Our Jamaican authorities wish to express their appreciation to the staff for the cordiality and frankness that characterized the Article IV consultation. The assessment and recommendations reflect the constructive contribution the Article IV process makes to domestic policy discourse on a range of economic policy initiatives.
Despite the first change in government in 18 years, Jamaica enjoys continuity and broad consensus on the major economic policy fundamentals. The new government, which took office in September 2007, has set out a new medium-term macroeconomic strategy for Jamaica. They place very high priority on the maintenance of macroeconomic stability and fiscal consolidation. They are committed to setting realistic and achievable macroeconomic targets as the essential foundation for building credibility, engendering confidence, and ultimately delivering a sustainable higher growth rate.
Accordingly, the authorities’ medium-term policies seek to strengthen the economic foundation for a vibrant and competitive economy through strong fiscal discipline and debt reduction, reform of the tax system to increase efficiency and effectiveness, enhancing the business climate, and further improving the quality of governance through improving public sector management and reducing bureaucracy. The authorities have taken a consultative approach to policy making, pursuing broad partnership with key stakeholders from the private sector, civil society and the diaspora, while recognizing that difficult choices will have to be made. They are also pursuing more active engagement with the multilateral institutions.
Recent Economic Developments
Jamaica was confronted with a number of challenges in FY2007/08, which were in large measure triggered by exogenous shocks related to the deteriorating global economy and to weather-related events. Economic activity was severely impacted by the dislocation resulting from Hurricane Dean and sporadic floods, including supply shocks to agricultural prices. High oil and commodity prices also had a significant impact. These factors, along with the exchange rate pass-through from the 4.6 percent depreciation of the Jamaica dollar vis-à-vis the US dollar, undermined the pursuit of price stability and contributed to a significant increase in inflation from 7.4 percent in FY2006/07 to 19.9 percent in FY2007/08. GDP growth is estimated at 0.9 percent, compared with 2.5 percent in FY2006/07. Nonetheless, the fiscal deficit at 3.7 percent of GDP for FY2007/08 was lower than anticipated, reflecting strong corrective measures taken by the authorities to contain expenditure and an aggressive revenue compliance program.
The Macroeconomic Program
The authorities’ 2008/09 macroeconomic program is aimed at creating conditions to support sustainable growth over the medium term. The main features are improvement in fiscal and debt performance, prudent monetary policy to rein-in inflation risks, maintenance of adequate reserves to support investor confidence, restoration of growth in the agricultural sector and expansion of capacity in the manufacturing and export sectors. The outlook is for increased economic activity, driven by capacity expansion and recovery in sectors adversely affected by weather-related and other exogenous shocks.
The 2008/09 budget presented on April 10, 2008, reflects the new administration’s determination to provide a framework that will encourage new investments and jobs, and hence accelerate growth. The budget provides for increased allocations for infrastructure development, restoration and expansion of the agriculture sector, and for the social sector -health and education. In the light of rapid increases in food prices globally, the social safety net has been widened to further protect the poor and vulnerable.
Fiscal Policy and Debt
Our authorities are keenly aware of the imperative of improving Jamaica’s debt dynamics to bring about sustained macroeconomic stability and growth, recognizing that the path is not without risks and uncertainties. Over the years, Jamaica’s challenges have necessitated delicate and often difficult trade-offs between deficit/debt reduction and stimulating growth. The staff’s recommendations for addressing the policy challenges presented by the fiscal deficit and high public debt are consistent with the authorities’ medium-term program. The differences of view between the positions of the staff and the authorities lie not over the overall objectives, but rather regarding the pace of implementation.
The staff’s recommendation is for a front-loaded adjustment, with a higher primary surplus of 10¼ percent in FY2008/09, compared with the authorities’ 8.4 percent. Years of generating double-digit primary surpluses in Jamaica, while demonstrative of the country’s commitment to fiscal discipline, have seriously constrained public investment. By the staff’s own analysis, “...countries with very low public investment, like Jamaica, appear to grow more slowly, even if private investment remains high”. In the view of the authorities, a framework that will encourage new investments, job creation and hence, accelerate growth requires a sound program of fiscal consolidation over the medium term that encompasses a gradual, moderate reduction of the fiscal deficit over a three-year period to a balanced budget in 2010/11. Such an approach will achieve a sustainable reduction in the debt over the medium term while allowing for sufficient fiscal space to pursue measures to stimulate economic growth and consequently increase revenue. Our authorities are convinced that the front-loaded approach recommended by the staff would increase the risk of choking off investment and growth opportunities. The authorities and the staff agree fully that prudent fiscal management, greater expenditure prioritization and more efficient delivery of public services remain critical elements of the strategy.
Discussions between the government, trade unions and public sector workers towards a third Memorandum of Understanding (MOU III) for a two-year (2008-2010) wage agreement has not been without its challenges, given the sharp rise in inflation and its impact on the cost of living. However, negotiations have reached an advanced stage and ratification of MOU III is expected shortly. In keeping with their commitment to prudent fiscal management, the authorities are cognizant of the need to balance adequate wage packages for public sector workers concomitant with higher levels of productivity, with the need for wage increases to remain within the bounds of a credible macroeconomic framework that will facilitate growth and improved living standards.
