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Jamaica: Staff Report for the 2008 Article IV Consultation Supplementary Information

Author(s):
International Monetary Fund
Published Date:
June 2008
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1. This supplement provides an update on recent developments, including the authorities’ budget proposal to parliament for FY 2008/09.

2. Inflationary pressures remain unabated although the Jamaican dollar has appreciated moderately and international reserves have continued to recover. Annual headline inflation rose to 19.9 percent in March, from 18.2 percent in January, mostly on account of food, fuel, and transportation. About two-thirds of the reserve losses that occurred during June–November 2007 have now been recovered and international reserves stood at $2.1 billion at end-March.

3. A large unregulated investment scheme has been declared unable to make payments by a court-appointed receiver. Preliminary indications are that liabilities far exceed assets. The principal behind the scheme has been arrested while investigations continue, including into the nature of the entity’s affiliates in several countries.

4. The budget deficit for FY 2007/08, which ended March 31, is likely to have been lower than recently anticipated, due to underexecution of investment spending. The latest estimates show some capital projects behind schedule. The primary surplus is, therefore, likely to have amounted to 9 percent of GDP, compared to the 8¼ percent of GDP indicated in the staff report (4/3/08), but still below the 10¼ percent of GDP target in the original budget (Tables 1 and 2).

Table 1.Jamaica: Summary of Central Government Operations(In billions of Jamaican dollars)
(4/3/08)(4/3/08)
Budget 1/Staff Rpt.RevisedStaff Rpt.Budget
2007/082008/09
Budgetary revenue and grants243.1249.7252.1289.0300.0
Tax221.9225.2224.5260.3273.7
Nontax17.921.423.025.120.8
Grants3.33.14.53.65.5
Budgetary expenditure265.7286.1281.4337.6349.2
Primary expenditure164.2184.1180.0208.0225.6
Wage and salaries88.586.786.298.1107.0
Other expenditure49.364.864.973.373.9
Capital expenditure26.332.728.936.644.6
Interest 2/101.5102.0101.3129.5123.6
Budget balance-22.6-36.4-29.3-48.6-49.2
Of which: primary budget balance78.965.672.180.974.4
Off-budget expenditure9.010.310.32.69.5
BoJ cash losses 3/7.48.78.72.69.5
Deferred financing 4/1.61.61.60.00.0
Overall balance-31.6-46.8-39.6-51.2-58.6
Financing31.646.839.651.258.6
Of which: divestment0.04.54.50.06.0
Sources: Jamaican authorities; and Fund staff estimates and projections.

As originally approved by Parliament at the start of the fiscal year.

The authorities were originally considering changes in procedures for making payments to the central bank, which would have resulted in two interest payments in FY 2008/09. They have now decided not to implement the changes this year. This does not affect the primary balance or the overall balance; it only reallocates amounts between interest and BoJ cash losses, which are also covered by the government. The larger overall balance for FY 2008/09 now reflects the worsened primary surplus.

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

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

As originally approved by Parliament at the start of the fiscal year.

The authorities were originally considering changes in procedures for making payments to the central bank, which would have resulted in two interest payments in FY 2008/09. They have now decided not to implement the changes this year. This does not affect the primary balance or the overall balance; it only reallocates amounts between interest and BoJ cash losses, which are also covered by the government. The larger overall balance for FY 2008/09 now reflects the worsened primary surplus.

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

Table 2.Jamaica: Summary of Central Government Operations

(In percent of GDP) 1/

(4/3/08)(4/3/08)
BudgetStaff Rpt.RevisedStaff Rpt.Budget
2007/082008/09
Budgetary revenue and grants31.331.231.530.031.1
Tax28.628.128.027.028.4
Nontax2.32.72.92.62.2
Grants0.40.40.60.40.6
Budgetary expenditure34.235.735.135.036.2
Primary expenditure21.223.022.521.623.4
Wage and salaries11.410.810.810.211.1
Other expenditure6.48.18.17.67.7
Capital expenditure3.44.13.63.84.6
Interest 2/13.112.712.713.412.8
Budget balance-2.9-4.5-3.7-5.0-5.1
Of which: primary budget balance10.28.29.08.47.7
Off-budget expenditure1.21.31.30.31.0
BoJ cash losses 3/1.01.11.10.31.0
Deferred financing 4/0.20.20.20.00.0
Overall balance-4.1-5.8-4.9-5.3-6.1
Financing4.15.84.95.36.1
Of which: divestment0.00.60.60.00.6
Sources: Jamaican authorities; and Fund staff estimates and projections.

