Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

In spite of challenging circumstances, the Staff Monitored Programme (SMP) for fiscal year 2000/01-2001/02 has achieved its major objectives of maintaining economic stability and laying the foundations for strong economic growth.

During the first half of fiscal year 2001/02, the Jamaican economy was growing at an annualised rate of 3 percent, reflecting a recovery in mining activity and a rebound in agricultural output following a period of drought. However, between July and November 2001 the Jamaican economy sustained three major shocks: an outbreak of violence in a section of Kingston in July; a significant reduction in visitor arrivals as a result of the 11 September terrorist attacks in the US and the slowdown of the world economy; and major infrastructure damage and population dislocation as a result of wide scale flooding in the eastern section of the island in November. These shocks resulted in lower growth of around 1 percent in FY 2001/02, and a fiscal deficit of 5.7 percent of GDP despite significant expenditure cuts. Net International Reserves were consistently above target, rising to over US$1.9 billion by end-March 2002, with end year inflation contained to around 7½ percent, representing the sixth consecutive year of single digit inflation. Progress continued with institutional reforms, including sales of intervened financial institutions and the strengthening of prudential supervision. Overall public sector debt declined modestly from 133 to 130 percent of GDP.

The main challenges facing the Jamaican economy continue to be high public sector debt and low economic growth, which has been further exacerbated by recent flooding in May 2002. The challenges will be addressed by continuing fiscal consolidation, maintaining macroeconomic stability and through further structural reforms. Within this context, the Government plans to reduce the Central Government's fiscal deficit by 1.3 percentage points of GDP in fiscal year 2002/03 to 4.4 percent of GDP, with a primary surplus of around 10.5 percent of GDP, to be achieved by continued restraint in expenditures and further strengthening of tax administration to improve revenue collection. These targets will need to be reviewed in August in light of pending estimates of the additional spending required for reconstruction as a result of the May floods as well as the success of our efforts to attain international assistance in this respect. Exchange rate and monetary policies are intended to promote growth through maintaining and, if possible, enhancing competitiveness while preserving single digit inflation. The target for Net International Reserves is US$1.6 billion at end-March 2003. Improvements in public sector management will continue with the restructuring of remaining (generally smaller) public enterprises through reorganizations, mergers, transfers and privatisation.

The annexed Memorandum of Economic and Financial Policies presents the Government's specific economic objectives and policies for 2002/03. In support of these objectives, the Government requests that the Fund staff monitor the execution of its programme during the period April 1, 2002 through March 31, 2003, with a progress review against the targets included in the Memorandum, in November 2002. It is the Government's intention to publish this review.

The Government of Jamaica believes that the policies set forth in the attached Memorandum will enable it to achieve its programme objectives, but remains ready to adopt additional measures as necessary to achieve the above targets under the SMP. The authorities will provide to the Fund all the information necessary to monitor the programme.

Annex: Memorandum of Economic and Financial Policies

Memorandum of Economic and Financial Policies
for the Government of Jamaica for 2002/03

I. Introduction

1. The Government of Jamaica would like to continue in FY 2002/03, the informal monitoring of its economic and financial policies by the IMF staff. ¹ The objectives of the programme are to consolidate the gains in economic stabilization and adjustment achieved to date and lay the foundations for sustainable, strong economic growth that would further reduce poverty. The informal monitoring under the new SMP would serve as a vehicle for maintaining close dialogue with the Fund as well as strengthening the signal to international partners and financial markets of Jamaica's commitment to credible and consistent macroeconomic policies. This Memorandum of Economic and Financial Policies (MEFP) reviews recent developments and describes the Government's economic objectives and policies for FY2002/03 and over the medium term.

II. Background and recent economic developments

2. The SMP for FY 2001/02 was broadly on track up to September 2001, with all quantitative targets for end-September met. Real GDP growth was estimated at an annual rate of 3 percent from April to September. This was due mainly to the strong recovery of agriculture from the previous year's drought; a resumption of bauxite and alumna production after disruption in a processing plant in the U.S. and positive, albeit lower, growth in tourism. Inflation was higher than envisaged, at 7½ percent, largely due to administrative increases in transportation prices in June. ² This, however, represents the sixth consecutive year of single digit inflation. Net international reserves at end-March 2002 were US$1.9 billion, significantly higher than the SMP target, largely reflecting successful international bond issues in May and December 2001, and buoyant private sector inflows.

