Karim Youssef and Bas Bakker | Securing Jamaica’s economic independence and future

The COVID-19 shock has hit Jamaica hard. A sudden stop in tourism generated a large economic contraction in fiscal year 2020-21. Economic output, or GDP, declined by about 10 per cent – the deepest recession for Jamaica.

But this crisis has also been different from previous ones because it has not also precipitated a fiscal or balance-of-payments crisis. On the contrary, whereas in previous crises the Government had to cut back on spending because no financing was available, this time, the Government was able to increase support to the population. If the COVID-19 shock had been combined with a fiscal crisis, a sharp depreciation of the exchange rate, and high inflation, the crisis would no doubt have been much worse for Jamaica and Jamaicans.

Why has this crisis been different? Because of years of reforms and policy adjustment in the decade before COVID-19 hit and an appropriate policy response to the crisis itself. The recent clearing out of gulleys will help Jamaicans avoid flooding when a ‘once in a lifetime’ hurricane hits. A similar ‘hardening’ of the economic policy infrastructure and institutions has allowed Jamaica to weather the metaphorical COVID storm without a large exchange-rate depreciation, banking problems, or a financial crisis.

The reforms took place in the context of several IMF-supported programmes, the latest of which was completed in November 2019, and have continued since. The reforms have focused on restoring the health of Jamaica’s public finances and boosting the capacity of economic policy institutions to deal with shocks. These reforms had strong ownership by Jamaica across three administrations, reflecting a broad-based appetite of the Jamaican people to see continued improvements in Jamaica’s economic policy infrastructure and institutions.

Many reforms were passed. To name but a few: a fiscal responsibility law was adapted, and legislation was passed to establish an independent Fiscal Commission. The Bank of Jamaica was also made independent and modernised with a mandate focusing monetary policy on delivering price stability, thereby allowing a flexible Jamaican dollar exchange rate to act as an important shock absorber.

The reforms worked: pre-pandemic, poverty rates were trending down, and unemployment had reached an all-time low. Government divestment of assets was opening new opportunities for private investment. Public debt fell precipitously, from 145 per cent in 2013 to 94 per cent in 2019. Without the pandemic, it would likely have declined further to 60 per cent in 2025-26.

The reforms also created buffers. With a much-reduced debt and a large primary surplus, there was scope to react to the COVID-19 emergency by temporarily increasing expenditure. Jamaica launched a timely and well-targeted response to the COVID-19 pandemic, with measures to support jobs and provide resources to vulnerable segments of the population. This helped minimise the loss of human life, supported livelihoods, and is aiding in preparing for the recovery.

RAPID FINANCING

The emergency package was partly financed by lowering the primary surplus. This was not in violation of the fiscal responsibility law. The legislation has an escape clause: in the event of large shocks, the primary surplus target can temporarily be lowered.

In May 2020, Jamaica drew on the International Monetary Fund’s Rapid Financing Instrument – emergency loans that were created precisely for situations like this. The RFI helped catalyse additional support from other international financial institutions and development partners.

The Bank of Jamaica helped ensure financial stability during the crisis. It boosted systemic liquidity, maintained an appropriately accommodative monetary policy stance.

As the crisis recedes, the temporary deterioration of the public finances needs to be rolled back, and future budgets will necessitate higher primary surpluses, relative to FY2020-21. One reason for this is that this is required by the fiscal responsibility law.

To ensure that the temporary use of the escape clause does not lead to a permanent deterioration of the public finances, the legislation also has a subsequent correction mechanism. What this means in practice is that the target date to bring Jamaica’s debt down to 60 per cent of GDP has not been abandoned but has only been shifted back by two years, from FY2025-26 to FY2027-28.

But it is also important because the public debt ratio has increased to 110 per cent of GDP in FY2020-21. This leaves few buffers to deal with any potential new shocks. Rebuilding buffers is important because there is a perennial risk of natural disasters for Jamaica, and as the COVID-crisis has demonstrated, we never know when a new crisis will materialise.

Of course, Jamaica also needs to increase growth. Even excluding the COVID crisis, growth has averaged only 1.3 per cent over the 15 quarters prior to the COVID-19 pandemic outbreak. True, this is an improvement on the long-term average quarterly GDP growth of 0.6 per cent since 1997, but it is still far too little. Why growth has been so low is not an easy question to answer, but it is likely that several factors play a role, including low human capital, high crime, and weak infrastructure.

PRIORITIES AND FISCAL SPACE

The Government can help boost longer-term growth. Not by increasing overall expenditure. There is simply no scope to do so: Jamaica’s public debt is still too high to allow for higher deficits. But a refocusing of expenditure, spending more on items that help boost long-term growth, and spending less on others, will help.

What are the priorities? Improving education and training, reducing crime, upgrading infrastructure, increasing digitalisation of the economy, shifting towards renewable energy sources, boosting access to finance, and continuing to build resilience to natural and health disasters.

Closing the skills gap through education and training will help boost productivity (which has been falling in the last few decades) and create opportunities for a more diversified economic structure – which has thus far eluded Jamaica.

Reducing crime through both prevention and suppression efforts will not only lower the very high vulnerability to crime amongst Jamaica’s youth. It will also help bring down public and private security costs – a ‘crime tax’ – which are estimated at 4.0 per cent of GDP. Reducing the crime tax would boost profits and investment.

Upgrading weak road and water infrastructure would help increase agricultural resilience and growth by mitigating the effects of frequent heavy rain and drought conditions on agricultural output.

In short, going forward, Jamaica should focus both on how much it spends and what it spends. The overall envelope is set by the target of bringing debt ratios down to 60 per cent of GDP. Within the envelope, spend more on areas that foster long-term growth. Completing public-sector and public-compensation reforms would create room to do so. Bringing down the debt, which would lead to lower interest payments, will further help.

- Karim M. Youssef is the IMF Resident Representative for Jamaica.kyoussef@imf.org

- Bas Bakker is the IMF Mission Chief for Jamaica.bbakker@imf.org