World Bank to Jamaica: Ease austerity, provide space for more public investment
World Bank to Jamaica ...
Ease austerity, provide space for more public investment
Assistant Editor - Business
After two years
of successful macroeconomic stabilisation and structural reforms, the Jamaican Government may wish to consider easing austerity measures to generate the necessary fiscal space for increased public investment, the World Bank has suggested.
However, it said a key challenge will be to ensure that the public investment programme is well prioritised and managed, so that an expanded investment portfolio produces the desired economic impact.
In its fall 2015 economic update on Jamaica, the World Bank noted that the need to maintain "an extremely high primary fiscal surplus" precludes investment above a certain threshold, limiting the Jamaican Government's ability to implement vital infrastructure projects that could increase the country's competitiveness and attract further private investment.
At the same time, it referenced a number of countries where, it said, public investment in infrastructure has had a direct effect on private-sector productivity and technological progress.
However, it observed that research highlights the crucial importance of expenditure efficiency, as higher rate of public investment are likely to result in higher debt-to-gross domestic product (GDP) ratios in developing countries.
It was in that context that the World Bank said a programming exercise examined medium-term macroeconomic scenarios in Jamaica to determine whether it is possible to accelerate real GDP growth by increasing capital investment above what is
currently envisioned in the Government's strategy, while achieving a similar or even
deeper reduction in the debt-to-GDP ratio.
The exercise takes fiscal year 2015-16 as a base year and projects the evolution of key macroeconomic variables through fiscal year 2020-21.
The baseline scenario reflects the Government's current fiscal adjustment programme, which targets a steady decline in the debt-to-GDP ratio to about 90 per cent by fiscal year 2020-21.
The bank said the programming assumptions are aligned with the policies set out in the Government's Fiscal Policy Paper 2015-16 and the International Monetary Fund (IMF)-supported programme.
It notes, however, that while its baseline scenario assumptions are informed by the IMF's ninth review of the Extended Fund Facility with Jamaica, the exercise is not meant to reproduce the fund's macroeconomic projections.
Under the baseline scenario annual real GDP growth rate would rise gradually from 1.4 per cent in fiscal year 2015-16, to 2.7 per cent in fiscal year 2020-21.
Over the same period, tax revenue would remain constant at around 26.5 per cent of GDP, budgetary expenditures would decline from 27.9 per cent to 25 per cent of GDP, and the central government's primary balance would remain above seven per cent of GDP.
"This would constitute an austere approach to budget management primarily focused on reducing the debt stock," the World Bank said.
Alternatively, it said, the Government could leverage the success of its reforms over the past two years to create additional fiscal space for growth-enhancing investments.
That strategy could also support a decline in the debt ratio, but would be contingent on achieving higher growth rates.
In this scenario with higher rates of public investment, annual real GDP growth rate would rise gradually from 1.4 per cent in fiscal year 2015-16, to 4.5 per cent in fiscal year 2020-21, well above the baseline projection of 2.7 per cent.
As a result, real GDP growth would average 2.9 per cent over the projection period, up from 2.4 per cent in the baseline. The fiscal accounts would remain broadly similar as a share of GDP. Increased public spending would be partially offset by higher revenues, slightly reducing the primary surplus to an average of 6.8 per cent of GDP over the medium term, said the Washington, DC-based international financial institution.
According to the economic update, the findings of the programming exercise indicate that policymakers may be able to effect a reduction in the debt-to GDP ratio by carefully balancing the focus on fiscal contraction with higher public investments that can catalyse private investment to achieve higher growth.
"Ceteris paribus, reducing the debt-to-GDP ratio through higher growth offers a number of important advantages, especially in terms of its impact on poverty reduction and shared prosperity," the World Bank said.
"After two years of successful macroeconomic stabilisation and structural reforms, the authorities may wish to consider easing austerity measures to some extent in order to generate the necessary fiscal space for increased public investment, while continuing to enhance expenditure efficiency," it added.
The World Bank - from which, along with the Inter-American Development Bank, more than US$1 billion of loan support was expected with the approval of the IMF agreement in May 2013 - said Jamaica's current strategy of expenditure-side fiscal adjustment has yielded important benefits, restoring its ability to access commercial markets and mitigating macro-fiscal volatility.
Nevertheless, the potential benefits of accelerated growth through increased investment are considerable, it said. According to the Government's own estimates, the successful implementation of projects already identified in its March 2015 Growth Agenda Policy Paper could boost the GDP growth rate to over three per cent in fiscal year 2016-17.
"If these investments were complemented by further structural reforms to improve the business climate and continued macroeconomic stability, they could help to create a virtuous cycle of growth and debt reduction," said the economic update.
"However, ensuring that increased public investment translates into accelerated growth will require the efficient selection and prioritisation of public investments, access to financing on reasonable terms, and substantial project implementation capacity, as well as a supportive external economic environment," the World Bank concluded.