The FINANCIAL — On April 10, 2018, the Executive Board of the International Monetary Fund (IMF) completed the 2018 Article IV Consultation and the third review of Jamaica’s performance under the program supported by the Stand-By Arrangement (SBA), on a lapse of time basis.
The 36- month SBA with a total access of SDR 1,195.3 million (about US$ US$1.7 billion), equivalent of 312 percent of Jamaica’s quota in the IMF, was approved by the IMF’s Executive Board on November 11, 2016. The Jamaican authorities continue to view the SBA as precautionary, and to use it as an insurance policy against unforeseen external economic shocks that could lead to a balance of payments need, according to IMF.
Strong program implementation continues to anchor macroeconomic stability. All quantitative performance criteria and structural benchmarks for end-December 2017 were met. Fiscal consolidation is ongoing: primary surplus is expected to be at least 7 percent of GDP in FY17/18 and a similar target is set in the FY18/19 budget; public debt is projected to be under 100 percent of GDP by end-March 2019. The unemployment rate is at a 10-year low, inflation and the current account are modest, international reserves are at a comfortable level, and external borrowing costs are at historical lows.
Nonetheless, GDP growth is estimated to have been a disappointing 0.5 percent in 2017. Weakness in agriculture, slow recovery in mining, and a deceleration in manufacturing offset growth in tourism and construction. The growth forecast is being revised down to 0.9 percent in FY17/18 and about 2¼ percent in the medium term; expected growth dividends from 5 years of reforms are somewhat offset by remaining structural issues, crime, and implementation capacity constraints.
Inflation remains well-anchored. Higher food prices resulting from flooding have begun to unwind, and CPI inflation in February was 4.4 percent (y/y). Core inflation has remained low (2.7 percent in February 2018), in part due to weak domestic demand. Both headline and core inflation are expected to steadily approach the midpoint of the BOJ target band (4-6 percent) over the medium-term. The current account deficit remains relatively low (at 2.8 percent of GDP in FY17/18) and it is expected to shrink over the medium-term, as oil prices remain contained and tourism earnings improve.
Financial system vulnerabilities are being progressively addressed. Non-performing loans were at about 2 percent of assets at end-2017, and banks’ capital are at about 14 percent of risk-weighted assets, well above the 10 percent regulatory minimum. Liquidity risks appear manageable, a steady fall in real interest rates has supported credit creation, and banks’ FX assets and liabilities appear to be broadly matched.
Executive Board Assessment
In concluding the 2018 Article IV Consultation and the Third Review under the Stand-By Arrangement with Jamaica, Executive Directors endorsed staff’s appraisal as follows:
The economic reform program, that began in May 2013, has been a turning point for Jamaica. With broad-based social and political support for reforms, the Jamaican government—over two administrations—has embarked on a path of fiscal discipline, monetary and financial sector reforms, and wide-ranging structural improvements to break a decades-long cycle of high debt and low growth.
Considerable progress has been achieved on macroeconomic policies and outcomes. Fiscal discipline—anchored by the Fiscal Responsibility Law—has been essential to reduce public debt and secure macroeconomic stability. Employment is at historic highs, inflation and the current account deficit are modest, international reserves are at a comfortable level, and external borrowing costs are at historical lows.
Growth and social outcomes, however, have been discouraging. Economic growth continues to disappoint, averaging only 0.9 percent since the reforms began. Entrenched structural obstacles, including crime, bureaucratic processes, insufficient labor force skills, and poor access to finance, continue to hinder productivity and growth. Moreover, the agricultural sector’s vulnerability to weather shocks exacerbated rural poverty in 2015. Not addressing these bottlenecks could pose risks for continued public support for the government’s policy program.
Structurally reducing the wage bill is critical for the government to reprioritize spending toward growth-enhancing projects. More expenditure is needed for infrastructure, citizen security, building agricultural resilience, health, education, and the social safety net. Creating the space for such spending will require going beyond temporary remedies like wage freezes and adjustments to non-wage benefits. It will require high-quality measures to (i) overhaul the compensation structure to retain skills and reward performance, (ii) streamline the vast and inequitable allowances structure, (iii) prioritize key government functions and shed those activities that it can no longer afford to undertake, and (iv) change the capital-labor mix through technology upgrades, including a better monitoring of (and accountability for) government spending. Inevitably, these reforms will also require a reduction in the size of the public workforce. Such a holistic approach will support a durable reduction in the wage bill, without frequent discordant wage negotiations, and enhance public service delivery with fewer but better paid public employees.
Improving social outcomes and fostering inclusive growth will require addressing structural bottlenecks and creating an enabling environment for private sector. Countering both weak social outcomes and escalating crime will take time but will be essential for sustained growth. In this regard, the evidence suggests that early childhood education, interventions to improve school attendance, and skills training for the youth would foster a virtuous cycle of lower crime, higher wages, stronger growth, and increased economic opportunity, particularly for the young. Policies to support productive private investments, including improving lending to smaller businesses and reducing lending-deposit interest spreads, will help fuel such an upswing. However, the government must resist the pressure to use scarce public resources to “pick winners” (including through providing tax incentives). Instead, the goal should be a uniform, broad-based, and low rate tax system, a level playing field for business, and harmonized rules for all.
Formalizing the current inflation targeting regime will help entrench macroeconomic stability and promote growth. With inflation likely to remain in the lower part of the central bank’s target range, a looser monetary stance remains appropriate. Meanwhile, upcoming revisions to the BOJ Act—including a clear mandate for price stability, a reformed governance structure, and a strong central bank balance sheet—will help institutionalize the inflation targeting framework. Also, continued development of the FX market, liquidity management and forecasting toolkit, along with upgrading the BOJ’s communication practices, will improve policy signaling and enhance credibility. Successful inflation targeting will require a clear commitment to a flexible and market-determined exchange rate with limited involvement of the central bank in the currency market. This implies that FX sales should be confined to disorderly market conditions, especially given the reductions in the surrender requirements, and buy auctions should aim to build reserves in a non-disruptive way.
Financial sector stability is a prerequisite for strong and sustained growth. Ongoing prudential and supervisory improvements will enhance systemic stability. While changes to investment limits for non-banks should be considered, they must be backed by a thorough assessment – including of appropriate regulations, risk management guidelines, and supervisory arrangements – to ensure that greater flexibility in non-banks’ asset-liability management practices does not jeopardize financial stability. Introduction of a Special Resolution Regime for financial institutions will strengthen the system’s safety net while putting clear requirements in place for the use of public resources.
Continued reform implementation will not only safeguard hard-won gains but also deliver stronger growth and job creation. After 5 years of reforms and tenacious fiscal consolidation, risks from reform fatigue and loss of social support are high, especially as growth remains feeble and crime escalates. Addressing some of the entrenched structural problems that hamper growth is not an overnight task; these difficult reforms require continued broad-based support and policymakers’ commitment to persevere with the implementation.