IMF predicts growth of more than eight per cent for Jamaica
... Says the main risk to economy is COVID-19; expresses concern about global inflationary pressuresThursday, November 18, 2021
WASHINGTON, DC, United States (CMC) — The International Monetary Fund (IMF) is predicting economic growth of more than eight per cent for Jamaica this year, but warned that while the economy is recovering the novel coronavirus pandemic poses a significant risk that could lead to a more prolonged disruption of tourism, trade, and capital flow.
In a statement issued following the conclusion of the 2021 Article IV Mission, the Washington-based financial institution noted that tourism has rebounded to near 70 per cent of pre-crisis levels, despite two COVID-19 waves this year, and other sectors have picked up as well.
It said real gross domestic product (GDP) in the second quarter of this year was 14.2 per cent higher than the same quarter a year earlier.
“We project growth of 8¼ per cent in financial year 2021/22, moderating to 3.5 per cent in financial year 2022/23. But risks to the outlook are significant.
“A third COVID-19 wave is abating, and vaccination has picked up pace, with one million people now having received at least one dose. But new COVID-19 waves in Jamaica or abroad could lead to a more prolonged disruption of tourism, trade, and capital flows,” the IMF said.
It said another risk is posed by the uncertain duration of global inflationary pressures.
“The sharp rise in world food and energy prices has helped boost year-on-year inflation to 8.2 per cent in September, well above the central bank's target range of 4-6 per cent. Natural disasters continue to be an ever-present risk.
“On the other hand, a faster pace of vaccinations at home and abatement of the pandemic in Jamaica's main tourism markets are upside risks.”
The IMF said that as the crisis recedes and the recovery advances Jamaica should restart debt reduction and rebuild buffers, given high susceptibility to external shocks and risks to debt sustainability.
“Policies should also focus on boosting growth which has been low in the last decades, enhancing institutions, and tackling the still high levels of poverty and crime,” it added.
The IMF said in the decade preceding the pandemic Jamaica made good progress in restoring macroeconomic and financial stability. It said aided by IMF financial support, the fiscal deficit was brought from 11 per cent of GDP in 2009 to a surplus; public debt fell from 142 per cent of GDP to 94 per cent and inflation and the current account deficit declined.
“Jamaica institutionalised hard-won fiscal discipline through a fiscal responsibility law, moved to inflation targeting, allowed for greater exchange rate flexibility, and strengthened oversight of the financial system. These reforms are continuing,” the IMF said, noting that the recent passage of the amendments to the Bank of Jamaica Act and the legislation to establish a fiscal council are two of the latest achievements of the Government's ambitious reform programme.
It said that these improvements allowed Jamaica to implement a strong policy response, when it was hit hard by the novel coronavirus pandemic.
“An early lockdown in the spring of 2020 helped contain the number of COVID-19 cases but the impact on the economy was severe, with real GDP shrinking by 10 per cent. To counter the social and economic effects of the pandemic, the Government suspended the fiscal rule for one year and temporarily reduced the primary balance target from 6.5 to 3.5 per cent of GDP, increased spending on health and social protection and reduced the GCT rate.
“At the same time, the central bank injected liquidity and encouraged banks to put in place loan moratoria to provide temporary support to the private sector,” the IMF said, noting that the availability of buffers built-up pre-crisis and the calibrated policy response to the crisis ensured that, unlike in the past, the pandemic-related shock was not followed by a fiscal, financial, or balance of payments crisis.
The IMF said that the Government's goal to reduce debt to 60 per cent of GDP by 2027/28 is appropriate.
“As a result of the crisis, public debt has increased to 109 per cent of GDP, and assurances that it will be brought down over time are important for investor confidence and preservation of macroeconomic stability.”
The IMF said lower debt and debt service payments would also create more fiscal space to mitigate contingent and long-term fiscal pressures including creating buffers for natural disasters.
It said that although the Financial Administration and Audit Act Regulations only require publication of a fiscal framework for the next four years, publication of a fiscal framework for a longer-term period that shows how the debt reduction will be achieved would further increase the credibility of the government's target.
The IMF said that for the financial year, 2022/23, and in line with the Fiscal Responsibility Law, the Government aims at an overall fiscal surplus of about 0.3 per cent of GDP, the same as in the financial year 2021/22.
It said that the impact of lower Bank of Jamaica (BOJ) dividends would be partly offset by lower interest payments.
Public debt and interest payments are expected to decline faster as the authorities pay down maturing bonds from the debt exchange operation of 2010 and 2013. Running fiscal surpluses of about one per cent of GDP in the financial year 2023/24 and beyond would ensure smooth progress to the debt target and avoid the need to raise the fiscal surplus much sharper in later years in order to meet the debt target.
The IMF said that rises in the wage bill risk crowding out other expenditure. It said the new public sector compensation system that will come into effect in during 2022/23 will make the wage structure more transparent, standardized, and equitable, and reduce the large differences in pay with the private sector.
“But it will also further add to the wage bill, which is already one of the highest in the region, reducing the room for other expenditure. A reassessment of the various roles and responsibilities of Government, as well as increasing efficiency in the provision of public services, that would facilitate a reduction in the size of the public workforce, could help offset the costs of the new wage structure.
“At the same time, more resources are needed for infrastructure and other growth-enhancing expenditures. Infrastructure needs are significant, and better infrastructure would help boost private sector growth. More resources are also needed to entrench disaster resilience.”
The IMF said that to reduce the high crime rate, which deters economic activity and investment, more spending on police and crime prevention may be needed.
“And in health care, the number of hospital beds and doctors per person is relatively low,” the IMF said.