The International Monetary fund's (IMF's) article IV review, which is essentially an assessment of the health of the Jamaican economy, was released earlier this week.

The IMF began its review by observing that Jamaica has weathered a series of negative shocks over the past year, including Hurricane Dean, heavy rains, and a reversal of the one-off increase in tourists diverted from hurricane-affected Mexican destinations in 2006, which in their view caused the decline in real economic growth to one per cent in FY 2007/08 (April-March) from two per cent the previous year.

They noted that headline inflation had more than doubled over the past year to 19.9 per cent by March 2008 due to weather-related shocks and the already significant price pressures associated with rising global food and oil prices.

In short, "Jamaica's economic challenges have been compounded by a more difficult environment, with natural disasters, the global economic slowdown, and increases in global oil and food prices contributing to slower economic growth, rising inflation and a widening current account deficit."

The IMF noted that the primary surplus (which is the budget balance excluding interest) improved last year, primarily due to improved tax administration that "enabled the government to increase revenues by over one per cent of GDP over the previous year to an estimated nine per cent of GDP, compared to eight per cent of GDP the previous year".

This was still less than anticipated in the original budget, which had projected a primary surplus of 10 per cent of GDP, mainly due to a sharp increase in previously unbudgeted non-wage current expenditures and capital spending in the mid-year budget supplement, despite lower capital spending.
Despite this additional budget expenditure captured in the supplementary budget, the IMF estimates that both the government budget deficit and what it calls the "overall fiscal balance" (which includes off budget expenditure) for fiscal year 2007/2008, at 3.7 per cent and 4.9 per cent of GDP respectively, is substantially lower than their calculation of the comparable deficit for 2006/2007 of 5.6 per cent and 7.3 per cent of GDP respectively.

Perhaps even more encouragingly in terms of long- term fiscal responsibility, the Government's calculation of last year's central government deficit of 4.7 per cent of GDP is almost exactly the same as the 4.9 per cent calculated for the overall deficit by the IMF. This is in contrast with previous years, when off budget expenditure has caused the IMF's "overall fiscal balance" to be substantially higher than deficit figure released by the central government. In a note, the IMF explains that the difference between their main budget balance figure and the "overall fiscal balance" is due to debt issued to the Bank of Jamaica to cover its cash losses as well as debt related to off-budget projects financed by the private sector, the latter appearing to refer to what is called "deferred financing". The extremely small difference at the end of the last fiscal year suggests "cash losses" are now being properly accounted for, and deferred financing is not being used.

The IMF welcomed the plan to balance the budget by FY 2010/11, thereby driving a virtuous cycle of lower debt and higher growth, although they noted this adjustment effort "would need to be underpinned by broad-ranging reforms of the tax system, public services and public enterprises".

The IMF recognised the need to set realistic targets to provide adequate fiscal space for growth-enhancing investment spending, whilst repeating their usual call for "a stronger fiscal adjustment in the current budget year".

They argued that early fiscal adjustment would support monetary and exchange rate policies, important when Jamaica faces a backdrop of a widening current account deficit, higher-than-expected inflation, and a weak external environment.

Commenting on the IMF's assessment, minister of finance without portfolio Don Wehby noted that "The IMF's assessment of the policy challenges facing the country and their recommendations for tackling them are fair and balanced, and are consistent with the Government's medium-term programme.

"The Government has placed priority on strong fiscal discipline and debt reduction, reforming the tax system to increase efficiency and effectiveness, enhancing the business climate, reducing bureaucracy and improving public sector management," he added.

Encouragingly, the IMF believes that "bank prudential indicators have remained generally sound notwithstanding a sustained rapid growth in credit".

Whilst correctly noting that "the growth of unregulated investment schemes promising implausibly high rates of return has, however, been a worrisome financial development with potentially adverse macroeconomic consequences", they were "encouraged by the authorities' intention to prevent unregulated investment schemes that are not in the public interest, while ensuring that legitimate investments can proceed".

The IMF noted that "strains in international financial markets have put further pressure on an economy reliant on external financing."

They argue that "on the external front, rising global energy prices contributed to a widening of the current account deficit to 15 per cent of GDP. Moreover, the confluence of economic developments in Jamaica and ongoing turbulence in global credit markets unsettled the foreign exchange market in 2007, put pressures on the capital account and led to reserve losses".

However, despite noting that "reserves declined by 20 per cent during July-November 2007" they mention approvingly that reserves had "recovered significantly in recent months following hikes in domestic interest rates by the Bank of Jamaica".

Importantly, whilst the IMF directors believe a "further moderate rise in interest rates might be needed to alleviate inflationary pressures and stem capital outflows", they argue that "the current level of the exchange rate broadly reflects fundamentals", despite giving their usual advice "to let the Jamaican dollar adjust should large balance of payments pressures persist."

The IMF directors agreed that Jamaica needs to address the economy's vulnerabilities, improve its lackluster growth performance, and strengthen its medium-term public debt dynamics.

They welcomed what they call Jamaica's ambitious medium-term macroeconomic strategy that places high priority on the maintenance of macroeconomic stability, fiscal consolidation, and structural reforms, and encouraged the Government to implement its strategy and build a broad domestic consensus in support of reform.

Describing the Government's structural agenda as "appropriate", they nevertheless encouraged an "expeditious detailing and sustained implementation of the reforms" including measures to improve the business environment and to divest non-core public companies, which they regarded as "essential to promote critically needed private sector led growth and strengthen competitiveness."

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