Mon | Sep 25, 2017

Support for reforms will falter without strong growth - IMF

Published:Wednesday | June 24, 2015 | 6:00 AMMcPherse Thompson
Businessman going up a chart representing growth and success.

Social support for reforms under Jamaica's economic support programme with the International Monetary Fund (IMF) and the tight fiscal stance being undertaken by the government may falter without a significant movement in economic activity.

Despite improved business and consumer sentiments, concrete evidence of a robust growth pickup is yet to be seen, the IMF said in approving the eighth review under the extended fund facility this week.

"Although risks to the programme are slowly receding, they remain high," the IMF said, adding, "without stronger economic activity, social support for the demanding reform programme may falter".

It added that external financial flows could be affected by exogenous shocks, notably higher United States interest rates or changes in PetroCaribe flows.

"Continued weakness in budget revenue could jeopardise the sustainability of the fiscal consolidation over a longer horizon. Vulnerabilities in the financial system are temporarily elevated due to the securities dealers sector transitioning to a new business model and the domestic government bond market remaining frozen," it said.

In its Spring 2015 economic update subtitled Jamaica: Sustained Adjustment, Fragile Recovery, released last week, the World Bank said that while the US$800 million sovereign bond issue in 2014 re-established access to international debt markets, the government remained locked out from internal financing as the market for government paper continued to be frozen.

However, it said that as risk spreads continues to decline and the IMF programme progresses successfully, it is expected that the domestic bond market would become active again.

The World Bank also noted that the government continues to benefit from a parliamentary majority, but the impact of difficult reforms is beginning to take its toll.

It said the People's National Party's (PNP) previously strong approval ratings have eroded amid fiscal austerity, a weak economy, high unemployment and steep crime rates.

"The opposition Jamaica Labour Party has benefited as evidenced by a strong lead in public opinion polls," the World Bank said.

"However, internal party issues may prevent it from sustaining this lead in the run-up to the next elections, due before end-2016. The PNP administration may be forced to increase social spending before the elections, despite its commitment, so far, to an austerity programme," it added.

In its outlook for Jamaica, the World Bank said that even though real gross domestic product (GDP) growth was low in 2014/15, the transitory nature of the drought the island experienced last year implies that growth could pick up to 1.5 per cent in 2015/16.

Growth, it said, will be driven by private investment, increased dynamism in the export sector and some increase in private consumption as business and consumer confidence rise with each successful review of the IMF supported programme.

As fiscal space is regained, more expenditure could be targeted towards capital accumulation, yielding higher growth in the medium to long term, the bank said. Lower oil prices and the recovery of the United States economy will also help Jamaica grow in the medium term, it said.

The World Bank said Jamaica's growth outlook would largely depend on the country's ability to remain on track with its structural reforms which, coupled with continued progress under the IMF-supported programme, would help attract the lumpy infrastructure investments needed to support the logistics hub initiative, the government's key growth programme.

Reforms that would reduce the regulatory constraints to investment, while strengthening competitiveness and improving transparency, would go a long way to help secure those deals, the bank said.

Noting that global developments, including the recent decline in the price of oil, will have a mixed impact on the local economy, the bank said, in the medium term, the recovery of the United States economy will imply higher demand for Jamaican exports.

However, an increase in United States interest rates could divert capital flows to developed economies and possibly reduce financing available for Jamaica as investor appetite for emerging market debt decreases.

The bank said Jamaica's growth forecast is subject to considerable risks. A key challenge, it said, is to generate sufficient growth to more than offset the contractionary impact of the ongoing fiscal consolidation.

Fiscal consolidation, in turn, needs to rely more on revenue generation which has been difficult in a low-growth environment.

The World Bank said continued expenditure restraint will become difficult, especially as the 2016 election deadline approaches.

Jamaica's large amortisation needs - averaging about US$1.4 billion, annually, between 2017/18 and 2019/20 - create significant refinancing risks and necessitate continued strong access to international and domestic capital markets, the latter remaining frozen since the domestic debt exchange in 2013.

mcpherse.thompson@gleanerjm.com