The Government of Jamaica remains fully committed to its EFF program, whose front-loaded adjustment is expected to restore growth, improve competitiveness, and place debt on a firm downward path. With all quantitative conditions and structural benchmarks for the 1st review having been completed, we hope all Directors will support the completion of this review. We thank the staff for their comprehensive report and the technical assistance that has been provided in support of the authorities’ reform efforts.
Despite a challenging external and domestic environment the authorities remain on track to meet their fiscal target of achieving a primary balance of 7.5 percent of GDP. Moreover, the authorities are expecting to achieve this goal while expanding and improving social protection for the most vulnerable segments of society, for example through a reform and 15 percent overall increase in their income support program, the Programme of Advancement through Health and Education (PATH).
Although GDP contracted slightly more than originally forecast for 2012/2013 as a result of the aftermath of hurricane Sandy, the authorities are expecting a return to growth as external conditions ameliorate, the benefits of structural reforms begin to take hold, and the competitiveness of the economy improves. As a counter-balance to the staff’s emphasis on the downside risks to the program, the authorities wish to highlight the upside potential that will result from steadfast implementation of their growth agenda. Of particular note, the growth trajectory over the medium term could shift upwards as major works associated with strategic growth projects are implemented and goods and services respond more strongly to the continuing gains in price competitiveness.
Inflation has picked up to 9.5 percent in August 2013, but still within the Bank of Jamaica’s target of maintaining single-digit inflation. The uptick in prices is largely the result of trade related inflation pass through as market forces have generated a gradual depreciation of the Jamaican dollar. Going forward inflation is expected to return to more moderate levels as the economy returns to growth and competitiveness improves.
Despite weak economic growth the most recent data showed a level of employment that was slightly higher, although this was overshadowed by an anomalous and sharp increase in the labour force. The results of the October survey will be important in confirming whether this signaled a rise in labour force participation or merely a statistical error.
The financial sector continues to display remarkable resilience to adverse conditions. Although the National Debt Exchange (NDX) resulted in reduced interest income and some capital losses, the financial system remains sound and to date there has been no request for support under the Financial Sector Stability Fund (FSSF). Moreover, non-performing loans (NPLs) have experienced a marked decline recently, as low as 5.8 percent in June, and provisioning for these NPLs remains high. As expected, the NDX resulted in a tightening of liquidity within the system, particularly in the secondary market for government bonds, which staff highlights. The authorities are cognizant of the tighter liquidity conditions and believe that the financial sector’s demand for sovereign bonds, and liquidity in the secondary market, will gradually return as Jamaica continues to successfully implement its reform agenda. The Bank of Jamaica is intensively monitoring the financial system’s level of liquidity and stands ready to respond should circumstances warrant additional central bank support.
A cornerstone of the program remains tax reform and fiscal sustainability, which will be cemented by the implementation of the fiscal rule that has already been agreed in concept, with support of TA provided by the Fund. An important element of this reform is the overhaul of the system of tax incentives, beginning with the tabling of the Omnibus Tax Incentive Act in the coming weeks. My authorities place great importance on ensuring that reforming the tax incentive regime was properly sequenced and balances fiscal constraints with the need to promote employment and growth. In order to secure broad based consultation and support for the reforms, the authorities created an Incentives Working Group comprising key private sector and public sector representatives. The Incentives Working Group actively collaborated with staff from the Inter-American Development Bank (IaDB), who have provided intensive technical assistance to Jamaica in the area of tax reform. Tax reform discussions are complex, often requiring in-depth exchanges amongst stakeholders and repeated model simulations to estimate the cost and benefits of various reforms.
We are happy to report that the discussions on tax reform have culminated in a comprehensive plan on the key principles and elements of tax reform that makes the best use of limited fiscal space to promote investment, growth and employment. The Omnibus Tax Incentive Act is the first step in a larger process to improve the use of tax incentives, broaden the tax base, and eventually lower tax rates. The authorities are grateful to FAD, the Incentives Working Group, and the IaDB for their tireless efforts in this area. Staff notes that the actual tabling of the Act in Parliament will be subject to a very small delay, with submission to Parliament occurring slightly after the projected September 30th timeline, which was necessary to ensure that the Act reflects the best advice from all the parties. We welcome staff’s conclusion that the reform process remains on track and would stress that this slight delay in tabling the Act will have no impact on the overall program as it does not affect when the new incentive regime becomes effective.
Finally, we would like to confirm the authorities’ intention to consent to the publication of the staff report.