On June 20, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 and fourth review through the Extended Arrangement under the Extended Fund Facility (EFF) with Jamaica. The completion of the review enables the disbursement of an amount equivalent to SDR 45.95 million (about US$70.9 million) bringing the total disbursements under the arrangement to SDR 268.59 million (about US$414.4 million).
The Executive Board approved the EFF arrangement for four years and a total of SDR 615.38 million (about US$948.1 million, the equivalent of 225 percent of Jamaica’s quota in the IMF (see Press Release No. 13/150) on May 1, 2013.
In early 2013, the Jamaican authorities adopted a comprehensive economic reform program to tackle the challenges of low growth and high debt head-on. Since then, fiscal policy has been tightened further and extensive structural reforms have been implemented, including wide-ranging tax reform and a fiscal rule anchored on a reduction in public debt to 60 percent of GDP by 2025/26. The authorities also initiated significant reforms in the financial sector, and have allowed the exchange rate to depreciate. In addition, and in view of minimizing the social impact of the reform program, the government has taken steps to strengthen social protection programs, including through the cash transfer program (PATH), a vital component of the social safety net.
Following the Board discussion of the review, Mr. Naoyuki Shinohara, Deputy Managing Director, and Acting Chair made the following statement:
“Jamaica’s program implementation under the Extended Fund Facility has been commendable. The achievement of a primary surplus in a short time is impressive. Essential social spending has been safeguarded and steps are being taken to strengthen the social safety net. Continued support by the international community remains crucial as Jamaica is undertaking this difficult adjustment.
“With upfront fiscal adjustment and the steadfast implementation of an ambitious and wide-ranging structural reform agenda, the initial dividends from the reorientation of policies are emerging. The government’s economic strategy aims to boost growth and employment, place public debt on a sustainable path, restore competitiveness, and strengthen the social safety net. Its full implementation will bring about tangible benefits for Jamaica and its people.”
The Executive Board also concluded the 2014 Article IV consultation with Jamaica.
A gradual economic recovery appears to be under way. Growth is estimated at 0.9 percent in FY2013/14, as mining, agriculture and tourism picked up. Recorded unemployment remains high, but fell from 16 percent to 13.5 percent (in seasonally adjusted terms) from April 2013 to January 2014. Inflation declined to 7.6 percent (year-on-year) at end-April, as the impact of the ongoing depreciation of the exchange rate was countered by weak domestic demand. These factors also caused a sharp reduction in the current account deficit to 9.5 percent in FY2013/14. Gross international reserves increased to US$2 billion at end-March 2014.
The public sector’s fiscal position was balanced in FY2013/14, following a deficit exceeding 4 percent of GDP in the previous year. This resulted from lower interest costs and an increase in the primary surplus of the central government to 7.5 percent of GDP. The 2014/15 budget aims to maintain this primary surplus. The authorities’ ongoing fiscal consolidation efforts and gains from the early 2013 debt exchange have reduced public sector debt from 147 percent of GDP in March 2013 to 140 percent a year later.
Standard indicators of the soundness of the financial sector remain broadly positive, including the share of non-performing loans and capital-asset ratios. Stress test results from the Bank of Jamaica confirmed that banks largely remained in compliance with capital requirements under a range of shocks. However, the financial system is still heavily exposed to government debt holdings and a decline in the market value of government bonds could have a negative impact on financial institutions’ capital.
The steadfast implementation of planned policies should support a gradual economic recovery. Growth is projected to reach almost 1½ percent in 2014/15, as the negative fiscal impulse comes to an end. The gradual impact of various supply side reforms and rising confidence with implementation of the authorities’ comprehensive reform program are expected to help raise growth to beyond two percent over the medium term. The risks to the outlook remain high, however, and include a possible disruption of external financing flows, natural disasters, lower partner-country growth, and oil price shocks.
Executive Directors welcomed the emerging signs of economic recovery and the marked improvements in fiscal and external balances. Directors commended the authorities for the impressive implementation of their economic transformation program, notably the ambitious fiscal adjustment. They stressed that steadfast implementation of the economic strategy and sustained broad public support for the reform agenda would be critical to achieving the objectives of growth, employment, and poverty reduction.
Directors noted that downside risks to the outlook remain high, and that the economic and social costs of the adjustment effort have been substantial. Careful sequencing and prioritizing of wide-ranging reforms, with the full support of the international community, will be important. Directors welcomed as critical the steps being taken to safeguard social spending and improve the social safety net to protect the most vulnerable.
Directors commended the authorities for the remarkable front-loaded fiscal consolidation aimed at reducing public debt to sustainable levels. They welcomed in particular the achievement of a primary surplus that is exceptional by international standards, progress on tax reform, and the adoption of a fiscal rule. Directors agreed that efforts should focus on improving tax collection. At the same time, accelerated efforts are needed to reform the public sector and contain the wage bill, address contingent fiscal risks by strengthening the performance of public entities, and improve public financial management to better leverage the growth impact of scarce public investment. Directors also looked forward to progress on strengthening debt management.
Directors supported the overall stance of monetary policy, which aims to balance the multiple objectives of containing inflation, rebuilding reserves, and ensuring sufficient credit to the real economy. They recommended increasing reliance on interest rate channels and expanding the monetary policy toolkit for liquidity management, while maintaining exchange rate flexibility. Directors welcomed the plan to adopt inflation targeting once prior conditions have been met.
Directors welcomed progress in strengthening the banking system, including the adoption of legislation on bank supervision. They encouraged a proactive approach to address remaining vulnerabilities in the financial system, giving priority to reforming the business model of the securities dealers. Further consolidating supervision and enhancing the bank resolution framework are also crucial.
Directors stressed the importance of promoting growth and job creation, by reducing red tape, improving infrastructure, and boosting competitiveness. They welcomed the improvement in price competitiveness resulting from a flexible exchange rate. Reducing the price of electricity and focusing training on critical skills remain important priorities.