Jamaica: Staff Report for the 2003 Article IV Consultation
Author: International Monetary Fund
Publication Date:
23 Mar 2004
eISBN:
9781451820102
Language:
English
Keywords:
ISCR; CR; issuer rating; exchange rate; disinflation strategy; bond issue; deficit; private sector; current account; money supply; debt sustainability analysis; public sector debt; Public sector; Global
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Jamaica faced intense macroeconomic imbalances that threatened its macroeconomic stability. Executive Directors emphasized the need for credible policy actions and strong fiscal adjustment to reduce imbalances and lower vulnerability. They welcomed the strong fiscal adjustment in the budget and encouraged the Bank of Jamaica to reorient monetary policy. They stressed the need for a policy mix that would restore macroeconomic stability, achieve higher growth, lower external imbalances, and emphasized for anti-crime measures, infrastructure building, and sector-specific policies to promote growth.

Abstract

Jamaica faced intense macroeconomic imbalances that threatened its macroeconomic stability. Executive Directors emphasized the need for credible policy actions and strong fiscal adjustment to reduce imbalances and lower vulnerability. They welcomed the strong fiscal adjustment in the budget and encouraged the Bank of Jamaica to reorient monetary policy. They stressed the need for a policy mix that would restore macroeconomic stability, achieve higher growth, lower external imbalances, and emphasized for anti-crime measures, infrastructure building, and sector-specific policies to promote growth.

I. Perspective and Background

A. Brief Perspective

1. Over the past decade, the Jamaican economy has undergone significant structural change. Economic liberalization and structural reform have resulted in a more open and market-oriented economy with reduced government intervention. The economy has moved away from reliance on traditional sectors such as agriculture and mining to tourism and other service-oriented sectors. However, growth rates were disappointing with the average growth rate for 1990–2001 less than 1 percent (Figure 1), marginally below the population growth rate.

Figure 1.
Figure 1.

GDP Growth and Inflation

(In percent)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

2. High public debt has exerted a heavy burden on public finances over the past decade, particularly in the second half of the 1990s. Jamaica’s debt, at the beginning of the 1990s, was close to 210 percent of GDP and was reduced through fiscal surpluses and restructuring to 80 percent of GDP by FY 1996/97.1 2 However, partly as a result of rapid liberalization in the context of inadequate regulation, Jamaica was hit by a major financial sector crisis in late 1996 which affected many domestic financial institutions.3 The government’s decision to bail out all depositors is estimated to have increased the debt to GDP ratio by 40 percent.

3. Tight monetary and exchange rate policies resulted in a sharp real appreciation of the Jamaican dollar during the second half of the 1990s (Figure 2). To break out from long periods of high inflation, the government adopted, from mid–1996, an exchange rate based disinflation strategy. This strategy has successfully delivered single digit inflation in recent years, but at the cost of high interest rates and real exchange rate appreciation of about 30 percent between 1996 and 2001.

Figure 2.
Figure 2.

Exchange Rate Developments

(Index 1990=100)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

4. Social problems such as crime and unemployment remain serious. Crime and violence have increased during the past decade.4 High crime rates have imposed significant social and economic costs on society. Helped by support from high remittances and the government’s social programs, poverty has halved during the decade, but remains around 17–18 percent of the total population. The unemployment rate has been steady at 15 percent in recent years, with much higher youth and female unemployment rates; outward migration has averaged around 1 percent per year.

B. Background

5. At the 2002 Article IV Board discussion on August 7, 2002, Directors saw the key policy priorities as reversing fiscal slippages and setting a firmer foundation for medium-term growth. Directors commended the authorities for having maintained growth and low inflation in spite of numerous shocks to the economy and noted the success of the government in disposing assets of the intervened financial institutions. Directors acknowledged the strong fiscal effort evidenced by high primary surpluses over the previous 4 years, but were concerned about the overruns of the FY 2001/02 staff monitored program (SMP) fiscal targets. Directors stressed, in the context of an SMP for FY 2002/03, the need for further fiscal effort and strengthening of growth-oriented policies to reduce significantly the extremely high public debt burden

6. In the event, the FY 2002/03 SMP did not achieve its goals (see Annex I). The SMP was designed to strengthen the fiscal position; preserve low inflation; lay the foundations for faster growth; and signal to Jamaica’s development partners (including multilateral banks) and international financial markets the authorities’ commitment to credible macroeconomic policies. However, the fiscal targets were missed by wide margins and net international reserves (NIR) declined by more than expected as external confidence deteriorated. Fiscal slippages and a worsening current account position led to instability in financial markets.

