THE governor of the Bank of Jamaica, Brian Wynter, at his quarterly press briefing last week, revealed that “from all indications”, all the targets in the second IMF review have been met, as was the case in the first review.

The just released June 8 IMF report on the first review of our Stand-By Arrangement (SBA) observes that the Jamaica Debt Exchange (JDX) “was far more successful than assumed in the program”. The amount of eligible domestic bonds included, at US$7.8 billion, far exceeded the US$5 billion in eligible bonds originally projected to be part of the IMF programme. The participation rate of 99.2 per cent also far exceeded the 80 per cent participation rate projected by the IMF.

The net result is that the IMF now projects interest costs to be 11.5 per cent of GDP for the current fiscal year, a full two per cent below the 13.5 per cent originally projected in the programme. This is calculated on a US$ 7.8 billion debt exchange, rather than the US$4 billion (80 per cent of US$5 billion) originally projected.

The positive impact of this reduction in interest costs on government finances will however be partially offset by the consequent lower interest withholding income tax receipts, estimated by the IMF at 0.75 per cent of GDP below the original program meprojections.

Critically, central government amortisation (repayment of principal) for fiscal year 2010/2011, at 7.8 per cent of GDP, will now be much lower than the 12.2 per cent of GDP originally envisaged in the programme, which was itself much lower than the 15.5 per cent of GDP in 2009/2010.

As a result of all of this, based on the better than expected JDX results and

the improved outlook for

market interest rates, “the improvement in fiscal balances and the debt ratio is projected to be faster than originally envisaged under

the programme.”

The IMF argues that “financial market conditions have improved substantially” with market interest rates falling “to levels not seen since the 1980’s” amidst what they describe as “a modest appreciation of the Jamaican dollar”. The IMF projects, in line with the Governor’s forecast, that inflation will decline to 7.5 per cent by the end of fiscal year 2010/2011 (the bottom end of our central bank’s 7.5 to 9.5 per

cent range).

Commenting on the fact that there had been no requests for access to the “Financial System Support Fund”, the IMF observed that financial institutions have been able to absorb the “lower-than- expected valuation and income losses from the debt exchange.

Specifically, the IMF observe that none of the risks to local financial system capital: a decline in the market value of Government of Jamaica instruments, external margin calls, and a decline in deposits, have materialised. In addition, they argue that the

positive market reception

of the programme strategy,

including medium-term fiscal consolidation with IMF support, contributed to a decline in interest rates prior to the launch of the debt exchange. Importantly, as a result, the new bonds issued were valued at about par eg face value, despite their lower coupons relative to the old bonds, “resulting in no meaningful capital losses on balance sheets.” What the IMF termed “Positive expectations about the program” led to a rally in the Eurobonds prior to the JDX, further boosting capital as these bonds were largely held by domestic financial institutions.

Importantly, these developments were “appropriately accommodated” by central bank policy rates, which were reduced to about the level of the new bonds prior to the debt exchange. The IMF observes that “Post-JDX, the continued rise in the value of new bonds” has also helped to reduce the losses incurred as part of the swap on the

old bonds.

In addition to the by now very familiar quarterly “quantitative performance” benchmarks, such as the primary surplus and net international reserves, the IMF has a number of structural benchmarks.

As has recently become abundantly clear, a key structural benchmark is the issue of incentives. On page 50 of the IMF review, it observes “The government intends to reform the system of tax incentives, which are eroding revenue collection and distorting economic decision making. The government remains committed to outlining an action plan by September 2010, as envisaged in the January 2010 Memorandum of Economic Financial Policies (MEFP)”. The IMF observes “that the magnitude of discretionary waivers is not accurately known”. The IMF notes that “In the short run, the government is committed to (a) not expand the scope of tax incentives until the new policy is in place; and (b) immediately carry out an audit of waivers (to be completed December 2010) to ascertain whether they were granted following proper procedures and, in the case of conditional waivers, whether they were used for the purpose for which they were granted (structural benchmark).” Whilst short run is not defined, it is presumably before September.

The IMF states that so far the government has “demonstrated strong ownership of the program”, which it regards as very important.

At this point, it is useful to look again at an Observer article entitled “Does Turkey’s Export-led growth hold lessons for Jamaica”, written on April 1, 2009.

In the article, Dr Zafer Mustafaoglu, who was closely involved in the Turkish reform programme, observed how Turkey experienced a lost decade in the 1990’s due to severe fiscal imbalances and macro instability. Problems included weak overall fiscal management, a fragmented budget structure, a neglect of strategic planning and a weak link between policy and the final budget. Despite budget controls, there was large scale waste and inefficiency, and an outdated public accountability structure.

Turkey enacted public expenditure reforms included the enactment and implementation of a new Public Financial Management and Control law, consolidation of all public sector accounts and

the introduction of accrual accounting, the strengthening of public procurement and the elimination of extra budgetary funds, all areas where Jamaica now intends very similar types of reforms.

Tax reforms included

the establishment of a semi

— autonomous revenue administration along functional lines, the simplification and expansion of the base for personal income tax, and the introduction of a flat 20 per cent corporate tax rate.

Following the implementation of a comprehensive reform programme, Turkey managed to halve its debt ratio in five years, converting a massive public sector deficit into a surplus, and almost tripled its per capita GDP in US dollars to over US$9,300 in 2007 up from just over US$3,500 in 2002.

Export growth of 14.9 per cent per annum helped to drive robust economic growth of 6.8 per cent per annum over the period. The growth in exports, particularly manufacturing, was driven by the local private sector and not by increased foreign-direct investment, although that also improved sharply. The sharp rise in export growth occurred despite weakness in Turkey’s primary export market, Europe.

Critically, observes Dr Mustafaoglu (who is now leading a World Bank team looking at Jamaica’s economic growth problem), for a long time Turkey had resisted reforms, content to muddle through, with governments trying temporary solutions.

He noted that Turkey had had 17 unsuccessful programmes with the IMF before successfully completing their last two IMF Stand-By programmes between 2001 and 2008.

The key to success was the ownership of the IMF programme by the government, with determined implementation of the reforms ultimately making the difference.