What does the new precautionary stand-by arrangement mean for the Jamaican people?

Saturday, November 12, 2016

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On Friday, the International Monetary Fund’s (IMF) executive board approved a 36-month precautionary Stand-By Arrangement (SBA) for Jamaica. The Government’s new reform programme replaced the Extended Fund Facility (EFF) – under which tremendous progress was achieved in macroeconomic stabilisation over the past three-and-a-half years – putting to rest any uncertainty among domestic and international stakeholders about the government’s reform agenda going forward.




SHIFTING GEARS TO GROWTH AND JOB CREATION


At the heart of the Government of Jamaica’s reform programme is the renewed focus on economic growth that is needed to significantly improve the living standards of the Jamaican people and reduce the poverty level which remains high. Moreover, escalating crime poses a threat to private investment and job creation, at a time when a well-trained Jamaican labour force continues to migrate to seek better employment opportunities on other shores.


Cognisant of the above challenges, the Government’s new programme, which the IMF supports, cements the macroeconomic stability and fiscal discipline achieved under the EFF, and seeks to:


(1) reallocate budgetary resources toward protecting the poor and vulnerable, and at the same time enhance citizen safety and national security;


(2) transform the public sector to make it more efficient and delivery-focused;


(3) follow through on the recommendations of the Economic Growth Council to unlock Jamaica’s growth potential and facilitate the creation of private sector jobs;


(4) foster financial inclusion and bolster financial sector resilience; and


(5) modernise the monetary policy toolkit of the Bank of Jamaica for an eventual move to full-fledged inflation targeting, while ensuring a well-functioning foreign exchange market.


The reforms specifically aim to rebalance government spending to increase PATH benefits and review the current broader social safety net in Jamaica, including targeting to protect Jamaica’s poor and vulnerable.


Institutionally, the Government’s continued commitment to strong fiscal consolidation is anchored around the debt ceiling of 60 per cent of gross domestic product (GDP) by 2025/26, consistent with the country’s Fiscal Responsibility Law enacted under the EFF. This important anchor implies, under current macroeconomic projections, a primary surplus target of seven per cent of GDP.




WHY A PRECAUTIONARY PROGRAMME?


One of the key barometers of success of the EFF is the amount of international reserves accumulated by Jamaica over the past few years.


From less than US$1 billion at the start of the programme in May 2013, net international reserves amounted to about US$2.5 billion at the end of October 2016.


Jamaica’s relatively comfortable reserves position means that the country no longer needs financing from the IMF for supporting its external sector; Jamaica has in some sense "graduated" to an IMF-supported programme where the IMF’s financing acts as insurance that is available in the event of an adverse external shock like a large oil price increase, global capital market turmoil, or a natural disaster.


In fact, Hurricane Matthew’s recent near miss of Jamaica is a reminder of the country’s vulnerability to such shocks.


Maintaining access to this insurance will require continued prudent fiscal, monetary, and exchange rate policies consistent with the Government’s reform programme.


As with the EFF, the SBA’s monitoring framework takes the form of quantitative targets and structural benchmarks. However, rather than quarterly reviews, the SBA will be assessed semi-annually.




A STRONG SIGNAL OF THE LONG-TERM COMMITMENT OF THE IMF TO THE JAMAICAN PEOPLE


The precautionary SBA supports the Government’s commendable policy efforts to raise the living standards of Jamaicans.


The US$1.64-billion cumulative financing available over the three-year SBA nearly doubles the total financing that existed under the EFF.


This substantial commitment from the IMF is a strong vote of confidence that reflects Jamaica’s remarkable track record under the EFF, as well as the Government’s commitment to implement its ongoing economic reform agenda.


This line of credit should provide confidence to financial markets about Jamaica’s ability to withstand major shocks without eroding its policy buffers. It should also help catalyse additional resources and technical support from other international financial institutions, donors, and development partners.


All that said, the true taste of success will come from securing a safer, more resilient and fast-growing economy for the next generation of Jamaicans. Achieving these goals will require difficult policy choices and sacrifices.


Rallying around these bold objectives is essential for durably transforming the Jamaican economy.





Constant Lonkeng Ngouana is the IMF resident representative for Jamaica.

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