International Monetary Fund (IMF) mission head Trevor Alleyne announced at a press conference on Friday that “All quantitative performance targets were met”.

Even more encouragingly, Alleyne noted that “the structural reform agenda appears to moving forward on schedule”. This agenda included amendments to strengthen the fiscal responsibility framework, public sector rationalisation, tax administration and financial sector reforms, as well as a continued progress in the divestment of public enterprises, “notably the divestment of the remaining sugar factories”.

Alleyne advised that the draft letter of intent had been agreed with the government for the second quarter, and it was expected that this would be formalised after approval by Jamaica’s Cabinet, management in Washington, and finally at the IMF Executive board meeting at the end of September.

Commenting on the fiscal responsibility framework, Finance Minister Audley Shaw observed that under the new legislation he was obliged to bring to Parliament an “early supplementary budget”, but that the variance from the budget “would not be major.” For example, the fallout from West Kingston and the state of emergency meant that they had to “adjust certain expenditures”. Shaw observed that whilst “they had not yet finished” calculating these costs, they were currently projected at over J$500 million. In addition, two major public hospitals had required their CT scanners to be repaired, and a further J$60 million had had to be set aside as a vector control programme to control mosquito infestation.

Fiscal improvement primarily due to lower interest rates

“The overall fiscal deficit was declining ahead of expectations driven primarily by lower than expected interest rates”, according to Alleyne, who argued that this would lead to “much improved debt dynamics going forward”.

The key primary surplus target (which excludes interest costs) was also met due to “Strong GCT collections, reflecting improved tax administration efforts, and the continued cautious execution of expenditure”.

Significantly, Alleyne advised that “The exchange rate has been stabilised at an appreciated level and the NIR floor was exceeded by a very large margin”. Whilst Alleyne did not reveal the net international reserve (NIR) floor for the end of June (this has been revised above the target in the original IMF agreement), it is worth noting that at the end of March, net international reserves already exceeded the old “floor” by US $695 million. This floor reflected what Bank of Jamaica Governor Bryan Wynter was now able to call “an overabundance of caution and prudence”, as the portion of the IMF money drawn down as protection against capital flight had not been needed.

The NIR currently stands at the very healthy level of just under US $2 billion, reflecting the addition of the proceeds of the recent Inter-American Development Bank (IADB) loan, although this is expected to decline slightly over the course of the next month, despite the expected disbursement of Special Drawing Rights (SDR 31.9 million) after IMF board approval at the end of September.

Alleyne pointed out that the net cost of the acquisition of these reserves was much lower than in previous periods. The current situation was a welcome change, where due to an excess demand for Jamaican currency (despite sharp cuts in domestic interest rates), the Central Bank was facing the need to acquire reserves to prevent the currency appreciating further. According to Governor Brian Wynter, this week the Central Bank bought US $60 million, at the same time announcing a further cut in its policy “signal” rate (30 day certificate of deposit) to eight per cent on the back of a reduction in its inflation target for the fiscal year to six to eight per cent from 7.5 to 9.5 per cent.

In the past, reserves had often been acquired in the exact opposite scenario when the dollar was declining due to an excess supply of Jamaican dollars created by an investor desire to move out of our currency. This had then required the central bank to “sterilize” the additional excess supply of Jamaican dollars created, what was often termed “the mopping up of liquidity”, pushing domestic interest rates higher, with obvious consequences for the government budget and economic activity generally.

Commenting on the level of interest rates, Shaw observed that in his view, for too long, high interest rates had closed down factories in Jamaica, creating a growth in debt without perceptible growth in the economy. Shaw also noted that when treasury bill rates go up, the local banks move up their rates in days if not hours, whilst when treasury bill rates fall, the fall in rates is very sluggish.

With respect to the NIR, Shaw observed that the current “costs of carry” of the multilateral loans are very low, well below the 3per cent at which “they had laughed”. They included a US $200 million World Bank loan of 0.63per cent, and recent loans of US $430 million from the IADB at between 1.23 per cent and 1.51 per cent.

Addressing the important issue of waivers, Shaw advised that the Ministry of Finance was currently engaged in a review based on the perspective that tax policy in this area “had to be an intrinsic part of the strategy for investment and growth”.