Renews call for a downsizing of the public sector to help offset the costs of the new public sector compensation system

The International Monetary Fund (IMF) is projecting that Jamaica’s economy is set to grow by as much as 8.5 per cent next fiscal year, the biggest level of growth in years.

In its latest Article IV Consultation, the IMF assesses that the economy is now recovering with tourism rebounding to near 70 per cent of pre-crisis levels, despite two COVID-19 waves this year. The IMF notes that other sectors in the economy have picked up as well.

As such, real gross domestic product (GDP) in the second quarter of 2021 was 14.2 per cent higher than the same quarter a year earlier.

“We project growth of 8¼ per cent in FY2021-22, moderating to 3½ per cent in FY2022-23,” the IMF projects.

Even before the pandemic, growth in Jamaica has been anemic, averaging in 2010-19 by only 0.6 per cent, barely keeping pace with population growth. Real GDP per capita is at the same level as in 1970.

Low growth explanation

This low growth was partly due to repeated crises, but growth has also been low during expansions, and in the last 25 years, growth has exceeded two per cent only twice. Low growth can partly be explained by the decline of Jamaica’s traditional export industries .

Sugar, bananas, and textiles exports have all declined following the expiration of preferential access agreements, while aluminum and bauxite exports have lost market share to more effective competitors. Growth has also been held back by supply-side constraints. 

These include low levels of human capital, high rates of crime, infrastructure deficiencies and the high costs of production (electricity costs in Jamaica are the fourth highest in the world). This is in addition to the fact that access to finance for SMEs remains a challenge, cross-border trade and paying taxes is cumbersome, import tariffs are relatively high, and neighbouring competitors enjoy enhanced access to the US market from Free Trade Agreements.

Removing supply side constraints to growth should be among the central policy priorities in the coming years, the IMF is recommending. Education and training, the IMF says, “needs to become more effective and linked to labour demand; infrastructure, logistics, and digitalisation would benefit from an upgrade; crime needs to be contained, and energy sources shift towards renewables”.

Downsizing the public sector

Lowering the wage bill, the IMF argues could free up scare resources for spending in growth critical areas. As such it is renewing its call for a downsizing of the public sector highlighting the fact that the rises in the public sector wage bill risk crowding out other expenditure.

The new public sector compensation system that will come into effect in FY 2022-23 will make the wage structure more transparent, standardised, and equitable, and reduce the large differences in pay with the private sector.

However, the IMF assesses that “it will also further add to the wage bill, which is already one of the highest in the region, reducing the room for other expenditure. A reassessment of the various roles and responsibilities of government, as well as increasing efficiency in the provision of public services, that would facilitate a reduction in the size of the public workforce, could help offset the costs of the new wage structure”.

At the same time, more resources are needed for infrastructure and other growth-enhancing expenditures. Infrastructure needs are significant, and better infrastructure would help boost private sector growth.

“More resources are also needed to entrench disaster resilience; to reduce the high crime rates, which deter economic activity and investment,” the IMF reports, adding that more spending on police and crime prevention may be needed. The sharp rise in world food and energy prices has helped boost year-on-year inflation to 8.2 per cent in September, well above the central bank’s target range of four to six per cent.

Natural disasters continue to be an ever-present risk.

As the crisis recedes and the recovery advances, the IMF advocates that Jamaica should restart debt reduction and rebuild buffers, given high susceptibility to external shocks and risks to debt sustainability. 

Policies should also focus on boosting growth which has been low in the last decades, enhancing institutions, and tackling the still high levels of poverty and crime.

Rebuilding Fiscal Buffers

The government’s goal to reduce debt to 60 per cent of GDP by 2027-28 is appropriate, as deemed by the IMF. As a result of the crisis, public debt has increased to 109 percent of GDP, and assurances that it will be brought down over time are important for investor confidence and preservation of macroeconomic stability.

Lower debt and debt service payments would also create more fiscal space to mitigate contingent and long-term fiscal pressures including creating buffers for natural disasters. Although the Financial Administration and Audit Act Regulations only require publication of a fiscal framework for the next four years, publication of a fiscal framework for a longer-term period that shows how the debt reduction will be achieved would further increase the credibility of the government’s target.

Running fiscal surpluses of about 1 percent of GDP in FY 2023-24 and beyond would ensure smooth progress to the debt target and avoid the need to raise the fiscal surplus much sharper in later years in order to meet the debt target. Re-orientation of existing expenditure and increasing revenue could create additional resources in the near-term, while declining debt and interest payments would do so over the medium term. 

Revenues could be raised by reducing exemptions. Lower debt and interest payments would create significant scope to scale up social spending in health and education. There is also scope to make existing expenditure more effective .

Monetary Policy

Inflation has risen above the central bank’s target range of four to six per cent. Rising inflation is mainly the result of rising global food and energy prices, but other import prices and shipping costs have increased as well—the result of global supply-chain shortages.

The IMF expect inflation to increase to 8.8 per cent at end-2021 and then recede to 6.7 per cent at end-2022, but “there are significant risks that inflation may be higher, global inflationary pressures may last longer and be more intense than we currently expect, and pass-through of global food and energy prices to local inflation (which has weakened in recent years) may be stronger than projected”.

The BOJ has raised policy rates by 100 bp. (to 150 bp) effective October 1, but depending on inflation developments, further tightening may be needed to firmly anchor inflation expectations, underline the central bank’s commitment to its inflation goal, and bring inflation to within the target range by end-2023.

According to the IMF, “even if the current shocks are transitory and longer-term inflation expectations have not been affected (which is hard to gauge as no survey of inflation expectations beyond 12 months exists), further rises in inflation that is not accompanied by a monetary policy response could de-anchor the expectations and jeopardise the inflation’s return to the BOJ target range. Moreover, monetary policy is still accommodative as evidenced by the policy interest rate in real terms continuing to decline this year”.