YESTERDAY morning, in a vote of confidence in the Bruce Golding administration’s economic reform agenda, the Executive Board of the International Monetary Fund (IMF) approved a 27-month

Stand-By Arrangement with Jamaica in the amount of SDR 820.5 million (about US$1.27 billion) to help Jamaica “cope with the consequences of the global downturn”. Half of the package, a disbursement of SDR $414.3 million (about US$ 640 million), will become available to Jamaica immediately. Further disbursements will be contingent upon successful quarterly reviews by the IMF board to ensure targets are being met.

In yesterday’s conference call from Washington, the IMF’s chief of mission to Jamaica, Trevor Alleyne, noted that the key objectives of the programme are aimed at addressing Jamaica’s deep-seated structural weaknesses, increase our growth potential and make the country less vulnerable to external shocks.

Asked why it took so long to negotiate the agreement, Alleyne observed that both the IMF and the Government were of the view that there was no point in a “shallow agreement”, so time was taken to look carefully at the critical underlying problems of the Jamaican economy.

In addition, the package could not go to the board before the “prior conditions” for board approval were met, including the December tax package, a successful local debt exchange, and progress on the divestment of Air Jamaica.

Alleyne noted that the Government’s successful domestic debt programme, exchanging the equivalent of nearly US$ 8 billion, was a crucial step towards securing IMF financing. “We also took to heart part of the Government’s rationale that the debt exchange should constitute an overall burden sharing that was to be made more equitable,” he said, adding, “we have been in contact with the authorities and they have passed on to us the preliminary results of the debt exchange – we are aware of some of the results and they are as we had hoped for.”

In their subsequent press release, the IMF noted that the three pillars of the IMF deal are “an ambitious plan that puts public finances on a sustainable path that includes much-needed public sector reform; a debt strategy to lower exceptionally high interest costs and help address the problem of the debt overhang, and raise the productivity of public spending; and financial sector regulatory reform to reduce systemic risks”.

The IMF advises that the Jamaican authorities are already implementing actions expected to improve the public sector fiscal balance by over five per cent of GDP in FY 2010. “Among them, a debt exchange aimed at generating interest savings of at least three per cent of GDP and a 65 per cent reduction in the amount of maturing debt over the next three years have been successfully carried out, with an acceptance level of almost 95 per cent of bondholders. A tax package has already been enacted and is expected to produce an increase in revenues of around two per cent of GDP. Loss-making public entities are being divested.”

Commenting on the agreement, finance minister Audley Shaw noted that

“This is a historic and game-changing time in Jamaica’s history, and the Government of Jamaica is deeply grateful to the financial community for it’s overwhelming response to the Jamaica Debt Exchange. The JDX was a major prior action required for the favourable consideration of our application to the IMF. It is worthy of note that, up to today, participation is at the 97 per cent mark.”

At the IMF press conference, Alleyne observed that in the past, the combination of high interest rates and short-dated maturities had strangled private sector growth. The aim of the new agreement is to create space for “crowding in” private sector development and to improve the quality of public financial management. Specifically, this means that the initiatives to create centralised treasury management and a fiscal responsibility framework must improve the quality of public financial management in the medium term.

Alleyne agrees with Jamaica’s finance minister Audley Shaw that the IMF deal will pave the way for other multilateral funding. “There is financing from multilaterals and domestic financing envisaged,” Alleyne said, adding, “by no means do we expect the budget to be balanced by 2010/11.” He went on to say the IMF expects Jamaica will be able to access private capital markets in a year’s time. “With the multilateral financing part of the programme, if that eventuality did not occur, we expect that there would be financing under the programme to amortise the bonds coming due in first half of 2011.”

Alleyne notes that the IMF believes the Government has the ability to meet the conditionalities, otherwise the managing director of the IMF would not have recommended the programme.

The programme, which aims to increase Jamaica’s rate of economic growth, has amongst its objectives the following:

* The achievement of a significant reduction in the rate of inflation to six-seven per cent over the medium term

* The reduction of the overall public sector deficit to one per cent of GDP over the medium term.

* An improvement in the current account deficit of the balance of payments from 18 percent of GDP to five per cent of GDP over the medium term

A critical component of the programme is a 25 per cent expansion of our social safety net spending aimed at protecting Jamaica’s most vulnerable citizens, including an expansion of coverage under the Programme of Advancement through Health and Education (PATH) from 325,000 beneficiaries to 360,000.

Commenting on the programme, local economist Dr Adrian Stokes noted that, “The medium-term economic programme is ambitious in what it seeks to achieve and the time line for achievement. The targets are eminently achievable if the policy menu outlined in the application is implemented. There will be clear head winds over the life of the IMF programme. Implementation risks as well as a weaker than expected global backdrop could militate against the economic programme. The programme is a tough but necessary one that gives Jamaica a chance to emerge stronger.”

In his press release, Shaw concludes, “The Agreement marks the commencement of a challenging but decisive journey towards good governance, solid economic development and the restoration of hope for all Jamaicans. All members and sectors will share in the tremendous sacrifice before us, as together we lay down an economic framework conducive to investment, job creation, increased productivity and the generation of significant foreign exchange earnings. Above all, our goal is the creation of a society with good social conditions, where the aspirations of all can be realised.”