3. However the economy suffered three major shocks in FY2001/02 - an outbreak of violence in a section of Kingston in July; a significant reduction in visitor arrivals caused by the September 11 terrorist attacks in the US and the slowdown of the world economy; and major infrastructure damage and population dislocation as a result of wide-scale flooding in the eastern parishes of the island associated with Hurricane Michelle - that have reduced real GDP growth for the fiscal year as a whole to around 1 percent. Lower revenues, higher expenditures on security, tourism promotion, and flood relief and rehabilitation resulted in an increase in the fiscal deficit, despite significant cutbacks in other expenditures. ³ The Central Government's deficit rose to 5.7 percent of GDP corresponding to a primary surplus of around 8 percent of GDP. Interest rates continued their downward trend, except for a brief interruption in October when they were increased temporarily to facilitate orderly adjustments in the exchange rate. The sale of the core assets of the Financial Sector Adjustment Company (FINSAC) has been completed, and negotiations are under way for divestment of the remaining commercial real estate. The activities of the institution are to be wound up by October 2002. The regulatory and supervisory framework for non-bank financial institutions was also strengthened with the establishment of the Financial Services Commission (FSC) to provide integrated supervision of securities, pensions, and insurance industries. Public sector debt declined modestly from 133 to 130 percent of GDP. ⁴

III. Program for 2002/03

4. The main challenges for the Jamaican economy continue to be high public sector debt and low economic growth. The recent recurrence of heavy flooding, in May 2002 has magnified these challenges. The policies in the 2002/03 programme will lay the foundations for faster economic growth through continued fiscal consolidation, macroeconomic stability, and further structural reforms. In this context, the Government plans to reduce the Central Government's deficit to 4.4 per cent of GDP; contain inflation below 7 per cent while enhancing competitiveness through prudent monetary and exchange rate policies; maintain a comfortable level of NIR (US$1.6 billion by end March 2003), consistent with real economic growth of around 2.5 percent. Improvements in public sector management will continue with the restructuring of remaining (generally smaller) public enterprises through reorganizations, mergers, transfers, further privatisations and closure.

A. Fiscal Policy

5. The aim of the fiscal measures in the FY2002/03 programme is to reduce the Central Government's deficit by 1.3 percentage points of GDP over the FY2001/02 outturn, to 4.4 percent of GDP, consistent with a primary surplus of about 10.5 percent of GDP. To achieve this, the Government intends to implement a series of measures to increase revenue collection. These include strengthening of the compliance machinery, reduction in preferential exemptions, and continuing expenditure restraint, especially with respect to wages and salaries. However, the Government is committed to at least maintain the real level of spending on social safety nets in 2002/03. The deficit of the rest of the public sector, of just over 1 per cent of GDP in 2001/02, will increase by 1 percentage point of GDP to 2 percent in 2002/03. This results from the quasi-fiscal operations of the Bank of Jamaica (BOJ), which is projected to make a loss of 3 percent of GDP, up 1 percentage point on FY 2001/02. These losses arise largely from the sterilization of the impact of past accumulation of foreign reserves on the money supply and a 16 percentage points reduction in the cash reserve. Continued emphasis will be placed on improving the performance of public enterprises where a surplus of 0.6 percent of GDP is projected in 2002/03 (unchanged from last year). The overall public sector deficit will decline by about ½ percentage point to around 6½ percent of GDP, with a primary surplus of about 10.5 per cent of GDP. These fiscal targets will be reviewed in August in light of considered estimates of the additional reconstruction spending resulting from the floods and the results of the Government's efforts to generate international support for this spending.

6. Total public sector debt is projected to decline from 130 percent of GDP at end-2001/02 to 125½ percent by end-2002/03. The Government will limit the approval of projects under the deferred financing scheme to an amount consistent with an increase in public sector debt of J$2 billion (0.5 percent of GDP) annually, and minimize the issuance of Central Government guarantees for borrowing by the public or private sector.

7. The Government believes that the above measures are consistent with generating the indicative primary surplus and the overall deficit but there are downside risks. First, domestic interest rates may not decline as rapidly as assumed and, second, the real GDP growth projections may not be realized. In either of these events, the Government is committed to taking measures to contain deviations from targets, through further cuts in expenditures. Any additional outlays or shortfalls in revenues will also be offset by expenditure cuts elsewhere.

B. Exchange Rate and Monetary Policies

8. The main objective of exchange rate policy is to maintain single digit inflation, while maintaining and, to the extent possible, strengthening the competitiveness of the economy. Consistent with these objectives, the BOJ will allow the exchange rate to reflect underlying market forces and will continue to permit limited flexibility in the rate provided that exchange rate movements do not appear destabilizing. The programme has established quarterly targets for official net international reserves, which will be monitored closely to determine if any policy response to deviations with respect to the targeted path is required.

