This paper discusses Jamaica’s Seventh Review Under the Extended Fund Facility and Request for Modification of Performance Criteria. Risks to the program are slowly waning but remain high. Notwithstanding the authorities’ demonstrated resolve in implementing the program, more tangible signs of improvements in growth will be important to sustain the social consensus needed to continue on the reform trajectory. The program is on track. All December 2014 quantitative performance criteria were met and structural reforms have progressed broadly on schedule. Based on the continued strong performance and the authorities’ policy commitments, the IMF staff recommends completion of the seventh review.
Our authorities value the collaborative relationship that has been developed with the Fund over the last few years. The EFF and the technical assistance Jamaica has received from the IMF have been important elements of the authorities’ multi-year economic reform plan. For this seventh review of Jamaica’s EFF, all performance criteria have again been met and the ambitious structural reform agenda is proceeding broadly on schedule. It is now halfway through the EFF and our authorities’ commitment to the program objectives has been unwavering and their implementation steadfast.
On February 19th, the Minister of Finance laid before Parliament a budget comprising the estimates of revenues and expenditures for the 2015/2016 fiscal year. The budget is in line with program expectations and maintains the impressive primary surplus of 7.5 percent of GDP, a critical component of Jamaica’s debt reduction strategy. Also, as part of my authorities’ commitment to improve fiscal transparency, for the first time the budget will be passed by both Houses of Parliament before the start of the upcoming fiscal year. The government has also tabled in the Parliament its Growth Agenda Policy Paper and a matrix outlining public and private sector initiatives being undertaken to improve the business environment and economic growth.
With an economy that has yet to recover and fully benefit from many of the structural and competitiveness reforms that have been undertaken in recent years, a tax relief and revenue broadening package was implemented. The package is intended to mitigate against the risk of a revenue shortfall in 2015/16, where revenues remain depressed in certain areas and economic activity remains lower than potential. Also, to lessen the burden on income earners, the threshold on personal income tax was raised, disproportionately helping medium and lower income workers. Nevertheless, to safeguard fiscal sustainability the government had to introduce new revenue measures, but the measures chosen were those that would be the least harmful to the vulnerable and to growth.
The authorities continue to contain expenditures while simultaneously focusing resources on growth-enhancing activities. In the area of wages and salaries, the authorities have maintained the commitment to no salary increases over a five year period, while honouring all commitments under prior agreements. Despite this adherence to the stated policy, however, the lower than anticipated growth has resulted in an inability to meet the legislated wage/GDP target of 9.0 percent by fiscal year 2015/16. The authorities expect to meet the target by the following fiscal year.
The Bank of Jamaica (BoJ) continues to operate under the goals of price stability and a market-determined flexible exchange rate that reflects underlying macroeconomic fundamentals. The recent decline in oil prices has, amongst other things, led to favorable developments in the current account and assisted in the BoJ’s efforts to lower inflation and anchor inflation expectations at a lower level. Understanding the importance of foreign reserves for a small open economy like Jamaica, both in terms of confidence and to smooth out excessive volatility, the BoJ continues to build up NIR through opportunistic purchases of hard currency, in line with program expectations.
The dramatic fall in oil prices has been a significant economic windfall for Jamaican consumers and producers. Electricity prices have fallen substantially as a result of the lower fuel bill, which has translated to an increase in disposable income for consumers and lower costs for producers. Oil and gasoline prices in Jamaica are market based and the benefits of the drop in energy costs are automatically transferred to final users. Moreover, the partly ad valorem tariff structure on fuel excises results in further gains in real disposable income for consumers as they pay less taxes when fuel prices decrease. Nevertheless, the authorities recognize that developments in energy markets are likely to be transient and the market is notoriously volatile, thus the recent windfall has not led to any complacency in their efforts to improve energy efficiency and diversify the energy mix for electricity production. Since its inception, the Electricity Sector Enterprise Team (ESET) has assisted in the authorities’ efforts to reach important milestones in terms of energy reform. Plans have been approved to transform the 115 mega-watt (MW) Bogue power plant from oil to gas and to construct a new 190 MW LNG-based power plant. Moreover, construction is set to begin by three smaller energy producers, which will be completed over the next two years. Through a combination of wind, solar, and bio mass these facilities will provide an additional 78 MW of renewable energy. Furthermore the government has implemented a tax measure that will fund an energy stabilization initiative which will include the purchase of hedges in the oil market and conservation initiatives amongst other energy cost stabilization measures.
The authorities are also moving forward on their commitment to improve the quality and efficiency of the public sector. With the assistance of the World Bank and the IDB, the first phase of their public sector transformation program is being implemented. This multi-year transformation process will culminate in a more streamlined, effective, and client-friendly public service. In order to safeguard sustainability, the authorities are actively engaged with stakeholders to reach agreement on a strategic plan that will rationalize the wage bill in a durable way.
Confidence in the authorities’ ability to deliver meaningful reforms and place debt firmly on a downward trajectory is rising. The need to further bolster confidence and have it translated into productive investment, jobs, and growth, is essential for economic success, both during the program and after it. A key ingredient of this will be convincing economic actors to get off the sidelines and mobilize their resources towards investment opportunities. Tax and structural reforms have assisted in making Jamaica a more attractive place to invest and work continues to bring to fruition flagship transformative projects. Also, every effort is being made, within the confines of the EFF’s fiscal targets, to safeguard growth-enhancing public capital expenditures to alleviate bottlenecks and fill infrastructure gaps.