There have been conflicting reports about the status of Jamaica’s Standby Arrangement with the International Monetary Fund (IMF) on Jamaica’s Medium-Term Economic Programme. The IMF Agreement is the centerpiece around which the Medium Term Programme is built, and is a pre-condition for other multilateral support.
Without it, Jamaica would not have had the necessary foreign reserves to have survived the deep dislocation caused by the worst economic crisis the world has known in modern history -- a crisis which caught us with a massive debt overhang, an anemic growth rate, and slim reserves to insulate us.
But the Medium-Term Programme is more than just an economic rescue programme that came at a period of crisis. The Medium-Term Economic Programme is the blueprint that points the way to building a credible foundation upon which our country can create a sustainable economy.
Safeguarding our medium term programme also has to be pursued within the context of the signs of relapse in the global recovery evidenced by recent developments in the United States and Europe. The possible impact of these on Jamaica and the measures needed to mitigate that impact have to be kept sharply within our focus.
This is why I am addressing you tonight.
Although I have shared various aspects of our progress with you – in both my speeches and interviews - it is necessary for me to clear up some misconceptions, and to inform you of some important issues that face us at this juncture.
The last completed review with the IMF on Jamaica’s Economic Programme was for the period ending in September 2010 when all the quantitative targets were met.
The December 2010 and March 2011 quarterly assessments have not yet been reviewed by the IMF. So, suggestions that have been made in some quarters that we have failed the tests are erroneous and misguided because no such tests have been applied. It is a fact, that the overall assessment of our performance for these two periods has been broadly positive. There was, however, a $3.5 billion shortfall on the Central Government primary surplus during the March 2011 quarter. Data submitted on all other quantitative targets showed that they were either met or exceeded.
Why then, have the December and March Reviews not taken place?
The reviews have not taken place because the critical issue now facing the Government concerns not so much our current performance but the measures that are necessary to achieve the targets over the medium-term. That is, those targets which extend beyond the life of the current IMF agreement, to March 2016. Although our current Agreement with the IMF ends next year, the programme involves the achievement of targets over the medium-term, such as the achievement of a balanced budget by March 2016, and a reduction in the debt-to-GDP ratio to 100 percent.
At this point in time, one of the medium-term targets that is of particular concern to the IMF and ourselves, is the Central Government wages-to-GDP ratio. This is not to be confused with the recently concluded 7% wage settlement. Rather, this is a medium-term target for the period ahead, up to March 2016.
At the end of the last fiscal year, the cost of Central Government wages was 10.7% of GDP. However, this must be reduced to 9% of GDP by March 2016 under the Fiscal Responsibility legislation. The Public Sector Master Rationalization Plan which is being implemented as of July 1, is aligned to this target, and discussions with public sector unions toward the strategies to achieve this critical target have already begun through the Public Sector Monitoring Committee.
In addition to the medium-term wage-to-GDP issue, other challenges have arisen since the presentation of the budget. They are:
1. The recent public sector 7% wage settlement has added $10.4 billion to expenditure for just this fiscal year alone….. and an additional $21 billion in arrears, covering the period April 2009 – March 2011. This will be paid over the medium-term. Thus the overall cost to Central Government alone of the 7% wage settlement from 2009 to 2012 amounts to $31 billion, some 2.3% of GDP.
2. The planned divestment of the Government shares in Clarendon Alumina Production (CAP) has not yet materialized. This has also led to higher than targeted expenditure to meet the losses being borne by the Government because of forward sale contracts entered into in 2005; and
3. For the first quarter of the 2011/12 fiscal year revenue and grants were $3.3 billion (4.2%) below budget.
These factors have impacted negatively on our projections to meet the current year’s targets. They have also impacted our medium term fiscal targets.
As far as this fiscal year is concerned, adjustments to the Budget must be made if our primary balance target is to be achieved. Accordingly, the first supplementary estimates are being prepared for Cabinet approval on August 15. They will be tabled in Parliament at the end of August.
These adjustments involve cuts to capital and recurrent expenditure across Ministries, Departments and Agencies. This is because a sacrosanct part of our agreement is the containment of expenditure within the limits of the resources available. This is the only honest approach we can take towards achieving a solid future. It is folly to believe otherwise and we must continue to appeal for the understanding of the Jamaican people when things that they would like to see done cannot be done at this time because the resources are simply not available.
But expenditure is not the only side of the equation. The adjustments will also involve strategic revenue collection measures. To this end, Tax Administration Jamaica has launched the Revenue Enhancement and Arrears Project (REAP) aimed at collecting a significant portion of tax arrears and improving compliance.
But these are not the only initiatives underway. We have a plan of action to safeguard fiscal operations and keep our medium-term programme on a sustainable path.
- We have presented the Green Paper on Tax Reform, and intense discussions that must include the issue of granting of waivers will be held over the next 6 weeks. A White Paper will be tabled in Parliament in October.
- We have before us offers for the purchase of our shareholding in Clarendon Alumina Production and a decision should be made by the end of August.
- The rapidly escalating cost of government pensions has a significant impact on recurrent expenditure. Exhaustive studies on pension reform have been completed and a Green Paper outlining the proposed reforms will be tabled in September. This is expected to lead to a White Paper in January 2012; and
- We have already started dialogue with our public sector unions to define a predictable way of determining a formula for wage settlements.
Notwithstanding the challenges we now face, we must be proud of the impressive gains achieved over the last year. The Jamaica Debt Exchange is not only the most successful debt swap in history; it is also a symbol of national sacrifice. So, too, are the gains which have come from fiscal restraint and a new attitude of transparency in the management of our country’s economic affairs.
We must also not take for granted the following achievements forged though our mutual sacrifice:
- Our exchange rate is stable
- Inflation is trending down
- We have healthy foreign exchange reserves
- We have the lowest interest rates in over a generation •
- We now have a return to positive economic growth over the past 2 quarters; and,
- The creation of 15,500 net new jobs for the last reported period ending in December 2010.
It is important to appreciate that, for the first in a long time, all these positive indicators are occurring at the same time. In other words, lower interest rates were not achieved at the expense of the value of the Jamaican dollar or the rate of inflation.
In closing, I assure you that the Government is working on a clear plan of action to lock in the positive economic gains achieved thus far. This includes further work on the establishment of sustainable fiscal operations and the creation of conditions to foster investment and growth.
This Administration has had the courage to take unpopular decisions in the country’s long-term interest – many of which were long overdue. We have also worked diligently to put Government’s own fiscal house in order. We have tightened systems, instituted a programme of fiscal consolidation, and established our first Fiscal Responsibility Framework which is enshrined in law…. and which sometimes does not get as much attention as it deserves.
Proof of our hard work is evidenced in Jamaica’s achievement of 95 out of a total of 100 performance objectives attached to our IMF programme, and 4 other multilateral programmes. Coming from where we were over most of the last two decades, this is very encouraging. It was not an easy achievement. And it could not have been done without your sacrifice, cooperation and goodwill.
Yes, we have come a long way, but there is still some distance to go. It will require discipline, but we can do it. The Government is working on a tough but achievable plan to deal with the current fiscal challenges and to secure the Medium-Term Programme. I know that your goodwill and support can be relied upon. Let us band together and move with determination towards our ultimate goal: The building of a prosperous Jamaica and the realization of a better life for all.
We are committed to instituting the necessary re-alignments to preserve our gains and to secure our Medium-term Economic Programme as together we work to "Make Jamaica the place of choice to live, work, raise families and do business".
May God bless you, and may God bless Jamaica – Land We Love"