Jamaica-2016 Article IV Consultation and the 11th and 12th EFF Reviews Concluding Statement of IMF Mission
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.1. Since May 2013, Jamaica has been implementing an economic reform program supported by the IMF’s Extended Fund Facility (EFF). Significant strides have been made in restoring macroeconomic stability, reducing public debt and deficits, undertaking comprehensive reforms in tax policy and administration, building financial sector resilience, and removing supply-side obstacles to growth. Macroeconomic fundamentals have significantly improved. Inflation is at historical lows, the current account deficit has more than halved, net international reserves have doubled, and access to domestic and international financial markets has been restored, supported by upgrades in credit ratings.
2. The program remains on track. All quantitative performance criteria for end-December 2015 and end-March 2016 were met. Tax revenues reached the budget target for the first time since the global financial crisis in 2007. The central government primary surplus for FY15/16 (April to March) slightly exceeded the program target of 7.25 percent of GDP. Capital expenditures accelerated during December to March, fully utilizing the additional fiscal space for growth-enhancing capital spending that was approved at the 10th review. Structural reforms are broadly on track, albeit with some minor delays due to the February elections and government transition. The mission reached preliminary staff-level agreement with the authorities on a package of measures that aims to complete the combined eleventh and twelfth reviews under the EFF. Consideration by the IMF’s Executive Board is tentatively scheduled for June 2016. Upon approval, SDR 56.7 million (about US\\$80 million) would be made available to Jamaica.
3. Economic recovery continues but growth remains weak. Confidence indicators are at an all-time high, inflation declined to 2.4 percent in April, and the current account deficit has significantly decreased, aided by low oil prices. The unemployment rate dropped to 13.3 percent in January 2016, down from 14.2 percent a year earlier. Foreign direct investment inflows increased by nearly 30 percent during the first three quarters of FY15/16. Nevertheless, real GDP is estimated to have expanded by only 0.8 percent in FY15/16; with ongoing agricultural recovery and higher investment, growth for FY16/17 is projected to rise to 1.7 percent.
4. Achieving sustained higher growth and job creation requires continued reforms. Fiscal discipline is critical for further reducing debt and creating space for productive capital spending. Combating crime, reducing the costs of energy and tax compliance, and improving infrastructure are essential to attract private investment. Greater banking sector competition, reforming financial sector taxation, reducing collateral requirements, improving credit risk assessment, and developing non-traditional financial services will help improve access to financial services and reduce the interest rate spread.
5. Continued exchange rate flexibility is needed to maintain competitiveness. The level of the exchange rate appears broadly in line with fundamentals but the balance of risks points toward a modest overvaluation. To avoid eroding external competitiveness, the currency should be allowed to depreciate to offset the inflation differential with trading partners. A flexible exchange rate implies that any intervention in the foreign exchange market should be predominantly to build reserves and smooth out excessive exchange rate volatility.
6. The ongoing phased reform of the personal income tax is a bold step to rebalance the tax system towards indirect taxation. The shift from direct to indirect taxes will reduce the marginal and average tax rates for the majority of the income tax taxpayers, improve work incentives, and encourage workers and employers to move out of the informal economy. The decision to take offsetting measures to safeguard revenues and avoid undermining debt sustainability was both bold and essential. Prior to undertaking the second step in raising the minimum threshold for income tax, attention should be directed to strengthening conditional cash transfers and improving targeting in order to protect the poor and vulnerable from the shift from direct to indirect taxes. Other reforms to further reduce distortive taxes (such as asset taxes, stamp duties and transfer taxes) will also help support private sector growth.
7. Efforts are needed to reduce the size of the public sector, improve public sector resource allocation, and protect social and capital spending. The large public sector wage bill continues to crowd out crucial expenditures. As such, concrete measures are needed to achieve a wage to GDP ratio of 9 percent by FY18/19. The additional fiscal space created during the 10th review for FY16/17 has been directed at growth-enhancing capital spending.
8. Reforms to the monetary framework should center on achieving price stability. A firmly established single mandate for achieving price stability will bolster the Bank of Jamaica’s credibility and lay the foundation for an eventual move to inflation targeting. In addition, the central bank’s liquidity provision should be made consistent with the loosened interest rate stance.
9. Financial sector stability requires further actions. Enhancements to the legal and operational frameworks for the resolution of banks and securities dealers should be determined and set up without delay. The amended Bank of Jamaica Act needs to be backed by concrete tools, procedures, and complementary regulations in order to truly vest the central bank with overall responsibility for financial stability. Information exchange and collaboration between the various supervisory agencies needs further improvement. Strengthening prudential requirements for securities dealers will bolster systemic stability.
The IMF team thanks the Jamaican authorities and other interlocutors for their candid and constructive discussions during the mission.