Signs of life for the IMF programme

Amid a wave of concerns regarding the status of the 2010 standby arrangement with the International Monetary Fund (IMF), it appears that in at least the short term, the programme is safe as far as the next fund disbursement is concerned. While the reviews for December 2010, March and June 2011 are yet to be done or published, there are signals that the programme is alive and well.

This comes on the basis of pronouncements by top technical authorities responsible for the management of the macroeconomy, both on the monetary and fiscal sides. Against these pronouncements, it would be quite a shocker if the IMF were to freeze future disbursements.

The pronouncements, however, seem well supported by signals being sent from the multilaterals themselves. One such signal is the September 8 US$100-million loan provided to the Government of Jamaica by the International Bank for Reconstruction and Development, more popularly known as the World Bank. On the announcement of this loan, the minister of finance is paraphrased as follows: "I go to di World Bank fi loan; di World Bank send letta to di IMF; di IMF send back letta to di World Bank, and di World Bank gi mi di loan."

This underscores that the IMF essentially issued a seal of approval for the World Bank loan. Had the IMF been at a place where it would cease disbursements to the Jamaican Government, it would not have provided its seal of approval for the World Bank loan.

As a matter of fact, it seems that the Jamaican Government was assessed by the IMF to be falling short in a set of specific areas and the purpose of the World Bank loan is to provide the Government with the necessary resources to address those shortfalls. Of course, some of the IMF's concerns have been the budgeting process, revenue potency, fiscal responsibility, and debt sustainability, to name a few.

While not a fixed-rate loan, the World Bank loan currently attracts an interest rate of 1.5 per cent and provides a grace period of nine and a half years before any payments become due. Notably, the World Bank loan provides budgetary support which can be contrasted with, but is complementary to, the IMF loan which treats balance of payments support.

Aim of world bank loan

The aim of the World Bank loan, together with other measures, is really meant to put the current IMF programme back on track, if you will. Under the World Bank loan, the areas to be addressed as conditions of the loan are listed as: (i) enhancing fiscal and debt sustainability; (ii) increasing the efficiency of financial management and budget process; (iii) strengthening tax administration and increasing tax-revenue capacity. When juxtaposed with the IMF's concerns surrounding how the Jamaican Government has managed the economy, it becomes clear that the conditions of the World Bank loan are meant to address exactly the concerns of the IMF regarding Jamaica's ability to remain on course.

First, by providing the World Bank funds today for budgetary support at a very low interest rate, the loan affords the Government the ability to honour its obligations in the short term, while it carves out a strategy for economic growth and debt repayment in what is a stable economy by way of indications on inflation, interest rates, GDP growth, among other macroeconomic indicators except for employment.

Second, the long-overdue seven per cent increase in wages to government workers, which was kept off the books during the Budget process, clearly threatened the IMF programme and brought about the need for at least one supplementary budget to be rolled out for the fourth consecutive year. Point Two of the World Bank loan is meant to address exactly this. Finally, we have begun to see attempts to meet one of the IMF's foremost concerns, which is Jamaica's ability to generate sufficient revenues to meet its expenses, including capital, operating and debt servicing.

To engage Point Three of the World Bank loan, Finance Minister Audley Shaw is quoted as follows:

"A credible Revenue Enhancement and Arrears Project (REAP) is now under way to raise at least $3b in additional tax arrears. This is a proactive move to fill a gap in projected revenue shortfall for this fiscal year. We are already beginning to see a reversal of the negative revenue picture which was $3.3b off-target in the fiscal year to July. In August, revenue was $1.6b in excess of target, thereby narrowing the negative deviation to $1.7b. Significantly, the PAYE category to the end of August was up 17 per cent year-over-year - further indication of the economy's return to growth."

Additionally, there are attempts to generate revenues from other sources, as can be seen from the plans to reintroduce a tax on energy drinks. Of course, this discussion has had its fair share of acrimony and there might be still some more to come. It may be the case that Jamaica has bought back the IMF's confidence with some measures aimed at implementing the Fiscal Responsibility Framework. Some of these measures are:

1. Monthly Publication of Tax Waiver Report - Before: no disclosure. Now: full disclosure on www.mof.gov.jm.

2. Prohibition of deferred financing - no more 'hidden' spending.

3. Most parliamentary standing committees chaired by the Opposition.

4. Tabling in Parliament of a Fiscal Policy Paper (five-year expenditure/revenue projections; ceilings on debt/deficit).

5. Tabling in Parliament of a tax-expenditure statement.

6. Parliamentary approval of the Public Bodies Budget (Before: central government only. Now: GOJ departments and agencies.).

These measures are partly in response to the need to rework the Budget (supplementary budget) and are clearly intended to address the IMF's concerns about the Jamaican economy. With the Jamaican Government having implemented these policies and receiving the World Bank loan, cautious optimism can be placed, at least in the short term, on the continuance of the IMF programme regardless of what the outstanding IMF reviews may disclose.

Darron Thomas is an economist. View his research on his SSRN Author page: http://ssrn.com/author=1510887. Email feedback to columns@gleanerjm.com and darron.thomas@gmail.com.