7. Increased macroeconomic imbalances in FY 2002/03 reflect in considerable part the lack of progress in implementing the policies recommended by the Board in the last Article IV discussion. The proposed fiscal measures and growth-oriented structural reforms were not implemented. The exchange rate has depreciated more than anticipated but this resulted from declining confidence in the macro-economic situation, and occurred despite significant foreign exchange market intervention and large interest rate increases by the BOJ intended to stabilize the exchange rate.

8. A general election was held in October 2002. The ruling People’s National Party led by Prime Minister P. J. Patterson won a record fourth consecutive term in office with a reduced, yet still comfortable majority. Dr. Omar Davies was reappointed Minister of Finance, a post he has held since December 1993. Political consensus has not emerged on economic issues and the opposition Jamaican Labor Party abstained on the recent budget. Some of the tax measures in the budget have been opposed by the business community.

9. Jamaica’s foreign exchange arrangements are classified by the IMF as a managed float with no pre-announced path for the exchange rate.5 Jamaica’s exchange rate system is free of restrictions on the making of payments and transfers for current international transactions. The external value of the Jamaican dollar is determined in an interbank market operated by commercial banks, in which the Bank of Jamaica (BOJ) is a major player, and has been “floating” in this manner since September 1990.

10. The statistical base in Jamaica is generally adequate for conducting surveillance but there are a number of areas where improvements are needed (Appendix II). Jamaica began participating in the General Data Dissemination System (GDDS) in January 2003, and is currently undertaking an assessment of what is required to subscribe to the Special Data Dissemination Standard (SDDS).

II. Recent Economic Developments

11. Growth was disappointing during FY 2002/03, although there was some pick up during the second half of the year. After stagnating during April to September, GDP growth rose to 1½ percent for the year as a whole with a recovery in the second half of the year in tourism, agricultural production (following extensive flooding), and mining output. The twelve-month inflation rate fell somewhat from the previous year to about 6 percent by March 2003 (Table 1).

Table 1.

Jamaica: Selected Economic and Financial Indicators 1/

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

Fiscal years run from April 1 to March 31. Latest estimates by the authorities for GDP in FY 2001/02 to FY 2003/04 are JS365.2bn, J$396.1bn, and JS435.4bn, respectively. The fiscal ratios in this and other tables for FY 2002/03 and FY 2003/04 are based on these numbers to be consistent with the working numbers used by the ministry of finance.

As of the end of fiscal year.

Flow as percent of liabilities to the private sector at the beginning of the period.

Figures for 2003/04 are government’s budget estimates.

Including FINSAC interest payments on a full year basis, implying an increase of 0.4 percent of GDP above cash interest payments in 2001/02.

Includes selected public enterprises, accrued but not paid FINSAC/FIS interest due to the private sector, and Bank of Jamaica operating balance.

The public sector debt is defined to include central government domestic and external debt and domestic and external debt guaranteed by the government. It excludes government securities held by public enterprises and external debt held by BoJ.

In percent of exports of goods and services.

Table 2.

Jamaica: Quantitative Targets and Outturn for Key Variables in the Staff-Monitored Program for Fiscal Year 2002/03

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The SMP targets are revised as indicated in the government’s Letter of Intent to the Fund Dec. 4, 2001.

Targets for FY 2002/03 are based on an accounting exchange rate of J$48.80 per dollar, and the cross-currency exchange rate against the U.S. dollar as of March 31, 2002.

Preliminary outturn for June 2002 - not target; at the time the LOI was signed, provisional data were available.

Cumulative figures for fiscal year to date.

The NIR floor for 2002/03 and limit for foreign medium- and long-term commercial borrowing will be adjusted by external borrowing to pre-fund next fiscal year’s debt service.

Defined as trade credits to selected public enterprises.

