WEDNESDAY'S Business Observer article entitled "Is Jamaica's new IMF programme sustainable focused primarily on the fiscal issues in Jamaica's IMF letter of intent, reflecting the programme's emphasis on front-loaded fiscal adjustment to achieve a near balance in the central government budget. It also included a brief description of the associated tax issues, particularly the very ambitious timetable to achieve incentive reform (December 31), and the start of comprehensive tax reform (April 2013). Today's analysis will look more deeply at the external accounts and growth.
In this, we are following the Memorandum of Financial Policies (MEFP), which on page 1 notes "... economic growth has stalled and the economy remains fragile", highlights "the widening of the external account to 14.1 per cent of GDP in FY 2011/2012 owing in part to a higher oil bill" and observes that "the capital account weakened significantly, in part due to a sharp drop in external loan disbursements, in particular to the central government. Net international reserves fell to under US$0.9 million at end March 2013."
The MEFP goes on to say that it expects the current account deficit of the balance of payments to narrow to 12 per cent of GDP for fiscal year 2012/2013, but remain elevated reflecting the impact of capital goods imports associated with a rebound in foreign direct investment, and continued high crude oil prices. In his Wednesday Observer opinion piece "Time for a more promising future for Jamaica", the IMF's point man in Jamaica, senior resident representative Gene Leon, argued that the starting point for the reform process is "the income earned by the country should be at least equal to its expected expenditure over the same period of time".
As at end 2011, Leon observes, net indebtedness (meaning our net international investment position, or what we owe the world minus what they owe us, both debt and equity) had grown to about 135 per cent of GDP, "well beyond levels that are deemed internationally prudent. To reverse this, the country needs to produce/export more or import less, reducing the need for financing from the rest of the world." What Leon doesn't say, is that on current trends (presumably what "elevated" means), our net indebtedness would be approaching 160 per cent of GDP by the end of 2013, and closer to 200 per cent by the end of the IMF programme.
The MEFP identifies the now standard impediments to growth as high public debt, low factor productivity and competitiveness, high energy cost, bureaucratic business processes, high crime and inadequate legal enforcement. It correctly notes that the programme of structural reforms "will require careful sequencing over the programme period, in particular across areas of public sector modernisation, private sector led growth, social protection, and public financial management".
On page two of the MEFP, the government notes, referring to the unemployment rate reaching 13.75 per cent in October last year, that "it is well aware that adverse economic conditions are generating drastic socio-economic changes in Jamaica. The contraction in activity has led to a significant increase in layoffs, exacerbating the already high unemployment rate". The issue is, as the government states in the MEFP, that "the most vulnerable social groups are most affected by the decline in economic activity".
The MEFP states that "the first phase reforms are expected to lay the foundation for specific growth projects in areas where Jamaica has a competitive advantage", including logistics, shipping, tourism, agriculture and business process outsourcing, but is silent as to whether this is consistent with the planned halving of tax expenditure over the life of the IMF programme.
In the critical area of implementation, a quick look at the structural benchmarks reveals that on April 30, the government was to introduce a five-year public investment programme (PSIP) beginning with the 2013/2014 budget and to be updated annually, and that on March 31 2014, the government is to finalise a review of public sector employment and renumeration to inform policy reform, clearly a critical document that we will attempt to find. It is not a good sign, however, that the biggest area of potential saving, pension reform, appears to have been left out, something that we shall return to in further articles.
Finally, the technical memorandum of understanding provides a "baseline" projection of flows from multilateral institutions, defined as "external loan disbursements from official creditors that are usable for the financing of the consolidated government" which it calculates as US$346 million by March 2014. The amount for the end of June is only US$15 million, and only a cumulative US$101 million by end September, suggesting that this figure does not include the US$90 million of the IMF's initial tranche, (unusually this fits in with their definition as it can be used for budget support), perhaps as this was apparently agreed at the last minute after the IMF's conversations with the other multilaterals. The rest of the programmed IMF money (just under 40 million SDR for the next two tranches up to end February), would, as usual, not be included in this calculation as a matter of course, although it would be added to gross reserves. It is unlikely, however, that gross reserves will increase, as money will also need to be paid back to the IMF over the period. In addition, the programme includes budget support grants of US$67 million.
The bottom line is that this is an extremely challenging programme for a government (country) with a poor record of implementation. The financial flows are not particularly generous compared to the first IMF programme in 2010, and the balance of payments appears to assume the continuation of PetroCaribe and a sharp rebound in foreign direct investment (FDI), at least for this fiscal year. Admittedly, this increase in FDI could be achieved, if even one of the proposed big projects starts. The current fiscal year, however, looks negative for growth, with the plan apparently to increase unspecified "fees and charges" if, say, tax revenues underperform. In summary, we may get through the current fiscal year, or at least the first two to three performance reviews, without serious incident, but it will become increasingly difficult going forward without a major change from business as usual in how we allocate resources to achieve results, both in the government and private sector. Future articles will explore in more detail what type of effort true transformation really requires.