In their fifth review of the IMF’s extended fund facility, the IMF noted that the programme is “on track”, with “strong policy implementation”. All quantitative targets and structural benchmarks were met. The completion of the review on September 24th, which encouragingly was approved by simple lapse of time without a board meeting as it was deemed that there was no need for formal discussions, enabled the immediate disbursement of US$68.8 million for direct budget support. However, the IMF reduced their growth forecast for fiscal year 2014/2015 to 1.1 per cent, offset by an increase in their growth forecast for 2015/2016 to 2 per cent, reflecting the impact of the recent drought on agriculture.

The IMF project inflation of about eght per cent for the full fiscal year of 2014/2015, a fall from the current nine per cent for the year to July, as they believe the impact of drought is expected to be short lived, and the inflationary impact of any further exchange rate depreciation will be offset by the weakness of demand.

The current account deficit for 2013/2014 is now estimated at 10.4 per cent of GDP, and was projected to fall to 7.5 per cent of GDP in 2014/2015. This has since been revised further downwards, to below seven per cent of GDP.

Gross international reserves increased to US$2.7 billion at end August, with net international reserves at about US$2.1 billion. However, large debt repayments in October 2014 and June and July 2015 means that, according to the IMF, by end 2015, reserves are projected to be broadly back on the path projected before the bond issue. Public debt has increased temporarily with the bond issue, requiring some modification to the quantitative targets under the programme, but the IMF says the debt is also expected to return to its prior path over 2015 as existing debt is repaid. Importantly, the recent bond will comfortably cover the government’s cash flow needs over the current fiscal year and into 2015/2016. Through the medium term, net financing needs are projected to remain close to zero.

Financial market conditions continued to improve through the summer as the injection of liquidity through six month repurchase agreements by the Bank of Jamaica continued through June, with interbank rates for overnight funds moderating to three to four per cent in August. Private sector credit growth has edged up, growing 1.1 per cent quarter over quarter or 6.3 per cent year on year in June 2014.

Fiscal performance was broadly in line with projections. Preparations for the 2015/2016 budget have started, with a new budget required to be adopted before April 2015. While no further fiscal consolidation is foreseen, achieving the primary surplus target of 7.5 per cent of GDP still poses policy challenges. The decline in the government wage bill, interest spending, and the fall in imports, are expected to erode the effective tax base as all are taxed relatively heavily. However, a further decline in the wage bill is expected to offer room for other spending, including the repayment of budgetary arrears to suppliers that were accumulated prior to the EFF supported programme.

Critical steps include modernising the public sector to help reduce the wage bill further from 10 per cent of GDP in 2014 /2015 to nine per cent of GDP in the upcoming budget. The wage restraint agreement with civil servants, which has frozen wages since March 2012, expires in March 2015. The authorities aim to meet the objective for 2015/2016 through continued wage restraint in the upcoming wage negotiations and reforms to modernize the public sector. Near terms actions include the completion of the public sector employee database, and approval of an action plan for public sector transformation.

Measures to be taken include upgrading revenue administration,for example, enhancing large taxpayer administration and putting in place pilots for the new automated tax and customs administration systems, as well as broadening the tax base, including a January 2015 review of progress in phasing out grandfathered firm specific incentives. The upcoming budget will also include a comprehensive fiscal risks statement.

The IMF cautions that risks remain high even though fiscal and external financing risks have lessened with Jamaica’s bond placement. The bond issue both meets a peak in budgetary cash flow needs in the fall of 2014, and greatly limits refinancing risks on maturing debt through 2015. However, other vulnerabilities include revenue shortfalls, inability to continue reducing the wage bill, a deteriorating performance by public bodies, or a disruption in external financing, including Petrocaribe financing by Venezuela. The drying up of secondary market liquidity in government paper, which the IMF observes “has remained inactive since the 2013 debt exchange” has heightened systemic liquidity risks, and once the market reliquefies, an upward shift in the yield curve could entail capital losses for financial companies. Furthermore, investor confidence remains frail and reform fatigue could set in if ongoing painful reforms and real wage compression do not result in more rapid job creation and income growth.

The IMF note “the programme remains fully financed”, and that staff’s assessment of the Jamaica’s capacity to repay the fund remains “broadly unchanged” from the last review. Despite the success of Jamaica’s recent bond issue, the IMF staff recommended that their most recent disbursement be used to provide direct budget support. This is partly because the other international financial institutions funding is expected to be relatively backloaded in the current fiscal year. “In particular” they note, “domestic government financing remains blocked by the frozen bond market, and the external bond issuance, that has boosted liquidity in the near term, was calibrated incorporating the expected fund support.”

The IMF argued that while societal support for the programme remains broad, several stakeholders stressed the importance of ongoing consultation in designing reforms. The high pace of reform thus far has benefitted from consultations between the authorities and domestic organisations, as well as the monthly feedback offered by the Economic Programme Monitoring Committee (EPOC), with representatives from a range of sectors. Several stakeholders noted that both the quality and acceptance of reforms hinged on maintaining an effective partnership.

In a brief comment on the review, IMF resident representative Bert van Selm pithily summarised their position as “Great job, stay the course”.

Specifically, he added “Much has been achieved, much remains to be done. In particular on public sector modernization, improving tax administration, and addressing impediments to the business climate (like development approvals, energy etc), to support higher growth.”