A. Public Finances

12. Public finances were much weaker than expected due to expenditure overruns in wages and non-wage recurrent expenditures, as well as higher interest spending. Lower tax revenues due to non-implementation of tax measures were offset by higher capital revenues. The central government deficit is estimated at around 8 percent of GDP and the primary surplus at about 7½ percent of GDP, compared with budget targets of 4.4 percent of GDP and 10.4 percent of GDP respectively (Figure 3, Table 3). The financial performance of other public entities was, however, somewhat better than planned, due to the effects of higher oil prices and exchange rate depreciation on the oil company and delays in capital spending by the housing development corporations.

Table 3.

Jamaica: Summary of Public Sector Operations

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Source: Bank of Jamaica; Ministry of Finance; FINSAC; and Fund staff estimates and projections.

Includes bauxite levy.

Includes capital revenue.

Includes statistical discrepancy.

Includes interest due and capitalized during the year up to 2000/01.

Includes FINSAC interest payments on a fill year basis upto 2000/01.

The public sector debt is defined to include central government domestic and external debt and domestic and external debt guaranteed by the government. It excludes government securities held by public enterprises and external debt held by BoJ.

Table 4.

Jamaica: Nonfinancial Public Sector Debt

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Nonfinancial public sector domestic debt (exclu Jamaica), net of nonfinancial public enterprises holdings of FINSAC securities and government papers, and government guaranteed domestic debt.

Nonfinancial public sector external debt (excluding Bank of Jamaica), including central government and government guaranteed debt, converted at end-period exchange rate.

Table 5.

Jamaica: External Public Debt Outstanding 1/

(In millions of U.S. dollars, end of period)

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Sources: Ministry of Finance; IFS; and Fund staff estimates and projections.

Medium- and long-term outstanding external debt for the public sector, including Bank of Jamaica. Data on private sector external debt are not available. As of end-December 2002, data from the Bank of International Settlements (BIS) showed that consolidated international claims of reporting banks on Jamaica amounted to US$1.4 billion, of which, US$1.0 billion represents claims on the private sector.

FY2002/03 figures based on staff projections.

Figure 3.
Figure 3.

Public Sector Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

13. The public debt ratio is estimated to have increased further in FY 2002/03. Overall public sector debt is estimated to have risen by 18 percentage points to close to 150 percent of GDP by March 2003 (Figure 3). Around one half of the rise in J$ terms reflects the 18 percent depreciation of the Jamaican dollar against the U.S. dollar during FY 2002/03; the remainder is due to the higher fiscal deficit partly reflecting higher interest rates, and the assumption of loans from public entities. About three-fifths of total debt is domestic and about half of overall debt is external or domestic U.S. dollar-linked (Box 1 and Tables 4 and 5). Nearly three-quarters of all the debt is estimated to be held by domestic residents;6 about one half of the domestic debt is at floating interest rates.

Key Facts of Jamaica Public Sector Debt (as of end-March 2003) in Percent (unless stated)

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Source: Ministry of Finance; and Bank of Jamaica

This figure is reported by the government which includes external and government guaranteed debt by the government and the Bank of Jamaica, as well as all domestic government debt. It is different from the one used elsewhere in this report which includes domestic guaranteed debt but excludes BOJ’s external debt and government securities held by the selected public enterprises.

Assuming 80 percent of external commercial bonds are held domestically.

B. External

14. The current account deficit widened by 3 percentage points of GDP to 12 percent of GDP (roughly US$900 million) in FY2002/03 (Figure 4). Weaker exports earnings, higher levels of external debt servicing and sharply higher import costs, reflecting in particular higher oil prices, were only partially offset by a further rapid growth in remittance flows (Table 6). Remittances are estimated to have grown by roughly a quarter in FY 2002/03, to over US$1 billion, exceeding travel receipts for the first time.7

Table 6.

Jamaica: Summary Balance of Payments

(In millions of U.S. dollars)

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Sources: Bank of Jamaica; and Fund staff estimates.

Includes central government and the Bank of Jamaica.

Includes net flows of private capital and errors and omissions.

Table 7.

Jamaica: Summary Monetary Indicators

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Source: Bank of Jamaica; and Fund staff estimates.

Includes Bank of Jamaica net profit and net unclassified assets.

Includes valuation adjustments

Includes 5 percent special deposit requirement imposed in January 2003 but expected to be removed during 2003/04

Includes open market operations.

