Ja­maica at a cross­roads: lev­er­ag­ing macroe­co­nomic sta­bil­ity for growth

Jamaica Gleaner - - IN FOCUS - Con­stant Lonkeng Ngouana is res­i­dent rep­re­sen­ta­tive for Ja­maica (In­ter­na­tional Mone­tary Fund). Email feed­back to col­umns@glean­erjm.com.

ONLY THREE and a half years ago, Ja­maica was on the verge of an eco­nomic melt­down — net in­ter­na­tional re­serves were be­low US$1 bil­lion; the cur­rent ac­count deficit was in dou­ble dig­its; pub­lic debt was at around 150% of GDP; in­vestor con­fi­dence was shaken; and the coun­try was shut out of in­ter­na­tional cap­i­tal mar­kets, with loom­ing re­fi­nanc­ing risks.

Fast-for­ward to Septem­ber 2016, Ja­maica’s eco­nomic land­scape looks very dif­fer­ent. The cur­rent ac­count deficit has shrunk to low sin­gle-digit; net in­ter­na­tional re­serves have nearly tripled; pub­lic debt, while still el­e­vated, has been placed on a firm down­ward path; and risks to the pub­lic sec­tor’s bal­ance sheet have been sig­nif­i­cantly con­tained.

Ac­cess to in­ter­na­tional and do­mes­tic cap­i­tal mar­kets has been re­stored and ex­ter­nal sov­er­eign bonds are now trad­ing on par with other emerg­ing mar­kets on the back of sev­eral up­grades from credit-rat­ing agen­cies and record-high in­vestor con­fi­dence.

These ma­jor gains were achieved through the im­ple­men­ta­tion of a de­ci­sive macroe­co­nomic pol­icy ad­just­ment that was sup­ported by the IMF’s Ex­tended Fund Fa­cil­ity. It em­bed­ded a strong and sus­tained fis­cal con­sol­i­da­tion, and a sub­stan­tial ex­ter­nal ad­just­ment, re­flect­ing a more com­pet­i­tive ex­change rate and low do­mes­tic in­fla­tion, sup­ported by low in­ter­na­tional oil prices. There Karen Thomas, First Global Bank cus­tomer, is ex­cited as she en­ters the newly re­opened Liguanea branch. Wel­com­ing her (from left) are Chad-Paul Pri­estly, branch man­ager; Ber­nadette Bar­row, se­nior vice-pres­i­dent— per­sonal and busi­ness banking; and So­nia Beaton Bogle, as­sis­tant vice-pres­i­dent— per­sonal and busi­ness banking strat­egy and sup­port. IMF res­i­dent rep­re­sen­ta­tive Con­stant Lonkeng Ngouana says although Ja­maica’s macroe­co­nomic sit­u­a­tion is im­prov­ing, ac­cess to pri­vate credit, from banks and other fi­nan­cial in­sti­tu­tions, is still dis­ap­point­ing.

were ma­jor in­sti­tu­tional re­forms to tackle deep-seated growth bot­tle­necks. Tax and cus­tom ad­min­is­tra­tions are be­ing re­vamped to fa­cil­i­tate pay­ing taxes and im­prove com­pli­ance. Mean­while, fi­nan­cial-sec­tor re­silience has been strength­ened and the Bank of Ja­maica (BOJ) is re­form­ing its mone­tary pol­icy and in­sti­tu­tional frame­works for an even­tual move to full-fledged in­fla­tion tar­get­ing.

CHAL­LENGES RE­MAIN

De­spite these hard-won gains, eco­nomic ac­tiv­ity has re­mained slug­gish, poverty re­mains el­e­vated, and un­em­ploy­ment is still high. Growth has un­der­per­formed rel­a­tive to ex­pec­ta­tions, in part be­cause of un­ex­pected shocks (such as the chik-V out­break, pro­longed drought, and

weak global de­mand), high­light­ing Ja­maica’s vul­ner­a­bil­ity to ex­oge­nous fac­tors. Agri­cul­ture — a large source of em­ploy­ment, in­clud­ing for the poor — re­mains at the mercy of mother na­ture.

Although tourism has been the main source of growth, the glob­ally ap­peal­ing Brand Ja­maica could be bet­ter lever­aged for growth pur­poses tourist ar­rivals grew by an av­er­age 3% per year over the past two decades, only about half of the growth rate recorded in the Do­mini­can Repub­lic. More im­por­tant, the link­ages be­tween tourism and the rest of the econ­omy have re­mained weak, at best.

On the so­cial side, the Gov­ern­ment has con­sis­tently shel­tered the pub­lic so­cial­spend­ing

floor from the fis­cal ad­just­ment, but there is wide scope for strength­en­ing the de­sign and cov­er­age of the so­cial safety net to en­sure that the most vul­ner­a­ble groups of the pop­u­la­tion are in­cluded in the devel­op­ment process, as en­vis­aged by the Gov­ern­ment.

