Be­fore 2016: A stag­nat­ing econ­omy

Jamaica Gleaner - - NEWS - The Caribbean Pol­icy Re­search In­sti­tute (CAPRI) is a pub­lic pol­icy think tank af­fil­i­ated with the Univer­sity of the West Indies and sup­ported by so­cially re­spon­si­ble mem­bers of the Ja­maican pri­vate sec­tor.

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.


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