During the past three decades, Jamaica has shown low economic growth and high public debt, and has faced other social challenges. To help restore competitiveness and improve financial market conditions, the authorities have come up with a comprehensive four-year economic program—2013/14 through 2016/17—that aims to avert immediate crisis risks and create the necessary conditions for sustained growth. The program’s main pillars include structural reforms, fiscal adjustments supported by extensive fiscal reforms, and improved social protection programs.
The Executive Board of the International Monetary Fund (IMF) today approved a four-year Extended Fund Facility (EFF) arrangement for Jamaica to support the authorities’ comprehensive economic reform agenda. The EFF arrangement amounts to SDR 615.38 million (about US$932.3 million), the equivalent of 225 percent of Jamaica’s quota in the IMF. The financing arrangement forms a critical part of a total funding package of US$2 billion from Jamaica’s multilateral partners including the World Bank and the Inter-American Development Bank, with each having preliminarily agreed to allocate US$510 million over the next four years. The Executive Board approval enables an initial disbursement by the IMF of an amount equivalent to SDR 136.75 million (about US$207.2 million).
Following the Executive Board’s discussion, Mr. David Lipton First Deputy Managing Director and Acting Chair of the Board, stated:
“For most of the past three decades, Jamaica has suffered from very low growth, high public debt, and serious social challenges. Key factors behind these problems have been Jamaica’s unsustainable debt burden, low competiveness, a weak business climate, and lack of policy credibility. During 2012/13, the authorities started to tighten fiscal policy and prepared a comprehensive four-year economic reform program to address these challenges.
“The main objective of the program is to put public debt on a firmly downward trajectory and thereby create a virtuous cycle of debt sustainability and higher economic growth. The authorities’ multi-layered reform agenda comprises ambitious fiscal consolidation, improvement in competitiveness, debt reduction, and improved social protection programs.
“Achieving higher and sustained growth is key to increase the welfare of Jamaicans and ensure the country’s long-term macroeconomic stability. The authorities’ growth agenda integrates ambitious fiscal consolidation with structural reforms to reduce impediments to growth and facilitate strategic investments.
“While the full benefits of the reform agenda may take time to materialize, the reforms are urgently needed to ensure a more prosperous future for Jamaica. To enhance sustainability of the reform agenda, fair burden sharing of the reform effort is essential. A central component of the program is the authorities’ package of measures to promote social coherence that includes a floor on social spending, an improved social safety net, and programs to increase employment.
“The authorities recognize that safeguarding the financial sector is also critical. They have established a Financial Sector Support Fund to offer assistance, if needed, to financial institutions participating in the recent debt exchange.
“Although the risks to the program are high, the implementation of the prior actions, the frontloaded nature of the reform agenda, and the envisaged collaboration with development partners should help foster the successful implementation of the program.”
During 2012/13 the authorities began to tighten fiscal policy. The government which took office in January 2012 attained an improvement in the central government’s primary surplus for the fiscal year 2012/13(April-March) to 5.2 percent of GDP from 3.2 percent the previous year. As the cornerstone of the budget measures, a tax package with a full-year effect estimated at 1.6 percent of GDP was enacted during the third quarter of the fiscal year. In addition, the government strengthened its Fiscal Responsibility Framework, including a sanctions regime for unbudgeted spending.
Economic activity has remained very weak, and the economy is estimated to have contracted by 0.2 percent in FY2012/13, as confidence has continued to wane. Unemployment has increased from 12 percent at end-October 2010 to 13.7 percent at end-October 2012. Price pressures have remained moderate, and inflation is estimated at about 7.3 percent on average in FY 2012/13.
The external position has deteriorated significantly, with the current account deficit estimated at around 12 percent of GDP. Sluggish foreign inflows, including from multilateral institutions, together with central bank foreign exchange sales and debt service payments, have contributed to a sharp drop in Net International Reserves to below US$900 million (compared to US$1.9 billion at end-2011). Since late 2012, however, this downward trend has been contained while the exchange rate has been allowed to depreciate.
The Jamaican authorities’ four-year economic program for FY2013/14 through FY2016/17, seeks to avert immediate crisis risks and create the conditions for sustained growth through a significant improvement in the fiscal and debt positions and competitiveness.
The main pillars of the program are: (i) structural reforms to boost growth and employment; (ii) actions to improve price and non-price competitiveness; (iii) upfront fiscal adjustment, supported by extensive fiscal reforms; (iv) debt reduction including a debt exchange to place public debt on a sustainable path, while protecting financial system stability; and (v) improved social protection programs. To alleviate the possible adverse impacts of fiscal adjustment on the most vulnerable, the program includes measures to ensure adequate social spending and a strengthened social safety net. The program sets a floor on social spending that will help safeguard this spending category.
The program includes a heavy and frontloaded reform agenda to help the economy recover as quickly as possible. The reform agenda seeks to ensure fair burden sharing and is focused on actions to strengthen public financial management, introduce a fiscal rule, reform the tax system, improve the business climate, move towards inflation targeting, and reform the securities dealers sector. The fiscal reforms are essential for a sustained fiscal consolidation effort to put debt on a downward trajectory. Structural reforms to achieve higher and sustained growth are pivotal to long-term economic stability and increased welfare of the population.