PASS­ING THE BA­TON

In­ter­est­ingly, Ja­maica has em­barked on a jour­ney of mov­ing from a gov­ern­ment-led econ­omy to pri­vate-sec­tor-led growth. Gov­ern­ment net bor­row­ing from the banking sys­tem is al­most non-ex­is­tent now, thanks to the cen­tral gov­ern­ment’s near-bal­anced bud­get.

The re­trench­ment of the Gov­ern­ment from the fi­nan­cial sys­tem, how­ever, is yet to trans­late into broad-based pri­vate credit ex­pan­sion. Do­mes­tic pri­vate credit is still only about 20% of GDP (nearly three times lower than do­mes­tic pub­lic-sec­tor li­a­bil­i­ties), one of the low­est among emerg­ing mar­ket economies.

Im­ple­men­ta­tion of poli­cies for im­proved ac­cess to fi­nance ought to be an in­te­gral part of any pri­vate-sec­tor-led growth un­der­tak­ing in Ja­maica.

De­ci­sive pol­icy ac­tions are needed to ef­fect com­pre­hen­sive pub­lic-sec­tor trans­for­ma­tion that would sharply im­prove pub­lic-ser­vice de­liv­ery, re­move bur­den­some red tape, and gen­er­ate ef­fi­ciency gains.

This would also pro­vide ad­di­tional fis­cal space for much­needed so­cial and devel­op­ment spend­ing to fos­ter sus­tained and in­clu­sive growth, shared among all Ja­maicans.

AD­DRESS­ING CRIME, BRAIN DRAIN

The newly formed Eco­nomic Growth Coun­cil (EGC) iden­ti­fies crime as a ma­jor im­ped­i­ment to Ja­maica’s growth — an un­safe en­vi­ron­ment af­fects cit­i­zens’ well-be­ing, im­poses a huge cost on busi­nesses, and makes it harder to max­imise Ja­maica’s tourism po­ten­tial. Con­tain­ing crime would re­quire an ap­proach to na­tional se­cu­rity that em­beds not only a ‘cor­rec­tive arm’, but also, and per­haps more im­por­tant, a ‘pre­ven­tive arm’, in­clud­ing through com­mu­ni­ty­based so­cial pro­grammes and a clearly ar­tic­u­lated com­mu­ni­ca­tion cam­paign.

One of the symp­toms of lack­lus­tre eco­nomic ac­tiv­ity and per­ceived lim­ited job op­por­tu­ni­ties in Ja­maica is the high propen­sity of Ja­maicans, par­tic­u­larly skilled ones, to mi­grate —nearly as many Ja­maicans live out­side of Ja­maica as they do in the is­land.

This brain drain could, in prin­ci­ple, be thought of as an im­plicit sub­sidy by Ja­maica to mi­grants’ host coun­tries in the form of a highly ed­u­cated labour force. This poses the dual pol­icy chal­lenge of lev­er­ag­ing the di­as­pora in the short term (be­yond re­mit­tances) and main­tain­ing an eco­nomic en­vi­ron­ment con­ducive to a vi­brant labour mar­ket that would re­tain Ja­maica’s trained labour force within its bound­aries over the medium term.

Yet an­other unique Ja­maican brand is the sig­nif­i­cant own­er­ship, en­gage­ment of var­i­ous stake­hold­ers, and sub­stan­tial lo­cal com­mu­ni­ca­tion around the Gov­ern­ment’s re­form agenda and its im­ple­men­ta­tion. The Eco­nomic Pol­icy Over­sight Com­mit­tee has been ac­tively mon­i­tor­ing the Gov­ern­ment’s com­mit­ments and progress un­der its re­form pro­gramme and re­port­ing to the wider pub­lic.

This has been an en­vi­able mark of do­mes­tic own­er­ship that is be­ing repli­cated in other IMF-sup­ported pro­grammes (in Gre­nada, for ex­am­ple).

This model could ex­tend well be­yond the IMF’s fi­nan­cial en­gage­ment in Ja­maica, in­clud­ing for mon­i­tor­ing ad­her­ence to the coun­try’s Fis­cal Re­spon­si­bil­ity Law, an­chored around a debt ceil­ing of 60% of GDP in 2025-26.

Lev­er­ag­ing the tremen­dous macroe­co­nomic progress over the past few years and over­com­ing a long his­tory of weak pol­icy cred­i­bil­ity pro­vides a golden op­por­tu­nity to pur­sue poli­cies that fur­ther im­prove Ja­maica’s re­silience to do­mes­tic and ex­ter­nal shocks, unlock the econ­omy’s growth po­ten­tial, and pro­mote job cre­ation in a safe and se­cure en­vi­ron­ment.

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