of Jamaica operating balance.

Includes net credit to nonbank financial institutions, capital accounts, valuation adjustment, securities sold under repurchase agreements and net unclassified assets.

Sources: Bank of Jamaica; and Fund staff estimates and projections.

Fiscal year runs from April 1 to March 31.

Includes Bank of Jamaica operating balance.

Includes net credit to nonbank financial institutions, capital accounts, valuation adjustment, securities sold under repurchase agreements and net unclassified assets.

Table 9.Jamaica: Selected Vulnerability Indicators
2003/042004/052005/062006/07 1/Prel. Est. 2007/08
Key economic and market indicators
Real GDP growth (in percent)1.80.42.02.41.0
CPI inflation (period average, in percent)12.612.814.87.412.1
Short-term (ST) interest rate (in percent)22.914.713.012.312.4
EMBI secondary market spread (bps, end of period)551405301320522
Exchange rate NC/US$ (end of period)60.961.565.367.6
External sector
Exchange rate regimeManaged float
Current account balance (percent of GDP)-6.9-7.5-11.6-11.7-15.4
Net FDI inflows (percent of GDP)7.16.06.07.311.1
Exports (percentage change of US$ value, GNFS)11.05.19.515.53.0
Real effective exchange rate (2000=100; end of period)88.192.796.594.8
Gross international reserves (GIR) in US$billion1.61.92.42.61.9
GIR in percent of ST government debt at remaining maturity (RM) 2/560.4396.4452.5291.6362.8
GIR in percent of ST government debt at RM and banks’ FX deposits. 2/97.2112.6111.6130.085.7
Net international reserves (NIR) in US$billion1.61.92.12.31.9
Total gross external government debt (ED) in percent of GDP 2/54.456.354.858.855.6
Of which: ST external debt (original maturity, in percent of total ED)0.00.00.00.01.0
ED to foreign official sector (in percent of total ED)44.241.233.329.426.9
Total gross external debt in percent of exports of GNFS123.1130.6132.0128.7127.1
Gross external debt of domestic private sector (in percent of total)
Gross external financing requirement (in US$billion) 3/0.81.21.72.22.3
Public sector (PS) 4/
Overall balance (percent of GDP)-8.1-8.6-4.8-7.3-5.8
Primary balance (percent of GDP)12.111.911.08.18.2
Gross PS financing requirement (in percent of GDP) 5/28.932.926.630.618.8
Public sector gross debt (PSGD, in percent of GDP) 5/143.7139.6133.0134.3128.3
Of which: Exposed to rollover risk (in percent of total PSGD) 6/16.617.111.913.213.7
Exposed to exchange rate risk (in percent of total PSGD) 7/53.751.451.552.651.9
Exposed to interest rate risk (in percent of total PSGD) 8/36.134.539.942.743.0
Public sector net debt (in percent of GDP)126.0121.8117.7121.9114.3
Financial sector (FS) 9/
Capital adequacy ratio (in percent)14.017.717.916.114.5
NPLs in percent of total loans3.12.72.32.22.0
Provisions in percent of NPLs125.0135.7131.8125.8127.8
Return on average assets (in percent)4.33.03.73.53.7
Return on equity (in percent)
FX deposits held by residents (in percent of total deposits)38.138.839.537.838.2
FX loans to residents (in percent of total loans, net of provisions)39.041.342.740.841.7
Net open forex position (in percent of capital) 10/
Public sector debt held by FS (percent of total FS assets) 11/32.724.623.922.922.0
Credit to private sector (percent change)44.819.316.925.928.6
Memorandum item:
Nominal GDP in billions of U.S. dollars8.38.910.210.711.5
Sources: Bank of Jamaica; Ministry of Finance; STATIN; and Fund staff estimates and projections.

Staff estimates, projections, or latest available observations.

Only government external debt. Private sector external debt unavailable.

Current account deficit plus amortization of external debt.

Public sector covers central government only.

FY 2006/07 debt reflects a US$350 million bond issued in March 2007 for pre-financing for FY 2007/08.

ST debt and maturing medium- and long-term debt, domestic and external, excluding external debt to official creditors.

Debt in foreign currency or linked to the exchange rate, domestic and external, excluding external debt on concessional terms.

ST debt and maturing medium-and long-term debt at variable interest rates, domestic and external.

Financial sector includes commercial banks only. Data in calendar year.

