KEEPING YOU IN THE KNOW ...
NOTES
Minister of State in the Ministry of Finance and the Public Service Fayval Williams
1. Rating action
Standard & Poor’s (S&P), one of the three global rating agencies, has affirmed Jamaica’s rating at single ‘B’ and raised its outlook to positive from stable.
S&P said that after many years of economic, fiscal, and monetary reforms, Jamaica has made material progress in achieving macroeconomic stability and improvement in its external debt burden.
Accordingly, S&P said: “We are revising our outlook on Jamaica to Positive from Stable, and affirming our ‘B’ long- and short-term sovereign credit ratings on the country.
“The positive outlook reflects the at least onein-three likelihood of an upgrade if in the next 12 months, Jamaica further strengthens its external liquidity position while maintaining tight fiscal policy, high primary surpluses, and modestly positive real GDP growth.”
2. Supplementary Estimate and Fiscal Policy Paper (FPP)
The first supplementary estimate for FY201819 was laid in Parliament on Tuesday, September 25, 2018, along with the interim Fiscal Policy Paper. Both documents were referred to the PAAC and the Standing Financing Committee for review.
In this First Supplementary Budget, against the backdrop of:
The overperformance on tax revenues to end of July 2018
The positive revision of the tax revenue forecast to end of March 2019
The very robust performance of capital expenditure and savings on the recurrent side of the original budget (lower interest cost and programmes) the proposed additional expenditures will be on both the recurrent and capital budgets.
On the recurrent expenditure, the additional spending will be $12.4 billion while the capital budget is proposed to be increased by $5.3 billion.
These expenditures are to be covered by betterthan-budgeted tax revenues and additional distributions from public bodies.
The primary surplus is now programmed to be at $142.98 billion, which satisfies the seven per cent of GDP requirement.
Additionally, project execution under the Major Infrastructure Development Programme has been progressing ahead of schedule. Accordingly, further capital expenditure has been provided to continue the pace of implementation of the three major works that are simultaneously under way in the Kingston Metropolitan Area.
3. IMF Fourth Review
The economic reform programme remains on track with the successful completion of the fourth review on September 21, 2018.
At the end of the review visit, Uma Ramakrishnan, the IMF mission chief, concluded that:
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Programme implementation remains robust.
• All quantitative performance criteria for endJune 2018 were met and structural reforms are on track. •
The primary surplus of central government operations exceeded the programme target by 0.7 per cent of GDP, driven mainly by continued buoyant taxes. •
Capital expenditure, which has typically lagged, exceeded budget by
13 per cent, and non-borrowed reserves over-performed by about US$400 million.
The IMF said in its report that “it is important for the Bank of Jamaica to continue improving monetary policy signalling and limiting FX interventions to episodes of disorderly FX market conditions. Meanwhile, the mission chief highlighted that Government is moving to table legislation that amends the BOJ Act to anchor monetary policy on price stability. Ongoing improvements in the monetary policy toolkit and clear communication are essential for the success of this flagship reform.
“Strong economic fundamentals and sustained policy implementation of the authorities’ reform programme provide the private sector with an unprecedented opportunity to expand domestic investment, generate economic opportunities, and become the growth engine for Jamaica.”
The IMF concluded that “Jamaica will benefit from fostering financial-inclusion policies while taking into consideration financial stability risks. Addressing domestic constraints to financial intermediation will support market deepening and further catalyse domestic investment.”
Debt/GDP is expected to reach 98.9 per cent of GDP at the end of FY2018-19.
4. Bauxite levy
For this segment, I will address some questions raised about the agreement signed between GOJ (Jamaica Bauxite Mining Ltd) and New Day Aluminium (Jamaica) Ltd, the company that purchased certain of the assets of the former mining company Noranda and was granted permission for mining activities. By way of background, successive governments have maintained two regimes for taxation in the bauxite industry: •
The levy regime in which companies are charged a fee on every tonne of bauxite produced and the income tax regime in which companies pay taxes based on profits. •
This has always been the case across governments – that there are two regimes. On taking over as Government, we found a bauxite industry that was in crisis: There had been no bauxite mining at Kirkvine since 2009.
Alpart Refinery had been closed for approximately seven years.
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The Government’s ownership in the Jamalco/CAP partnership was a major fiscal risk. CAP has had to seek financial assistance from the government. CAP currently owes a debt of approximately US$140 million to creditors. • Noranda was in bankruptcy courts in the US with a most uncertain future having filed for bankruptcy protection on Feb 8, 2016. • A US$12.5 million line of credit that Noranda had issued to the GOJ that could have been drawn on to pay outstanding bauxite levies to the GOJ was left undrawn and allowed to expire under the prior government.
WHAT WERE THE HEADLINES THEN?
That was the state of the companies in the bauxite/alumina industry. This is what we found when we came to Government. We had to set about to rescue the industry at a time when alumina prices were at their lowest in about five years. So let’s not conveniently forget history. FAST-FORWARD TO 2018:
As a result of the efforts of the current Government, more than 300 jobs were saved and all monies owed to workers are being paid. The partnership agreement with New Day prevented any disruption of Noranda Bauxite operations. We believe that this new arrangement will earn the country more in US dollars compared to the traditional levy system. Under the agreement, the GOJ will earn 17.33 per cent of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA), or US$1.50 per tonne of dried bauxite shipped – whichever is greater.
Consolidated EBITDA covers profits on the Jamaican operations as well as profits on the downstream alumina operations in Gramercy in Louisiana, USA.
The royalty payments of US$0.50 (50 cents) per dry metric tonne of ore shipped will also remain in effect.
At signing, New Day paid to the GOJ US$5.033 million for profit share. There was also US$2 million that was paid towards the outstanding legacy levies, with US$10.6 million remaining to be paid over a 36month period commencing in April 2019.
The taxation regime in place has a three-year review clause. No other agreement signed in the bauxite industry has this clause.