Currency in circulation plus local currency demand time and savings deposits at banks

In relation to base money at beginning of period.

In relation to liabilities to private sector at beginning of period.

Figure 4.
Figure 4.

External Sector

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

15. There was a major deterioration in the capital account for FY 2002/03 and NIR fell by nearly one third. The capital account surplus is estimated to have declined to US$370 million in FY 2002/03 compared to US$1.4 billion in the previous year. Total amortization payments in FY 2002/03—at US$0.7 billion—were only partially offset by US$300 million raised from commercial markets in June 2002.8 Foreign direct investment declined by US$100 million as flows began to return to trend levels after being boosted in the previous two years by acquisition activity in the financial and mining sector and start-up investments in the mobile phone sector. Weaker performance in “other sector investment” accounts for the remainder of the fall in the capital account, an area where there remains a good deal of uncertainty, in particular with regard to private sector capital flows (see Appendix II). At end-March 2003, NIR were US$ 1.3 billion, down roughly US$600 million for the year.

16. Spreads on Government of Jamaica global bonds over U.S. Treasuries rose over 250 basis points during the fiscal year to around 800 basis points (Figure 5). In February 2003, the authorities cancelled plans to raise an additional US$200 million from international markets reflecting rising spreads due to the deteriorating fiscal position, and the change in Standard & Poor’s rating from stable to negative. Spreads, after reaching a peak of around 1000 basis points, declined somewhat post-budget to around 850 basis points by mid-May.

Figure 5.
Figure 5.

Blended Spread (over U.S. Treasuries) on Government of Jamaica’s International Bonds

(In basis points)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

C. Financial Sector

17. In the second half of FY 2002/03, domestic interest rates more than doubled as the BOJ tried to stabilize the exchange market while money growth remained tight. Base money increased by around Commercial bank lending rate 7½ percent, as the BOJ increased its open market operations in the last quarter, while money supply remained roughly unchanged.9 Banking system credit to the private sector grew faster than expected as a result of increased demand for foreign currency lending by the tourism and telecommunications sectors, which accounted for about 60 percent of total lending in FY 2002/03 and for around 35 percent of private sector credit outstanding.10 As of end March 2003, the 6 month Treasury-bill rate was 33½ percent compared to 16½ percent as of end September 2002 (see Figure 6 and Table 8). In addition, a 5 percent special deposit requirement was imposed on Jamaican dollar deposits in February 2003 to reduce liquidity in the system.

Figure 6.
Figure 6.

Interest Rates

(In percent)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

Table 8.

Jamaica: Domestic Interest Rates and Yields on GOJ Global Bonds

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Source: Bank of Jamica Statistical Digest; IFS

The weighted lending rate is average commercial bank lending rate with proportion of loans in each category used as the weight.

Foreign currency lending rate.

US dollar denominated bond with a maturity date of 2007.

US Dollar denominated bond with a maturity date of 2011.

Blended spread for US dollar denominated securities (in basis points).

18. Since November 2002, the Jamaican dollar has come under frequent pressure (Figure 7). From November 2002 through 14, May 2003 the rate depreciated by 27 percent against the U.S. dollar despite several BOJ interest rate hikes designed to stabilize the exchange rate and significant net intervention (US$150 million). In real terms, after an appreciation of over 30 percent from 1995_2002 including a 4 percent appreciation in FY 2001/02, the Jamaican dollar depreciated by around 11 percent during FY 2002/03 reflecting the weakness of the U.S. and Jamaican dollars, recovering roughly one-third of the losses since the mid 1990s.11

Figure 7.
Figure 7.

Exchange Rate

(J$/US$)

Citation: IMF Staff Country Reports 2004, 076; 10.5089/9781451820102.002.A001

19. Steps were taken to strengthen prudential supervision and the balance sheet of the BOJ. Supervisory legislation was strengthened to improve the BOJ’s capacity to supervise financial groups. The BOJ implemented a World Bank sponsored recapitalization plan in August 2002,12 which reduced the proportion of below market-remunerated assets in its portfolio, and, on an accrual basis, the BOJ has again started to make profits. Despite this, however, the BOJ’s cash deficit for FY 2002/03 was estimated at around 2½ percent of GDP. These cash losses reflect the large spread between what the BOJ