Fiscal accountability and transparency in Jamaica

Colin Bullock and Christine Clarke, Guest Columnists

Jamaica has, within the past year or two, asserted a renewed commitment to prudence, discipline and accountability in its fiscal affairs. The specific vehicle of this renewed commitment is the February 2010 standby borrowing agreement (SBA) with the Inter-national Monetary Fund (IMF).

The programme is consistent with the imperative to reassure financial markets in a context of global financial crisis. It was expected to facilitate greater transparency and increase the attractiveness of its debt issues with additional benefits for the investment climate in general.

Our current reform agenda continues a trend beginning in the mid-1980s, where the country has pursued fiscal balance and debt sustainability. Effective public financial management would be expected to facilitate a pattern of taxation and public expenditure that is supportive of greater private-sector competitiveness in an increasingly globalised economy. This most recent programme has aimed at the meeting of numerical macroeconomic targets, and the implementation of structural reforms in public-sector financial management and financial-sector regulation.

'Seal of approval'

The Government's current engagement with the IMF is informed by a stated objective to rely more on multilateral financial institutions (MFIs) for official external financing. When the debt is externally and privately provided, there is need for accountability and transparency to facilitate the operation of financial markets. Assessments for international financial markets are usually provided by the major credit-rating agencies, Standard & Poor's, Moody's and Fitch, that require a broad range of economic, financial, social and political information. MFIs are more likely, in a heavily indebted economy such as Jamaica's, to require the 'seal of approval' of a borrowing arrangement with the IMF.

Prior to the 1990s financial crisis, the majority of the country's debt was 'external' rather than 'domestic'. At the launch of the Jamaica Debt Exchange (JDX), the domestic debt represented 55.5 per cent of the recorded J$1.3 trillion of debt, as well as 76.3 per cent of the interest costs. The domestic portion of the debt was the more volatile component, which made it the focus of the transaction. The JDX was implemented as a prior condition for IMF approval of the SBA. This helped to establish Jamaica's commitment to making hard decisions and implementing them in anticipation of subsequent economic improvement. The immediate reward for this commitment was a substantial front-loading of inflows from the IMF, the Inter-American Development Bank, the World Bank and the European Union.

The widely celebrated success of the JDX underpinned a mood of optimism regarding macro-economic policy and economic prospects. The potential economic benefit encouraged institutions, investors and individuals to support the JDX and the comprehensive reform agenda of the SBA. The JDX created enlarged fiscal space over two years and the SBA, while not being an explicit growth programme, held out hope for stronger growth if fiscal adjustment and structural adjustment measures were promptly and rigorously implemented.

The JDX and SBA, in the context of the state of the Jamaican economy in February 2010, were substantial achievements. However, as pointed out by all the analysts at the time and endorsed by our authorities, it was only the beginning of the road. There was widespread acknowledgement that a fundamentally altering set of actions had to be undertaken in order to ensure that the breathing space that the agreement and its conditions allowed would be used to provide what Jamaica most needed - a sustained improvement in the economy. The IMF itself, in discussing the "downside risks" to the programme, asserted the imperative for strict implementation of the agreed policy agenda.

The broad Jamaican non-government sector of financial institutions, pensioners, workers and other private individuals are heavily invested in the JDX and the IMF programme. Indeed, they were thanked publicly and fulsomely for their 'voluntary' participation in the JDX. These same entities are still heavily invested in Jamaica's public debt (including the external debt that was not 'restructured') and an IMF programme that is at best on 'hold'. Their faith and confidence have to be nurtured and sustained by a continuous flow of timely, coherent information.

From the outset, in addition to welcoming the commitment to fiscal prudence and discipline associated with the SBA, several commentators noted the ambitious nature of the programme's medium-term fiscal targets and indicated the need for comprehensive planning and implementation. The IMF covered itself analytically by noting that there were several downside risks to successful attainment of programme objectives. These included the high primary surpluses required, the imperative for a high degree of social and political consensus, the need for a substantial pick-up in economic growth to meet the central objective of moderation of the debt-GDP ratio, and continuing vulnerability to shocks from market sentiment and natural disaster. Despite the citation of the importance of growth, the outlook was an anaemic 2.0 per cent and there was no clear articulation in the programme of how stronger growth would be generated. Government was expected separately to design and implement a growth-enhancement programme.

Disquieting silence

More recently, some commentators have questioned our ability to maintain the commitment to fiscal adjustment as represented in the February 2010 SBA. Government expenditure in FY 2010-11 was influenced by the Tivoli Gardens incursion and by excessive rainfall. There were also other issues of expenditure not originally budgeted, some undertaken through special purpose funds with clear implications for increased public debt. 'Revenue & Grants' underperformed relative to target, and there was compensatory reduction of both recurrent and capital expenditure, although the measurement of arrears has still not been resolved. The IMF, for its part, has expressed concern about the pace of implementation of the structural-adjustment initiatives agreed in the SBA.

As Jamaica welcomed the revelation of successes for March, June and September 2010, portrayed as reflecting Government's commitment to fiscal prudence and discipline, investors also welcomed what appeared to be the high levels of disclosure and continuing dialogue between the Government and the public. The perceived break in communication and the recent reticence with respect to the status of the IMF SBA through December 2010, March and June 2011 is, therefore, understandably disquieting. The presentation of the 2011-12 Budget claimed success with stabilisation as a precursor to growth, without any admission of concern regarding what was then and continues to be a delayed assessment of SBA performance to end December 2010.

Unfortunately, the ministerial statement of August 7, 2011, while speaking to some of the challenges to come, did little to clarify the status of the current SBA with the IMF. Questions that arise include: Is the original programme still alive? Has it been formally suspended? Are we negotiating a continuation or a new agreement? How will December, March and June be treated in the event of a negotiated extension? The answers are important not least because the SBA is a legally binding agreement with consequences for Jamaica's citizenry and financial markets.

Communication failure

While economic theory is an evolving literature, fraught with conflict, the simple arithmetic of revenue versus expenditure defining deficits, borrowing and debt is entirely unambiguous. The public-sector technical staff undoubtedly has a firm understanding of this arithmetic and our economic circumstance. They are not, however, to be held responsible for the failure of communication as policymaking, and its communication is not a purely technical matter. Implementation and communication are influenced by a lot more than 'technicalities' and 'academics'. Action and expression by political representatives/policymakers is influenced by their position in the political cycle, internal and external circumstances, and their reading of public sentiment.

Despite our understanding of the political incentive system, we still believe that the (structured) communication of less positive news is better for markets and even politics than no communication at all. Markets are liable to respond positively to an admission that performance has deviated from programme because of exogenous circumstance, incomplete information or even overoptimism, but that we recognise the problem and have defined the 'following steps' to be quickly implemented for its solution.

In any renegotiated agreement, stronger growth is essential to success. Given anaemic performance to date, and the prospect for even sharper fiscal adjustment as promised by the August 7 ministerial statement, the generation of this growth will be extremely challenging. The amendments to the FAA Act, which have still not been passed, had set targets for budget balance and a debt-to-GDP ratio of 100 per cent by FY 2015/16.

The dissemination of the key aspects of what must be a comprehensive and realistic plan for not only fiscal adjustment, but also growth in the medium term, is necessary. This would be beneficial not just for financial markets but also to institutions and individuals that would both play a role in, and be impacted by, this transformation process. There is need for information-sharing, at the very least to reduce unnecessary speculation in the media about failure versus success, as well as to maintain the stated continued commitment to 'good governance'.

Christine Clarke and Colin Bullock are lecturers in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com, clarke.christine.a@gmail.com and colbul3@gmail.com.