THE IMF’s full Article 4 consultation document on Jamaica, released last week Friday, is a sobering read even for those very familiar with Jamaica’s economic situation, and decidedly more nuanced than the sunnier summary press report. It starts off by noting that “In 2013 the Jamaican authorities decided to redouble their reform efforts, narrowly avoiding a full- blown balance of payments, banking and fiscal crisis.” While observing that the reform effort has “performed well despite the complexity and difficulty of the reform agenda”, and that “recent data suggest a gradual economic recovery is underway”, it adds that “Domestic demand has been very weak due to both fiscal consolidation and real income losses from the growth slowdown”. Although the key primary surplus target of 7.5 per cent of GDP was met, this was due largely to “expenditure compression” as tax revenues fell short by about 1 per cent of GDP reflecting lower imports and weak employment.

Critically, “The current account deficit remains substantial but has improved sharply”, having fallen to 9.5 per cent of GDP, a reduction of two per cent from the previous year, as a result of what the IMF describes as “weak domestic demand” and a reduction of eight per cent in the real exchange rate from mid 2012, leading to a recovery in gross reserves to US$1.8 billion at end May. “Import compression has been the primary factor in driving the recent correction of the current account.” The IMF projects a further fall in this year’s current account deficit to eight per cent of GDP.

With respect to the exchange rate, it notes that “the real depreciation of the exchange rate since mid 2012 opens up an essential but contentious path to restoring Jamaican competitiveness” which “has been highly unpopular domestically” with “little apparent recognition of the job-creating benefits of currency adjustment”, in part due to the slow responsiveness of exports other than tourism to the weaker currency.

Encouragingly, the remaining over valuation of three to 15 per cent “appears modest”, in the words of the IMF, less than the eight to 22 per cent estimated in April 2013. Both the macroeconomic balance (based on fundamentals like the oil balance, remittances etc but stripped of cyclicality) and the external sustainability approach (this requires a current account balance that would stabilise Jamaica’s net international investment position, for example, the net of what is owed or owned by foreigners), suggest a reduction in the rate of overvaluation to three per cent from eight and 10 per cent respectively, assuming a long term sustainable current account deficit of 5 per cent and a stabilised net international investment position of 90 per cent of GDP, both still high by international norms.

However, the IMF’s calculation using the equilibrium real exchange rate approach (a more complicated concept than just comparing the movement in price levels or the required adjustment in the exchange rate to offset the difference in inflation rates between say the US at two per cent and Jamaica at eight per cent) apparently still indicates a currency overvaluation of 15 per cent. It is not explained what “adjusting for the impact of tourism” means in the report, but this likely refers to the concept of the equilibrium real exchange rate capturing both a traded (mainly tourism) and non-traded sector. Significantly, the report notes that as a percentage of the world tourism market, Jamaica’s share of overnight visitor arrivals and tourist expenditures has continued to decline since 2009, and our ranking in the Travel and Tourism competitiveness Index weakened further in 2013. They IMF cautions however, that “this approach is purely backward looking and does not incorporate the programmed policy adjustments over the medium -term”, seemingly leaving some room for their agreement with the Bank of Jamaica’s argument that the exchange rate is “much closer to equilibrium than the staff’s assessment”.

The risks outlined in the report include government technical capacity constraints to implement the reform programme, a continued lack of investor confidence, the related risk of a frozen government bond market, fiscal or external financing pressures such as to Petrocaribe, the impact of a US or world economic slowdown on tourism/exports, and weather related risks. However, mitigating these risks, the IMF says, are “the ambitious upfront policy effort that has already been undertaken, the visible support for the government’s strategy from domestic stakeholders and international partners, and the demonstrated and unwavering commitment to the programme at the highest levels of government”.

Fiscal policy remains “at the core of the adjustment effort” according to the IMF, with the need for the “prompt and steadfast implementation of the action plan to improve tax collection” and significantly, “Public sector reform needs to be stepped up without delay”.

Finally, the IMF argues that emerging from the trap of low growth and high debt “is a marathon effort and there are no short cuts” as “Reducing debt to a sustainable level is expected to take a decade of fiscal restraint and multiple years of productivity-enhancing policies”. They observe that while “it is impossible to ignore the near-term costs of the adjustment effort in terms of lost growth, weak job creation, and socioeconomic pain”, the alternative of continuing on Jamaica’s previous course was simply untenable and would inevitably ended in a fiscal and balance of payments crisis.”