9. The monetary programme will continue to be geared towards maintaining single-digit inflation through the targeting of base money. In the context of further fiscal consolidation, a moderate lowering of interest rates should be possible without triggering an increase in inflation. Accordingly, the BOJ has designed a monetary program for 2002/2003, which entails some increase in net claims on the public sector by the banking system, and continued lowering of interest rates to encourage faster growth. Lower interest rates would result in an 8 percent real expansion of credit to the private sector, which is important to maintain the momentum of economic growth.

10. Although the cash reserve and liquid asset requirements have been reduced significantly in the recent past, the liquid asset requirement remains relatively high at 27 percent. The BOJ proposes a further 7 percentage points reduction in the liquid assets ratio to 20 percent in 2002/03 and the cessation of remuneration of prudential reserves on foreign currency deposits, which caused a distortion vis a vis reserve requirements on Jamaica dollar deposits.

C. Structural Reforms

11. Significant progress has been made toward strengthening the supervisory framework for banks and non-bank financial institutions with amendments to the BOJ legislation to supervise financial groups, and the establishment of the Financial Services Commission (FSC)—in charge of supervising non-bank financial institutions. FINSAC has successfully discharged its mandate to restore the liquidity and solvency of the financial system, and that institution will be wound up by October 2002, with any residual activities handed over to the Financial Institutions Services (FIS). The Government has initiated the introduction and enforcement of legislative amendments to address tax evasion and any financing of terrorism activities and established a Financial Crimes Unit to investigate and prosecute money-laundering offences. Simplification of the tax system is to be examined.

12. Progress has been made in improving public sector management with the assistance of the World Bank and other international partners in recent years. ⁵ The Government plans to restructure the remaining (generally smaller) public entities through reorganization, mergers and transfers, privatisation, and closure. New legislation has been passed in Parliament—the Public Bodies Management and Accountability Act—to improve transparency and accountability of public entities.

13. In the current stable inflation environment, competitiveness will be enhanced by wage moderation and increased factor productivity. The recently established productivity centre should play a useful role in assessing productivity developments.

14. The Government will participate in the IMF's General Data Dissemination System (GDDS) by January 2003. The Government's medium-term objective is for Jamaica, as a regular borrower on international capital markets, to subscribe to the Special Data Dissemination Standard (SDDS). The Government will assess Jamaica's readiness for subscription to the SDDS. The Government will also implement plans to improve statistics on national accounts, balance of payments, and the labour market with technical assistance from CARTAC and other international institutions.

D. Monitoring

15. To assist in the monitoring of Jamaica's programme, quarterly quantitative targets for key variables and structural benchmarks have been set. These include targets for the overall balance of the Central Government, the overall balance of Selected Public Enterprises, net domestic assets of the Central Bank, the level of official net international reserves, and limits on external borrowing. The structural benchmarks cover measures with respect to public enterprise reform. An indicative target on the primary balance (of the Central Government) has also been set. The definitions and adjusters associated with data and information to be reported under the SMP are listed in Appendix I. Progress under the programme against these quarterly targets will be assessed in a mid-term review by the staff. It is the Government's intention to publish this mid-year assessment. Fund staff would also review performance targets under the programme in light of the impact of the 2002 floods on reconstruction spending, and its proposed financing, in August when firm estimates should be available.

IV. Medium-term Prospects

16. The policies in the SMP are expected to help lay the foundations for the medium-term achievement of higher growth, more employment, and moderate inflation. Growth is expected to accelerate to 3-4 per cent a year on average by 2005, owing to growth in tourism, as well as in mining, agriculture, and financial and other services. Inflation can be contained at around 5 percent per year in the medium term while strengthening competitiveness. The six-month Treasury Bill rate is projected to decline significantly from the current level (13.8 percent), while public sector primary surpluses will be kept over 10 percent of GDP. Continued fiscal consolidation helped by faster growth and lower nominal interest rates could shift the public sector overall balance to a surplus by 2005/06. Such an improvement in the overall balance could lower the public sector debt from around 130 percent of GDP at end-2001/02 to below 100 percent of GDP by 2006/07, which in turn would support further declines in real interest rates.

