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JAMAICA | IMF cautions Jamaica for high public sector wage bill

Featured International Monetary Fund (IMF) Mission Chief for Jamaica Uma Ramakrishnan International Monetary Fund (IMF) Mission Chief for Jamaica Uma Ramakrishnan
KINGSTON, April 20, 2017 - The Executive Board of the IMF has praised Jamaica’s programme implementation, describing it as a “strong performance” in its first review on the country’s performance under the new Stand-By Arrangement with the IMF.

According to the IMF, The rebalancing from direct to indirect taxes, which is accompanied by higher social expenditure, is expected to expand the revenue base to support growth-enhancing spending, which will create jobs and reduce poverty.

In addition,the Bank of Jamaica’s planned move to introduce a market-based exchange rate pricing mechanism will facilitate the central bank’s inflation targeting objective.

The International Monetary Fund (IMF) Mission Chief for Jamaica Uma Ramakrishnan, said all structural benchmarks, and all but one performance criteria for the first review under the new arrangement were met.

This allows the country another US$170 million for drawdown from total access of US$1.64 billion over a 36-month period.

The IMF however highlighted the need to preserve social consensus for reform which it said will be critical in sustaining gains to macroeconomic stability and resilience that have been achieved by Jamaica over the past four years.

In fact, the IMF is now cautioning the Government to “carefully plan, manage and communicate upcoming public sector changes, especially in light of ongoing public sector wage negotiations”.

Jamaica’s fiscal responsibility law allows for a wage bill of nine per cent of gross domestic product (GDP) by fiscal year 18/19. However, Minister of Finance Audley Shaw, in his budget presentations last month, indicated an estimated two to three per cent increase in the salary of public sector workers.

The proposed increase in public sector wages already pushes the budget over the required wage bill to GDP.

“With that in mind, the path needs to be agreed on by the Unions about how to meet that nine per cent, because the two-year wage negotiation is going to happen. So the question is what the path is going to look like; the budget has made certain assumptions on what wages could be for this year.

“That budget is based on calculations of 9.6 per cent of GDP, and the question is how to get to nine per cent within the time frame required on what is required by law,” Ramakrishnan told media representatives during an IMF video press conference at the Bank of Jamaica yesterday.

She added that Jamaica’s law on wage-to-GDP levels must be taken into consideration during the negotiation process in order to maintain macroeconomic stability.

Currently, Jamaica has debt of 120 per cent of GDP and as such maintains a primary surplus of seven per cent to lower the debt levels.

“Jamaica’s wage bill and the interest bill together are about two-thirds of the total spending of the Government. The remaining third of the budget is what is left for total spending on priority areas,” she said, adding that what is important for the country to keep in mind is that Jamaica is by no means out of the woods.

The following is the full text of the IMF statement on Jamaica's review:

On April 14, 2017, the Executive Board of the International Monetary Fund (IMF) completed the first review of Jamaica’s performance under the program supported by the Stand-By Arrangement (SBA), on a lapse of time basis.

The 36-month SBA with a total access of SDR 1,195.3 million (about US$ 1.63 billion), equivalent of 312 percent of Jamaica’s quota in the IMF, was approved by the IMF’s Executive Board on November 11, 2016 .

The Jamaican authorities continue to view the SBA as precautionary, and to use it as an insurance policy against unforeseen external economic shocks that could lead to a balance of payments need.

Program implementation remains strong under the SBA. Sustained macroeconomic discipline and visible reforms have boosted stability and confidence. Positive real GDP growth has been recorded in 7 consecutive quarters, and Jamaica is projected to grow by 2 percent in FY2017/18, bolstered, by construction and tourism, among other factors.

Inflation reached an all-time low in 2016, and investor confidence is at an all-time high, attracting foreign direct investment. The current account deficit has narrowed significantly, supporting accumulation in non-borrowed reserves.

Continued fiscal consolidation—as reflected in the 7 percent of GDP primary surplus target under the FY2017/18 budget—remains critical for further debt reduction. The ongoing revenue-neutral rebalancing from direct to indirect taxes, designed around the principles of fairness, progressivity and efficiency, will further expand the tax base and work incentives. The budget also provides for greater capital spending.

The significantly higher budget allocation for social spending will help insulate Jamaica’s poor and vulnerable from the impact of the rebalancing to indirect taxes. Implementation of the PATH graduation strategy later this year will help reallocate resources to the neediest families. The planned targeting assessment will be critical to improving and expanding the coverage.

Decisive policy actions are required to improve public sector resource allocation and efficiency. Reducing the government’s wage bill, including by strengthening budgetary controls, redefining the size of government, and lowering pension costs, is key to shifting Jamaica’s limited fiscal resources to productive spending.

At the same time, a broader effort to reduce the number of public bodies and improve their monitoring will enhance their governance and transparency, and reduce fiscal risks. Avoiding a return to discretionary tax incentives to specific businesses and/or sectors is critical to safeguard the gains achieved in tax policy from implementing the 2014 Omnibus bill.

Anchoring monetary actions on the central bank’s inflation objectives, supported by a flexible exchange rate, is crucial for policy credibility. The BOJ’s planned move towards a transparent and more market-based exchange rate pricing mechanism via foreign exchange auctions will improve price discovery in the foreign exchange market, and facilitate BOJ’s market-based purchase of international reserves. The authorities are also taking actions to further enhance financial sector supervision, crisis preparedness, and strengthening the framework for anti-money laundering efforts and combating the financing of terrorism (AML/CFT).

The expanded program monitoring—through the Economic Program Oversight Committee, the Economic Growth Council, and the Public-Sector Transformation Oversight Committee—will continue to update the wider public on progress under the government’s policy commitments, holding the government accountable to the Jamaican people.

  • Countries: Jamaica