What does Jamaica’s strong IMF performance mean?
Today’s Jamaica Observer editorial cites approvingly the International Monetary Fund’s (IMF) first report on the Stand -By Arrangement (SBA), namely that the implementation of the programme under the SBA remains strong, and that “sustained macroeconomic discipline and visible reforms have boosted stability and confidence”.
The editorial quotes the fund further: “Inflation reached an all-time low in 2016, and investor confidence is at an all-time high, attracting foreign direct investment. The current account deficit has narrowed significantly, supporting accumulation in non-borrowed reserves.”
Jamaica’s “strong performance” at the first quarterly review of its new Stand-by Arrangement meant that there was no need for a formal board meeting, which was therefore approved by “lapse of time” due to what mission chief Uma Ramakrishnan described as our “unwavering” commitment, during the IMF’s video briefing on Tuesday.
She also cited eight consecutive quarters of gross domestic product (GDP) growth, and a budget that “demonstrates sustained fiscal implementation”. There was, however, a “minor breach” in one performance criterion due to a delay in medical supplier arrears (amounting to US$2.2 million) by one unnamed public body, which required a waiver. However, she described this as “unsurprising” due to the “large number of reforms” (and entities) that the government was monitoring, and that the breach was “so small that it does not have any adverse bearing on the performance of the programme”.
Overall, moreover, she expressed clear approval of Jamaica’s performance, arguing that the rebalancing from direct to indirect taxes expanded the tax base and created work incentives. In the IMF’s written review, it was even more positive about the Administration’s decision to move to indirect taxes, saying that “the revenue-neutral rebalancing from direct to indirect taxes, designed around the principles of fairness, progressivity and efficiency, will further expand the tax base and work incentives”.
When Ramakrishnan was asked whether the IMF was comfortable with the reduction in property tax rates announced last week, which would reduce by half or $2 billion the additional amount expected from this source, she noted that there was fairly significant overperformance on tax collection up to February, and the IMF was willing to wait and see the March outturn, as the government reports to them in six weeks. If this overperformance was a “permanent feature”, it is possible that “tax compliance might be able to fill the gap”, otherwise it could be met by a reduction in expenditure.
While admitting that the shift from direct to indirect taxes could affect those who consume the most, Ramakrishnan noted that before the budget, the IMF had provided technical assistance to do a distribution analysis of the impact of the budget on the bottom 20 per cent of the population, by decile, in terms of expenditure, using the 2012 Household Expenditure Survey, which had a larger sample size than the more recent 2013.
She noted that an income survey would have been better, but that this is not available in Jamaica. While also admitting that our primary income support programme, PATH, had “gaps”, she observed that the World Bank was helping Jamaica with a project to expand coverage, reassess targeting, and move more of the needy onto PATH.
On the potentially controversial issue of the Bank of Jamaica’s planned move to introduce a market-based exchange rate pricing mechanism to facilitate the Central Bank’s inflation-targeting objective, Ramakrishnan advised that the proposed foreign echange “auction” would be “quite different” from the “allocations” of scarce foreign exchange which had existed in the 1980s in Jamaica. Instead, the goal was to “modernise” Jamaica’s foreign exchange allocation system, to “bring Jamaica into the forefront of best practice”. The auction would “not change anything significant”, but just the “modality” of the Bank of Jamaica (BOJ) foreign exchange flows (currently 15 to 16 per cent of total flows) by moving to a more “market-based mechanism”.
While she was deliberately not specific, as the IMF’s technical work is still occurring, page 20 of the IMF’s review provides an illustration of the “best price allocation methodology”. The graph appears to suggest a classic multiple-bid auction, with a cut-off price. Currently, it appears that the proposal is likely to be one where the banks bid for the BOJ’s needs in a transparent “same day” disclosure auction process, similar to the BOJ’s existing 14-day repo auctions, allowing the BOJ to gradually phase out its surrender requirements.
She argued, however, that Jamaica was by no means “out of the woods”, with a debt to GDP ratio of around 120 per cent, with the goal still to halve the debt to GDP ratio to a sustainable 60 per cent by 2025/26.
She agreed that the seven per cent primary surplus target could, however, be revisited with a sufficiently aggressive privatisation programme that used the proceeds for debt reduction.
The wage bill was again projected to be 9.6 per cent of GDP in 2017/2018 (the same as the previous fiscal year), and is only projected to fall to nine per cent of GDP by end March 2019, in line with the Fiscal Responsibility law. Ramakrishnan noted this was “still high by international standards”, with overall wage and interest costs still “two thirds of total spending”.
As the Jamaica Observer editorial also noted, in its call for the Government “to stay the course”, the IMF is projecting two per cent economic growth for this fiscal year. The IMF’s long-term projection of economic growth to 2022 tops out at 2.8 per cent, way below the planned five per cent target of the Economic Growth Council (EGC). When asked about this, Ramakrishnan observed that the EGC’s overall reform agenda “was far more ambitious than the IMF programme”, implying that much faster reform could produce faster growth. If the Government were able to achieve this, it would indeed deserve the kudos of the
Jamaica Observer and others.