Projected GDPs of J$800.5 billion for FY 2007/08 and J$964 billion for FY 2008/09 used for both the Staff Report and the revised columns. However, for FY 2007/08, the original GDP projection of J$776 billion is used.

The authorities were originally considering changes in procedures for making payments to the central bank, which would have resulted in two interest payments in FY 2008/09. They have now decided not to implement the changes this year. This change does not affect the primary balance or the overall balance; it only reallocates amounts between interest and BoJ cash losses, which are also covered by the government. The larger overall balance for FY 2008/09 now reflects the worsened primary surplus.

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.

Projected GDPs of J$800.5 billion for FY 2007/08 and J$964 billion for FY 2008/09 used for both the Staff Report and the revised columns. However, for FY 2007/08, the original GDP projection of J$776 billion is used.

The authorities were originally considering changes in procedures for making payments to the central bank, which would have resulted in two interest payments in FY 2008/09. They have now decided not to implement the changes this year. This change does not affect the primary balance or the overall balance; it only reallocates amounts between interest and BoJ cash losses, which are also covered by the government. The larger overall balance for FY 2008/09 now reflects the worsened primary surplus.

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.

5. The draft budget for FY 2008/09 envisages non-interest spending to be 1.8 percent of GDP higher than anticipated in the staff report (4/3/08). Parliamentary debate on the FY 2008/09 budget commenced on April 10. The draft budget envisages capital spending to be 0.8 percent of GDP higher than anticipated in the staff report (4/3/08), making up for the shortfall in FY 2007/08. The remainder of the spending increase in FY 2008/09, relative to the projections in the staff report (4/3/08), is accounted for by wages. Negotiations with public sector unions on a new agreement covering FY 2008/09–2009/10 have not yet concluded. However, the government’s current proposal to unions, included in the draft budget, implies a wage bill that is almost 1 percent of GDP higher than anticipated.

6. Increased revenues will help partially offset the higher spending. The authorities’ currently project FY 2008/09 revenues and grants 1.1 percent of GDP higher than envisaged in the staff report (4/3/08) and also anticipate some privatization receipts. The draft budget proposes tax policy measures affecting cigarettes and motor vehicles to raise 0.2 percent of GDP. The higher wage bill will also lead to increased collection of payroll taxes (0.2 percent of GDP). The remainder of the revenue increase is expected to accrue from administrative measures.

7. Raising sufficient revenues from administrative measures will not be easy. The authorities have had recent success with administrative measures—revenues increased by over 1 percent of GDP in FY 2007/08 from strengthening tax administration and arrears collection. The authorities hope to expand on this success this year. Inter alia, they have announced an amnesty program under which interest and penalties will be waived if the principal arrears are paid in full by June 30, 2008. Tax arrears, excluding interest and penalties, are currently estimated at over 6 percent of GDP. Nevertheless, it will be challenging to repeat the tax administration performance of FY 2006/07 and increase revenues by a further 0.6–0.7 percent of GDP, which the authorities will need to do to achieve their revenue objectives. Also, the amnesty program risks undermining incentives to remain current on tax payments in future.

8. The new information reinforces the thrust of the staff appraisal in the staff report (4/3/08). The overperformance, relative to earlier expectations, on the primary surplus in FY 2007/08 has been offset by the lower target in FY 2008/09. However, increased spending in FY 2008/09 will make it more difficult to balance the budget by FY 2010/11, as the authorities envisage (see paragraphs 14–17 in the staff report of 4/3/08). The widened current account deficit, more-than-expected inflation, and vulnerabilities represented by the weak external environment continue to argue for a strong fiscal adjustment this budget year to support the monetary and exchange rate policies.

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