Sum of on-and off-balance sheet exposure.

Excludes Bank of Jamaica securities.

Sources: Bank of Jamaica; Ministry of Finance; STATIN; and Fund staff estimates and projections.

Staff estimates, projections, or latest available observations.

Only government external debt. Private sector external debt unavailable.

Current account deficit plus amortization of external debt.

Public sector covers central government only.

FY 2006/07 debt reflects a US$350 million bond issued in March 2007 for pre-financing for FY 2007/08.

ST debt and maturing medium- and long-term debt, domestic and external, excluding external debt to official creditors.

Debt in foreign currency or linked to the exchange rate, domestic and external, excluding external debt on concessional terms.

ST debt and maturing medium-and long-term debt at variable interest rates, domestic and external.

Financial sector includes commercial banks only. Data in calendar year.

Sum of on-and off-balance sheet exposure.

Excludes Bank of Jamaica securities.

Table 10.Jamaica: Public Sector Debt Sustainability Framework, 2001/02-2012/13(In percent of GDP, unless otherwise indicated)
ActualProjectionsDebt-stabilizing primary balance 9/
2002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/13
1Baseline: Public sector debt 1/143.0141.5139.6133.0134.3128.3122.4120.3115.2108.3100.53.7
Government debt 1/139.3134.4132.2124.1122.5114.0105.0100.092.984.575.5
Of which: foreign-currency denominated63.569.666.061.162.758.157.158.358.658.558.1
Government guaranteed debt 1/3.77.27.49.011.814.317.320.322.323.825.0
2Change in public sector debt10.0-4.9-2.1-8.2-1.6-8.5-9.0-5.1-7.1-8.4-9.0
3Identified debt-creating flows (4+7+12)-0.21.6-6.7-11.8-3.1-9.2-13.8-9.5-10.4-10.9-11.1
4Primary deficit-5.2-12.1-11.9-11.0-8.1-8.2-8.4-10.0-11.8-12.3-12.5
5Revenue and grants28.130.331.229.029.931.230.031.031.531.832.0
6Primary (noninterest) expenditure22.918.219.318.021.823.021.621.019.719.519.5
7Automatic debt dynamics 2/5.013.45.0-0.85.0-1.6-5.90.51.41.51.4
8Contribution from interest rate/growth differential 3/3.2-3.54.3-4.82.7-1.6-5.90.51.41.51.4
9Of which: contribution from real interest rate5.8-1.34.8-2.45.6-0.5-3.33.14.24.34.1
10Of which: contribution from real GDP growth-2.6-2.2-0.5-2.4-2.9-1.1-2.6-2.6-2.8-2.8-2.7
11Contribution from exchange rate depreciation 4/1.816.80.74.02.3
12Other identified debt-creating flows0.00.30.20.00.00.60.50.00.00.00.0
13Privatization receipts (negative)0.00.30.20.00.00.60.50.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
15Other (specify, e.g., bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
16Residual, including asset changes (2-3) 5/10.2-6.54.63.61.50.74.94.43.32.52.1
Public sector debt-to-revenue ratio 1/509.4467.8447.4458.3449.4411.3408.3387.9366.0340.2313.9
Gross financing need 6/31.627.832.926.630.618.820.717.817.016.515.0
in billions of U.S. dollars2.62.32.92.73.32.22.72.42.42.52.4
Scenario with key variables at their historical averages 7/128.3131.7133.8133.9132.7130.95.3
Scenario with no policy change (constant primary balance) in 2005-2010128.3121.5120.9119.4116.6112.93.2
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)2.21.80.42.02.41.02.72.83.13.33.5
Average nominal interest rate on public debt (in percent) 8/12.715.714.313.012.211.814.213.313.212.211.6
Average real interest rate (nominal rate minus change in GDP deflator, in percent)5.1-0.73.8-1.74.8-0.3-3.03.64.95.35.5
Nominal appreciation (increase in U.S. dollar value of local currency, in percent)-4.0-21.9-0.9-5.8-3.4
Inflation rate (GDP deflator, in percent)7.616.510.514.77.412.117.29.78.36.86.1
Growth of real primary spending (deflated by GDP deflator, in percent)19.0-19.06.5-4.623.56.7-3.60.2-3.72.43.5
Primary deficit-5.2-12.1-11.9-11.0-8.1-8.2-8.4-10.0-11.8-12.3-12.5

Central government and government guaranteed debt on gross basis. From FY 2002/03, includes debt issued to the BoJ to cover its cash losses and related capitalized interest. FY 2006/07 debt includes US$350 million in prefinancing. The primary balance includes budgetary primary balance and off-budget expenditure. Dynamics do not drive guaranteed debt. PetroCaribe debt treated as guaranteed debt in this analysis.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. Guaranteed debt added for presentational purposes.

