IMF staff report: Jamaica's 'programme remains fully financed'Friday, October 04, 2013
THERE is no doubt that the Jamaican government has finally got religion in terms of meeting Jamaica's IMF targets. Jamaica's sovereign credit rating was upgraded by Standard and Poor's (S&P) to B- on September 24 (importantly, with a stable outlook) from CCC+, an important event that was essentially not covered by the local press.
The stable outlook means S&P believes that "the Government will largely meet its ambitious fiscal targets this year while advancing its tax reform agenda and avoiding a fall in foreign exchange reserves". S&P expects a gradual decline in the current account deficit to 10 per cent of GDP this year, and a slightly lower level in 2014, a little below the IMF projections for the corresponding fiscal years.
Unsurprisingly, the S&P report preceded by a week the confirmation by the IMF on Monday that we had passed the first test. The confidential briefing immediately following the IMF board meeting is detailed in my Observer article on Wednesday under the headline, "Country passes first IMF test with strong performance despite weak economy".
It is likely that S&P, in deciding to upgrade us, effectively anticipated the key comment on page 16 of the IMF staff report on the first review that "the programme remains fully financed" (encouragingly, the government quickly authorised the release of the report).
According to the report, "Financing assumptions remain in line with those at the time of the request for support under the EFF, involving multilateral financing from the World Bank and the Inter-American Development Bank (contingent on strong programme implementation) and bilateral financing, including the Petrocaribe facility." Encouragingly, it adds, "Based on these identified sources, the refinancing of maturing bonds, including those in foreign currency during early 2014, is projected to be feasible."
The staff document proposes some minor revisions to the quantitative criteria as end-quarter disbursements "notwithstanding expected disbursements by international financial institutions at end December 2013 and end March 2014" will not be available to cover within quarter financing needs, as had been previously, unrealistically, assumed. This timing difference appears to mean that domestic financial market borrowing will be required this quarter, which the IMF says "could lead to rising interest rates". However, the resulting higher end quarter debt levels are projected to be temporary and fully matched by government deposits.
However, the IMF report confirms what is by now a badly kept secret, that although the local financial sector remains stable, "financial institutions remain highly averse to new government paper, and secondary market liquidity on the domestic government bond market has not been restored". They observe that the expansion of credit has slowed since the first quarter of 2013 to less than three per cent (quarter over quarter). They note that, in particular, credit growth seems to have been affected by tighter market liquidity due to the National Debt Exchange- (NDX-) related reduction in debt service income and the drying up of the secondary markets for government securities; the introduction of the Centralised Treasury Management System (CTMS); and by the extensive sterilisation by the Bank of Jamaica of its foreign exchange purchases.
It notes that a full assessment of market conditions is hampered by the absence of new government bonds since the NDX. Essentially, what the IMF is saying is that the combination of the NDX, which has frozen institutional bond holdings by significantly lengthening their maturities, the removal of excess government bank balances from the banking system and the Bank of Jamaica sterilising (meaning offsetting the impact of its net foreign exchange purchases through issuing securities) has dramatically reduced the liquidity in the financial system, and, therefore, the money available for the banks to lend.
This impact has been further multiplied by the Government essentially running a balanced budget, as the sharp reduction in government spending also reduces the money in the system, spending that the Government would normally have borrowed short-term locally to finance. So, although the central bank is no longer "mopping up liquidity", meaning issuing vast quantities of short term instruments to take money out of the financial system that was ultimately caused by our high deficit spending (one will leave describing the transmission process for another time), the commercial banks and securities dealers concerned may consider this a "distinction without a difference" as the financial system still appears very tight to them.
With respect to the exchange rate, the IMF staff "welcomed the recent exchange rate depreciation, which has helped reduce the overvaluation of the Jamaican dollar, but has also posed challenges for monetary management. Monetary policy is aimed at achieving single-digit inflation with a flexible exchange rate regime. Importantly, the mission emphasised "the importance of boosting international reserves, if possible, above the current path for the programme floors". To contain possible risks to inflationary expectations from the recent pick up in inflation, including core inflation, which is being driven by the exchange rate adjustment as well as other cost factors, and to bolster financial inflows and reserves, the authorities and staff considered there was "only limited scope for an accommodative monetary policy stance to alleviate the immediate weakness in domestic demand". However, somewhat contradictorily, it notes: "At the same time, tight liquidity called for close monitoring to minimise pressures on financial stability."
In summary, the IMF believes that "while the Jamaican economy has continued to stabilise, growth and employment are expected to remain very weak". They correctly state, "Risk to the macroeconomic outlook remains high, especially from the uncertain external environment, and possible ongoing delays in the investment response to the authorities' reform programme."
They observe that "looking ahead, fiscal space in the current fiscal year could be curbed by financing constraints and the possible adverse effects of the weak economy on revenue collection. In this setting, the authorities will need to maintain their tight rein on expenditure, be prepared to adjust expenditures further if necessary, and promote the restoration of confidence and regular domestic market access through the resolute implementation of the programme."
In short, austerity is here for the foreseeable future.
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