Before 2016: A stagnating economy
JAMAICA HAS produced global superstars, brands, and cultural icons. The weather is warm, the beaches idyllic with displays of turquoise shallows, and new toll roads that beckon. Yet, challenges remain. Jamaica, for the greater part of the last two decades, has been characterised by a stagnant economy on the back of unsustainable fiscal and debt dynamics accompanied by sustained high unemployment and poverty rates.
In response to these challenges and the sheer unsustainability of its public debt, the Government entered into a four-year programme with the International Monetary Fund (IMF) in May 2013 under the Fund’s Extended Fund Facility. The programme involved the undertaking of a comprehensive and ambitious programme of reforms, primarily built around fiscal consolidation and key structural reforms in exchange for a modest amount of financial assistance of US$932 million and much more of the technical variety.
Addressing the economy’s imbalances and the weaknesses in its policy framework to create an economic environment for engendering growth has been the primary objective of the IMF-monitored reforms. Primarily, the programme ushered in some much-needed fiscal discipline. The agenda has been driven by the creation of a stable, predictable, and resilient macroeconomic environment which could nurture economic growth.
Under the programme, successive administrations have produced balanced budgets, improved public cash management, cheaper debt servicing, harmonisation of the incentive regime, improvement in the ease of doing business, and increased social expenditure. While this effort has been under way, the improvement in fiscal sustainability has allowed the central bank to focus more of its attention on driving inflation down. Remarkably, all the programme’s quantitative targets and structural benchmarks have been met.
At the start of the year, the country had already seen clear evidence that the economy had been improving. Inflation had fallen to record lows; the balance-of-payments current account deficit had shrunk by more than two-thirds; the net international reserves had risen; and the stock market was surging.
The year 2016 has been a continuation of these, still gradual, indicators of an improving economy. Net international reserves have remained at a healthy US$2.4 billion throughout the year, a figure which is two and a half times greater than it stood at the start of the programme.
Continued strict adherence to fiscal discipline together with the PetroCaribe debt buyback have helped place debt on a firm downward trajectory, with public debt falling more than 25 percentage points of gross domestic product (GDP). The improved fiscal performance and debt outturn has contributed to greater confidence at home and abroad. Local business confidence is reflected in historically high levels in the Business Confidence Index, up 12 per cent since last year. Internationally, Moody’s upgraded Jamaica’s sovereign credit ratings in November from Caa2 to B3.
And economic growth, finally, may be starting to pick up. While GDP growth had been averaging less than one per cent over the duration of the programme so far, the third quarter out turn for 2016 showed expansion of 2.2 per cent over the previous 12 months, the strongest growth performance in nine years. Corroborating this growth is an increase in employment over the year to July of 3.2 per cent.
Notwithstanding the clear indicators of an economic upturn, the job is not done.
Strong programme implementation over the last three and a half years has improved fiscal credibility, lowered debt and reduced borrowing costs. However, the public debt remains precariously high and, as reported by the IMF, is expected to remain broadly constant in FY16/17 due to a combination of small amortizations during the year and pre-financing for large redemptions coming due in early FY17/18. This leaves the country vulnerable to adverse domestic and international developments. In this context, fiscal discipline must be maintained.
Moreover, Jamaica’s growth, while positive, remains weak; unemployment, while declining, is still high (at 13 per cent in July of 2016). As the country has now signed a new ‘precautionary’ agreement with the IMF – further boosting investors’ confidence – social protection initiatives are particularly important to maintain social cohesion, build capacity, and improve productivity.
Fiscal consolidation, while crucial, does not address all the economy’s problems. Key among Jamaica’s pressing concerns is crime. With the murder rate being the sixthhighest worldwide, crime continues to be a major deterrent to investment in particular and economic activity in general. Going forward, addressing crime and other security challenges remains a priority.
Staying the course with continued fiscal discipline is critical to further reduce the debt and creating the fiscal space needed for productive spending in priority areas such as education, water access, infrastructure development, and crime reduction. Along this trajectory, the improvements in economic outcomes that were in evidence in 2016 should continue and even accelerate in 2017.