Derived as nominal interest expenditure divided by previous period debt stock.

Central government and government guaranteed debt on gross basis. From FY 2002/03, includes debt issued to the BoJ to cover its cash losses and related capitalized interest. FY 2006/07 debt includes US$350 million in prefinancing. The primary balance includes budgetary primary balance and off-budget expenditure. Dynamics do not drive guaranteed debt. PetroCaribe debt treated as guaranteed debt in this analysis.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. Guaranteed debt added for presentational purposes.

Derived as nominal interest expenditure divided by previous period debt stock.

Table 10. Figure 1.Jamaica: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas and the Baseline projection line represent actual Central Government Debt data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2006, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 11.Jamaica: External Debt Sustainability Framework, 2001/02-2010/11(In percent of GDP, unless otherwise indicated)
ActualProjectionsDebt-stabilizing non-interest current account 6/
2002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/13
1Baseline: External debt49.854.456.354.858.855.654.957.358.759.259.2-5.5
2Change in external debt-3.74.61.9-1.64.1-3.2-0.72.41.30.60.0
3Identified external debt-creating flows (4+8+9)7.50.3-2.4-1.22.03.75.94.3-1.80.7-0.4
4Current account deficit, excluding interest payments10.13.43.87.87.510.79.57.76.04.73.7
5Deficit in balance of goods and services19.814.917.420.421.824.922.520.719.217.716.3
6Exports39.444.243.141.545.743.843.344.445.346.547.3
7Imports59.259.160.561.867.568.765.865.064.564.263.6
8Net nondebt creating capital inflows (negative)-4.8-7.1-6.0-6.0-7.3-11.1-6.1-5.7-9.8-5.5-5.4
9Automatic debt dynamics 1/2.24.0-0.2-3.01.74.12.52.22.01.51.3
10Contribution from nominal interest rate3.73.53.73.84.24.73.93.73.63.43.2
11Contribution from real GDP growth-1.2-0.9-0.2-1.0-1.2-0.5-1.3-1.5-1.7-1.9-1.9
12Contribution from price and exchange rate changes 2/-0.41.4-3.7-5.8-1.3
13Residual, incl. change in gross foreign assets (2-3) 3/-11.24.34.4-0.42.1-6.9-6.6-1.93.1-0.20.4
External debt-to-exports ratio (in percent)126.4123.1130.6132.0128.7127.1126.7129.2129.4127.2125.2
Gross external financing need (In billions of U.S. dollars) 4/1.90.91.31.82.22.42.41.91.71.91.8
in percent of GDP22.610.414.917.520.820.818.513.611.512.411.4
Scenario with key variables at their historical averages 5/55.654.554.159.461.263.9-4.0
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)2.21.80.42.02.41.02.72.83.13.33.5
GDP deflator in U.S. dollars (change in percent)0.7-2.87.311.52.46.610.31.92.22.32.5
Nominal external interest rate (in percent)7.27.07.37.78.08.57.97.16.76.05.8
Growth of exports (U.S. dollar terms, in percent)1.711.05.19.515.53.012.37.37.78.57.7
Growth of imports (U.S. dollar terms, in percent)10.2-1.210.316.414.59.58.63.64.65.25.0
Current account balance, excluding interest payments-10.1-3.4-3.8-7.8-7.5-10.7-9.5-7.7-6.0-4.7-3.7
Net nondebt creating capital inflows4.87.16.06.07.311.16.15.79.85.55.4

Derived as [r - g - ρ(1+g) + εα(l+r)]/(l+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = rea GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(l+g) + εα(l+r)]/(l+g+ρ+gρ) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and nondebt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and nondebt inflows in percent of GDP) remain at the levels of the last projection year.

Derived as [r - g - ρ(1+g) + εα(l+r)]/(l+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = rea GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(l+g) + εα(l+r)]/(l+g+ρ+gρ) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and nondebt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and nondebt inflows in percent of GDP) remain at the levels of the last projection year.

Table 11. Figure 1.Jamaica: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2007.

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