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Jamaica and the IMF News Brief: Jamaica Revises Targets Under the Staff-Monitored Program Country's Policy Intentions Documents
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Jamaica—Letter
of Intent
Mr. Horst Köhler Dear Mr. Köhler, Over the first half of FY2001/02 the Jamaican economy is estimated to have grown at an annualised rate of 3 percent, the highest level in 7 years. This is partly due to a rebound in agricultural output following a period of drought as well as a recovery of mining activity. Nominal domestic interest rates have continued to decline reflecting growing confidence in the economy, and twelve-month inflation has been contained to around 7 percent under the Bank of Jamaica's tight monetary policy. The targets under the staff monitored programme (SMP) for end-June and end-September have been broadly met, with the Net International Reserves significantly above targeted levels as a result of the highly successful international bond issue in May. Structural reforms have also been proceeding as planned with continued divestment of FINSAC-controlled institutions. |
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The Jamaican economy has however sustained three major shocks since June: an outbreak of violence in a section of Kingston in July, which halted productive activity for a few days and negatively affected tourism over the longer term; a significant reduction in visitor arrivals consequent on the 11 September terrorist attacks on the USA; and major infrastructure damage and population dislocation as a result of wide-scale flooding associated with Hurricane Michelle in November. In addition, the slowdown in the global economy has negatively impacted exports and the current account deficit is now expected to be approximately 8 percent of GDP or US$200 million above the SMP projections. As a result of the shocks and the global slowdown, real GDP growth for the fiscal year is now expected to be 1½ percent or lower. These adverse developments contributed to the emergence of downward pressure on the exchange rate in October. To restore orderly market conditions, the Bank of Jamaica intervened in the foreign exchange market and increased domestic interest rates. These measures were highly successful. As market conditions permit, we intended to resume the path of domestic interest rate reduction. The World Bank and the Inter-American Development Bank have agreed to provide additional loans to help us deal with these shocks. In responding to the shocks, the Government aims to maintain the macroeconomic stability achieved under the SMP while regaining the momentum for higher growth. The Government is facing a deterioration in the central government fiscal deficit of around 2½ percentage points of GDP to around 5 percent of GDP resulting largely from the need for higher expenditures on security, tourism promotion and rebuilding after the floods, as well as lower revenues associated with the decline in economic activity. The Government has agreed with the IMF staff that the deterioration should be contained to around 1½ percentage points of GDP with a central government cash deficit of 4.1 percent of GDP. This will be achieved by reductions in capital and current expenditures, additional revenue enhancement measures and dividend payments from public enterprises reflecting, in part, lower world oil prices. The central government primary surplus target will be reduced by a similar amount to around 10 percent of GDP. Despite the fiscal pressures, social safety net expenditures will remain constant in real terms and the net international reserves target will remain unchanged at a build up of US$100 million for the fiscal year. The external commercial borrowing limit will be increased by US$50 million to reflect our plans for a shelf-registration in New York; we may, however, approach the markets for larger amounts to finance some of next year's requirements depending on market conditions. All other targets under the SMP remain unchanged. The attached table presents the adjusted macro-economic targets. Meeting these targets should imply, despite the adverse shocks, the achievement of a significant decline in the public sector debt-to-GDP ratio from current high levels, thereby permitting faster growth and lower interest rates. In this context, the Government will continue to limit the issuance of central government guarantees on borrowing to third parties and the assumption of any additional debt. The Government remains ready to adopt additional measures to achieve the targets under the SMP and the authorities will provide to the Fund all the information necessary to monitor the programme. The Government also hereby requests that the Fund staff monitor our FY2002/03 programme under a new SMP. In this context, the Government tentatively plans a reduction in the central government fiscal deficit of around 1 percentage point of GDP in FY2002/03 to 3 percent of GDP, and an inflation target of 5-6 percent while maintaining the FY2001/02 level of Net International Reserves. The Government looks forward to discussing the details of the programme to be monitored by the staff early next year. Yours truly,
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