On May 1st, the executive board of the IMF approved a four year extended fund facility of 225 per cent of Jamaica’s IMF quota, equivalent to Special Drawing Rights (SDR) of 615.38 million, or roughly US$932.3 million. Almost all the first tranche of SDR136.75 million, or US$207.2 million, had already been received by last week Friday — US $202.6 million to be exact — according to the Bank of Jamaica. In their letter of April 17th to IMF Managing Director Christine Lagarde requesting financial assistance from the IMF, the Jamaican government asked that US$90 million of the first tranche “be used to help meet the government’s financing needs directly”, so called budget support.

The letter is supported by a thirty page Memorandum of Economic and Financial Policies (MEFP), outlining the government’s programme in depth, and an additional fourteen page technical Memorandum of Understanding (TMU), defining the programme criteria and agreeing methods of assessment. The starting point for the MEFP comment that “Jamaica faces severe economic challenges” is that our debt to GDP ratio is “approaching 150 per cent of GDP”, having reached 137 per cent of GDP at the end of 2011, and 142 per cent of GDP in March 2012. Critically, it notes that “The high debt levels have also exposed the country to adverse shifts in market sentiment”, and that with “interest payments alone accounting for 37 per cent of government revenues, the fiscal accounts are stretched too thin to pursue productivity enhancing social and infrastructure investment”.

The centrepiece of the government’s debt reduction programme is to raise the primary surplus (revenue minus expenses but excluding interest costs) from 5.2 per cent of GDP in the just completed fiscal year ending March 2013, to 7.5 per cent of GDP in the current fiscal year ending March 2014, thereby achieving a central government deficit of 0.5 per cent of GDP. In reviewing the fiscal year just finished, the MEFP notes that the projected intake from last year’s tax package in June was 1.2 per cent of GDP (rather than the 1.6 per cent of GDP projected on an annualised basis) due to the later than customary start of some of the measures to allow for completion of the consultative process on tax reform. Last fiscal year, the goal had been to approximately double the primary surplus from 3.2 per cent of GDP, to 6 per cent, through a combination of the tax measures already mentioned, and a reduction in expenditure equivalent to 1.4 per cent of GDP.

The MEFP notes that the changes in tax revenues and fees of $27.3 billion for the current fiscal year (including $11.4 billion in financial support from the NHT), what it calls reform measures, was tabled early in Parliament in February to allow for a full fiscal year effect. Although the increase in property taxes is payable to local government, it will also help central government finances by allowing a reduction in existing transfers to local government of $3.4 billion.

Crucially, wage increases and performance increments will be limited to an annual average of no more than 5 per cent for the period 2013 to 2015. The government says this, combined with comprehensive public sector reform (including elimination of posts and an attrition programme) will allow it to reach an interim target of 10.6 per cent of GDP, and 9.7 per cent of GDP, for the fiscal years 2013/2014 and 2014/2015 respectively. In order to meet the legislated nine per cent of GDP by 2015/2016, there will be no net hiring of workers in any year of the programme, and the filling of vacant positions will be constrained.

Certain defined social protection spending (but only a subset of the overall social protection framework) will have a floor of the 2012/2013 budget, in real terms. Capital spending, both Central Government and state owned enterprises, will be selected according to efficiency criteria and consistency with growth and equity goals, as part of a five year public sector investment programme (PSIP).

The government has also identified unspecified “contingency measures”, which “could include but are not limited to increases in fees and charges for government services.” These can be implemented, in consultation with fund staff, as soon as a monthly review of budget implementation indicates that the budget target is at significant risk. The overall fiscal balance of the public bodies is to be zero in 2013/2014.

An action plan for tax reform was prepared in consultation with IDB and IMF staff in March 2013, with a specific time frame for the implementation of each tax reform milestone, as well as indicators that will measure progress towards approving and implementing tax reform. The Omnibus Incentive Act, guided by technical assistance provided by the IDB and in consultation with fund staff, will be tabled in parliament by September 2013 (what the IMF calls a structural benchmark). As of the end of December 2013, the government will no longer consider new applications under existing tax incentive regimes, and after December 31st 2013, new applicants will only be considered under the Omnibus regime, subject to the associated criteria. The Act will eliminate ministerial discretionary powers to grant or validate any new tax relief, and put in place a transparent regime for limited tax incentives. Any new tax incentives, based on the new Act, will be implemented administratively, without any ministerial discretion in its validation, based on a contract signed regarding the specific project, and published promptly.

Broader tax reform, also a structural benchmark, is to be prepared in consultation with Fund staff and guided by technical assistance provided by the IDB, and starts in the 2014/2015 fiscal year. It includes legislation to modernise income tax, property tax, customs tariffs and social security contributions, and is supposed to greatly reduce tax and tariff exemptions in all major taxes, except for a limited range of goods and services. It will be tailored to reduce overall tax expenditures from more than 6 per cent of GDP in recent years to no more than 2.5 per cent of projected GDP by the end of 2015/2016 (excluding any possible changes in the measurement of GDP).

Other key areas of this heavy and front loaded reform programme include, as a structural benchmark, the conceptual design by August 2013 of a legally binding fiscal rule for implementation in fiscal year 2014/2015 (to achieve a sustainable budget balance taking into account transient factors), a move towards inflation targeting (using monetary policy to achieve an explicit target rate of inflation), and reform of the securities dealer sector. Officials advise that the combined document, including the IMF’s public information notice (PIN) and the IMF’s staff report on the Jamaican economy (and hopefully including 2012’s unreleased IMF Article IV report on the Jamaican economy), will be authorised for release by the IMF on its website very shortly, allowing a fuller assessment of our economic situation.