A comprehensive tax reform program to simplify the tax system, further increase compliance and broaden the tax base will be an essential element of the authorities’ fiscal policy. The last overhaul of Jamaica’s tax system was undertaken in 1986. An extensive review of proposed tax reform measures is underway, taking into account previous tax reform studies. Tax policy-related technical assistance is being funded by the IDB, and the authorities have approached the Fund’s Fiscal Affairs Department for additional assistance in this field.
A number of measures will be implemented to improve tax administration during the current fiscal year. These include establishing new revenue centers and continued upgrading of existing ones to improve accessibility and make them more user-friendly; expanding the menu of options for e-payments; implementing an e-filing facility, and at the Customs Department, an electronic export system to expedite, simplify and standardize the processing of exports. Third-party collection agreements will also be introduced to allow for collection of specific tax types through various agencies such as banks and bill collection agencies.
Monetary and Exchange Rate Policy
Monetary policy management was significantly challenged in FY2007/08 by rising inflation and instability in the foreign exchange market. Intense foreign exchange demand pressures were experienced during the year, fuelled by the unexpected rate of depreciation, portfolio switching in the context of narrowing of interest rate spreads - facilitated by high levels of liquidity and increased payments for higher levels of imports, particularly oil. Investor confidence was also negatively impacted by pre-election uncertainties. These developments necessitated policy actions by the Bank of Jamaica (BOJ) to absorb excess liquidity and restore stability to the foreign exchange market through increases in interest rates, augmented by increased offerings of open market instruments and the sale of foreign exchange. Notwithstanding the ease in pressure in recent months, the BOJ continues to monitor market conditions and is prepared to take actions as may be necessary to ensure stability in the financial and foreign exchange markets.
Our authorities are fully cognizant of the need to further strengthen the resilience of the financial sector. They share the staff’s assessment of the main risks to the sector in the current environment and the need to take actions to reduce the risks posed by unregulated financial schemes. Stress testing by the BOJ on the resilience of the banking sector in the event of the collapse of these schemes found that there is an adequate level of capital to absorb potential losses. This limited exposure is consistent with the upgrade in prudential standards and the tightening in loan administration that forms part of the ongoing strengthening of financial sector supervision.
Unregulated investment schemes, by their very nature, elude regulatory oversight, thereby posing serious challenges for the regulatory authorities in terms of how to prevent the spread and/or closure of their operations. The authorities have been pro-active within the mandate of the respective institutions, pursuing these schemes through the legal system and disseminating public advisories on an ongoing basis. The Financial Services Commission (FSC), which regulates the securities, insurance and private pension industries, continues to take actions authorized by governing law to prevent these “clubs” from offering securities in contravention of the Securities Act. Cease and desist orders have been issued and the FSC is supported by the Financial Investigation Division of the Ministry of Finance and the Public Service in cases where prosecution becomes necessary. The authorities are, on an expedited basis, assessing the need for amended or new legislation, as may be required, to address oversight of such investment schemes. In addition, the authorities have requested technical assistance from the Fund to improve the assessment of systemic stability and the systematic stress-testing of licensed securities dealers, and to develop an appropriate data framework to enhance the current practices of the FSC, including by improving the financial and prudential dataflow from licensed non-bank financial institutions.
More generally, to enhance information-sharing across the regulatory agencies and improve capability to assess financial stability and contagion risks, the Financial Regulatory Council, comprising the regulators, the deposit insurance corporation and the Ministry of Finance, is being re-energized.
Enhancing the Business Climate
The new government places great emphasis on private sector development and increased competitiveness to spur growth. They are fully aware that while investment must be private sector-driven, an enabling environment is necessary. Accordingly, steps are being taken to simplify administrative procedures and eliminate unnecessary restrictions and requirements. A policy-based loan was recently signed with the IDB as part of a program to enhance competitiveness in Jamaica. In addition, the EU has committed to provide funding under its budget support program to reduce bureaucratic red tape and enhance the business climate.
Efforts to rebuild the foundation for growth and competitiveness also include a focus on small and medium size enterprises (SMEs). A special financing facility is to be launched through the Jamaica EX-IM Bank for start up and further expansion of those SMEs with capacity for speedy implementation and job creation.
In keeping with the authorities’commitment to fiscal containment and more efficient delivery of public services, they are pursuing a policy of divestment of non-core assets. In February 2008, the government sold 49 percent of its share in the petroleum refining company, PETROJAM. Negotiations are advanced with the preferred bidder for divestment of the assets of the Sugar Company of Jamaica, a process which is expected to be completed by end-2008. The process towards divesting Air Jamaica Limited has begun with the appointment of the IFC as lead financial advisor and coordinator for the work of specialist consultants. A Rationalization Plan is being developed for public entities, encompassing winding-up and removing inactive entities from the Companies Register, merging compatible entities, and divesting entities where appropriate.
The Jamaican authorities are undertaking an ambitious medium-term macroeconomic strategy against the backdrop of the difficult global economic environment, and the economic slowdown in Jamaica’s major trading partner, the USA. They are cognizant of serious downside risks, despite the apparent weak correlation between Jamaica’s economic performance and US economic slowdowns. But a clear commitment to growth-enhancing reforms, accompanied by continuing prudent fiscal and monetary policies, provides the foundation for tackling fundamental issues. The authorities will partner not only with domestic stakeholders, but also with the international financial community to address Jamaica’s vulnerabilities. The authorities look forward to continued excellent dialogue with the Fund, as they seek to transform the Jamaican economy.