Jamaica: Data and Information to be Reported
for the 2002/2003 Staff-Monitored Program

I. Reporting Commitments

Sector/Data	Data	Reporting Requirement
		Periodicity	Timeliness
General
Cable data	The entire set of cable data.	Quarterly	6 weeks
Selected public enterprises	Main aggregates and operating and overall balances.	Monthly	6 weeks
Specific
Central government budget turnout	Expenditure, revenues (by main categories) and financing data.	Monthly	6 weeks
Banking system credit to the government	Net credit to the central government and public sector, broken down to BOJ and commercial banks.	Monthly	6 weeks
CPI	Detailed CPI data.	Monthly	4 weeks
Trade	Value of exports and imports by main categories, current account balance.	Monthly	3-4 month lag
Bank of Jamaica	BOJ operating balance.	Monthly	4 weeks
Interest rates	6-month Treasury bill rates and 30-day to 180-day Reverse Repo rate.	Monthly	Monday following end of month or website
Bank of Jamaica	BOJ interventions in foreign exchange market.	Weekly	Each Monday
External debt (short term)	Short-term external debt stock and borrowing.	Quarterly	6 weeks
Medium and long-term external debt	Medium and long-term external debt stock and borrowing.	Monthly	6 weeks
Net international reserves	Net international reserves of the BOJ in U.S. dollars.	Weekly	Each Monday
Exchange rate	Daily average weighted selling exchange rate quoted by the BOJ.	Daily (1 day lag)	Available on website

II. Definitions

1. The net domestic assets of the central bank are defined as the monetary base (currency issued—either with the public or held by commercial banks—plus local currency regulatory cash reserve requirements and the commercial banks current account deposits) less net international reserves. ⁶
2. The net claims of Bank of Jamaica on the central government is defined as the government securities (including Treasury bills, Government of Jamaica debentures, local registered stocks, and other securities) held by the Bank of Jamaica minus the central government deposits and other claims with the central bank.
3. The banking system is defined as the consolidation of the accounts of the central bank and the commercial banks.
4. The nonfinancial public sector is defined as the central government, selected public entities and other nonfinancial public enterprises, and FIS and FINSAC.
5. Selected public enterprises are: National Housing Trust (NHT), National Investment Bank of Jamaica (NIBJ), Urban Development Corporation (UDC), National Insurance Fund (NIF), Human Employment and Resources Training (HEART), Petroleum Corporation of Jamaica (PCJ), Petrojam Limited, National Water Commission (NWC), Jamaica Mortgage Bank (JMB), National Housing Development Corporation Limited (NHDC), Airports Authority of Jamaica (AAJ), and Port Authority of Jamaica (PAJ). Any changes in this list of public enterprises will be made upon notification of deletions or additions to the group of selected public enterprises and the relevant targets will be adjusted accordingly.
6. Overall balance of Selected Public Enterprises is defined as the flows in total financing for the respective period as in the "Net Credit Return" of prepared by the Ministry of Finance and Planning.
7. The net credit of the banking system to the non-financial public sector is defined as advances, credit and other claims of the banking system to the non-financial public sector, minus deposits of the non-financial public sector in the banking system.
8. The overall balance of the central government is defined as total revenue and grants (excluding proceeds from privatization) less total expenditure.
9. The net international reserves of the central bank are defined as foreign assets minus short-term foreign liabilities of the Bank of Jamaica.
10. Foreign short-term commercial borrowing is defined as foreign borrowings of less than one year maturity—and includes financial leases and other instruments giving rise to noncessional external liabilities, contingent or otherwise—undertaken by the central government and/or the nonfinancial public enterprises.
11. Foreign medium- and long-term borrowing is defined as foreign borrowings of one year or longer maturity—and includes financial leases and other instruments giving rise to noncessional external liabilities, contingent or otherwise—undertaken by the central government and/or the nonfinancial public enterprises.

¹ The fiscal year runs from April 1 to March 31.
² At end March 2002, the 12-month inflation was 7½ percent. However, excluding the transportation increase in June, the rate would have been around 6 percent.
³ Higher expenditures also include larger wage expenditures due to earlier than anticipated wage settlements and higher interest payments related to the National Commercial Bank's (NCB) holding of Financial Sector Adjustment Corporation (FINSAC) securities.
⁴ Excluding debt held by the BoJ and government securities held by public enterprises, but including government guaranteed domestic debt. On the authorities' definition, including debt held by the BoJ and government securities held by public enterprises, but excluding government guaranteed domestic debt, the fall was from 136 to 133 percent of GDP.
⁵ The World Bank provided assistance through the Public Sector Modernization Project.
⁶Using an accounting exchange rate of J$48.80 per U.S. dollar. Non-U.S. dollar-denominated assets and liabilities are to be valued at the cross rates with the U.S. dollar on March 31, 2002.