structural challenges in jamaica and the support of the idb

CHAIRMANS CLUB

“Structural Challenges in Jamaica and the Support of the IDB” March 23rd 2010

Vulnerability to shocks Chronic stagnant growth and large current account deficits Sustained fiscal deficits and high debt High informality and flat or falling productivity High tax rate but very low tax base Small open economy

Multiple Simultaneous Shocks –

Remittances, tourism & bauxite affected by international economic downturn

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Oil and food price spikes and margin calls

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Negative growth forced fiscal revenue down and reversed poverty gains

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Interest rates and salaries rose above 90% of revenue

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Abrupt 22% devaluation

GOJ decided to not just muddle through but actually escape the high debt and low growth traps • Stop chronic deficits financed with costly debt • Fiscal responsibility Framework: limit deficits & move to performance based budgets • Control public bodies: Central Treasury Management • Rationalise public sector • Increase revenue (taxes, rates and coverage) and cut interest costs (outstanding JDX) • IMF Standby Arrangement approved Feb. 4

WHAT SUCCESS WILL LOOK LIKE: 2014 • • • • • • • •

Fiscal deficit: 1% GDP (>12% today) Total public debt: >120% GDP (140% today) Interest rates: <10% Inflation: 6 - 7% Exchange rate: Stable Balance of payments: Surplus NIR: Maintain 3 – 4 months throughout Real Growth: 2% sustained

WHAT WILL IT TAKE TO GET THERE? • Fiscal squeeze. PM: only J$30b for investment • Cost recovery, tax collection and less waivers • Reduce wage bill from 11.75% of budget to 9.5%.

Efficiency • Target benefits (PATH, SFP, Health,Tertiary) • Control & Close >50 public bodies; merge many and divest 20 to stem hemorrhage (Air J, bauxite, sugar, PETROJAM expansion, JUTC) • Interest rate trajectory consistent with JDX • Collaboration: Gov’t; Opposition; Unions; private sector

UNPRECEDENTED PROGRAMME NETTED UNPRECEDENTED EXTERNAL SUPPORT 2010 – March 2012 = US$2.4 billion

OVER 20% OF GDP!! IMF: US$1,300 million IDB: $ 650 million: ALL UPFRONT!  WB; CDB & EU

Risks – Interest rate trajectory: mitigated by lower inflation and less GOJ borrowing – Increased demands on NIR: mitigated by massive external support – Imported inflation (more price spikes) – Natural disasters – Slippage of fiscal targets: mitigated by new fiscal discipline

Fiscal deficit: Deviation from Estimates

IDB Support

Lending Program: Started 2008 • 2008: Counter cyclical support of robust reform agenda amidst global economic downturn and natural disasters. $205m; and $207m NSG. Total >$400m • 2009: Curtailed credit lines to the private sector triggered a $300m Liquidity Program for Growth Sustainability. Also $31m CSJP/NWC and $75m TJH. Total: >$US400m • 2010: Support of reform programs and SBA. Total new loans programmed: US$630m.

• Success of first year of the program is critical. Wait and see could undermine program so100% front loaded.

• Concessional terms: 1.23%; no upfront fees; 5 years grace; 25 yrs amortisation.

Areas of Policy Support • • • •

Competitiveness Public Financial Management Human Capital Development Education

1. Competitiveness – Tax Reform (simplification & reduction) – Tax Expenditure Review: How is revenue spent – Secured Transactions (collateral) and Credit Bureau – M-Banking legislation – Land titling: reduce time and cost

2. Public Financial & Performance Mgmt

– Fiscal Responsibility Framework: Limit deficits and increase transparency.

Public bodies accountability and control. (Central Treasury Management) – Improved expenditure management and control: Framework for Internal Audit and Control enacted – Public Procurement: Clearer rules and stronger enforcement. Procurement Appeals Board constituted; E-Tendering solution selected; training.

– Management for Results: Performance agreements and service contracts for PSs and CEOs of Executive Agencies

3. Human Capital Protection Program FISCAL SQUEEZE DURING ECONOMIC DOWNTURN: Unemployment increasing (11.6% total, up 13% over past year), commodity prices increasing (food prices up 66% since Jan.2007, CPI up 51%) , thus strong indication that poverty is likely increasing. Generally ,the groups most at risk: pregnant women and very young children, poor school-aged children, unattached youth, femaleheaded households, and elderly. Poverty gains reversed.

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Policy Measures: Protect non-salary social expenditure from cuts: health, nutrition, early childhood development, education.

Improve targeting of safety net programs Expand coverage and Increase benefits: Increase PATH coverage and per capita benefits by 25%, (max J$1,000/ month now) extend coverage of School Feeding Programme Support Innovative Programs to Protect Vulnerable Groups

4. Support for Education Sector Reform - Underachievement in student learning at all levels Problems: – Centralized MOE management ineffective at local level. Distracted from focus on policy design and accountability. Shift System: Reduces teaching time.

Low stakeholder participation: Weak local management of schools. Growing discipline problems in the classrooms Solutions: – Modernise MOE to focus on policy formulation, monitoring and evaluation, standard settings, and agencies coordination. Enhanced accountability through appraisals to Principals, Counselors and Teachers – Improve stakeholder and community involvement in education – Expand compulsory education from age 16 to 18 and decrease double shift by providing approximately 2,100 additional seats – Decentralize to the regions creating autonomous regional agencies 2015: Results: 1.

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90% of children achieving mastery in all four areas of grade 1 with Individual Learning Profile 85% of children achieving mastery on the grade 4 literacy test 85% for each subject as national mean score at grade 6 achievement test.

MICRO DECISIONS DETERMINE MACRO TARGETS

PM: “No more sacred cows” • • • • • • • •

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Tax and duty waivers still justified? Eg 100% income tax waiver in agriculture dates back to independence Most paved roads in the world but maintenance can’t keep up Untargeted subsidies: health services & tertiary education Does allocation of scarce revenue match new priorities? Safety net offers a maximum of just J$1,000 a month while Mt. Rosser hemorrhage continues Public investment where private sector could step forward (Mt. Rosser) Rates cover a fraction of costs but systems expanding (eg. buses, water, irrigation) Absurd Property Taxes: eg. less than J$300 for US$1.5 million property. Tax value is less than the cost of collecting it Land Titling: All applications to register titles must be certified by one of only three private referees in all of Jamaica, paid 1% of the value and appointed by the Governor General.

IDB supports the GOJ reform programme

LIFE AFTER THE IMF June 2012 • Jamaica will still have very high debt at 120% GDP but it will have started the slow hard climb out of the debt trap • General elections will have either taken place or will be imminent.

• Fatigue with >two years of fiscal squeeze; but interest rates, inflation and FX will be steady • Modest steady growth as trading partners may have recovered and major shocks avoided • Development strategy will have changed from chronic deficits and high interest debt to fiscal discipline new expenditure priorities • Growing space for both public and private investment in real sector • Increased, better social spending and infrastructure

WHAT SUCCESS WILL LOOK LIKE: 2014 • • • • • • • •

Fiscal deficit: 1% GDP (>12% today) Total public debt: >120% GDP (140% today) Interest rates: <10% Inflation: 6 - 7% Exchange rate: Stable Balance of payments: Surplus NIR: Maintain 3 – 4 months throughout Real Growth: 2% sustained

BETTING ON JAMAICA HISTORICAL TRANSFORMATION OF THE ECONOMY & GOVERNANCE Defining moment that will shape Jamaica for decades Understand your role and do your part!