Supply-side reforms needed to create jobs
Despite again commending Jamaica for the progress it has made under the extended fund facility, the International Monetary Fund (IMF) is still not satisfied that enough has been done to spur growth and reduce poverty and unemployment.
"Growth is low, poverty and unemployment are high, and crime and security challenges impose a serious drag on growth," said Tao Zhang, deputy managing director and acting chair of the IMF, following the executive board's approval of a three-year standby arrangement for Jamaica to support the authorities' continued economic reform agenda.
According to Zhang, "supply-side reforms are critical to unlock Jamaica's growth potential and create more private-sector jobs. In this context, every effort is needed, in collaboration with development partners, to execute the structural growth reforms recommended by the authorities' Economic Growth Council."
Supply-side policies are mainly microeconomic policies aimed at making markets and industries operate more efficiently and contribute to a faster growth rate.
Supply-side economists argue that growth can be most effectively created by investing in capital and lowering barriers on the production of goods and services. The result, they suggest, is that consumers will benefit from a greater supply of goods and services at lower prices, investment and expansion of businesses will increase the demand for employees and, therefore, create jobs. Typical policy recommendations of supply-side economists are lower marginal tax rates and less government regulation.
Zhang also suggested that "resources will have to be redirected to combat crime and ensure national security", noting that "easing of growth bottlenecks will facilitate a stronger private sector job creation, as the government refocuses and streamlines its role".
The IMF executive said "the authorities' commitment and commendable track record, together with continued broad-based support for the reform agenda, should help foster its successful implementation."
Emphasising that a renewed focus on growth and job creation is needed, Zhang said the new precautionary standby arrangement aims to sustain the macroeconomic stability, while boosting employment, raising the living standards of the Jamaican people, and progressively reducing a poverty level that remains too high.
The main pillars of the programme are to better support growth, jobs, and social protection, including by improving public- sector efficiency, rebalancing from direct to indirect taxes, strengthening the social safety net, and reallocating public resources to growth-enhancing capital spending;
It is also expected to further reduce public debt by maintaining a primary surplus at seven per cent of gross domestic product for the duration of the new arrangement.
Under the standby arrangement, the government is also expected to modernise the monetary policy framework and build the foundation for an eventual move to inflation targeting, while maintaining exchange rate flexibility and continuing to build precautionary reserves, as well as bolster the resilience of the financial system.
Key reforms include strengthening the operational autonomy of the Bank of Jamaica, refining the monetary policy signalling and liquidity provision framework, and improving macroeconomic modelling and forecasting.
"Toward this end, the authorities are committed to maintaining exchange rate flexibility and continuing to build international reserves through market-based purchases of foreign exchange. Furthermore, concrete steps will be taken to further enhance financial-sector resilience and promote greater access to credit and financial inclusion," said Zhang.
Among the main quantitative performance criteria under the standby arrangement are floors on the primary balance of central government, which the IMF defines as total revenues minus primary expenditure and covers non-interest government activities as specified in the budget. The target for December 2016 is $54 billion, according to the Bank of Jamaica quarterly monetary policy report.
It also includes a floor on the overall balance of the public sector - central government and public bodies, the latter institutional units that are themselves government units or are controlled, directly or indirectly, by one or more government units.
The performance criteria also include ceilings on contracting of new central government-guaranteed debt and the accrual of domestic and tax refund arrears, as well as a continuous quantitative performance criterion on the non-accumulation of external debt payment arrears.
It also comprise indicative targets on spending on social programmes and tax revenues, both floors, and a ceiling on the total loan value of user-funded public-private partnerships.
On Monday, Bank of Jamaica Governor Brian Wynter said the new standby agreement was significant in that it provides "powerful additional assurance to prospective investors that, without adding to the debt burden, a very substantial cache of resources is available to the country from the IMF in the event that it is needed".
He said that begins with immediate access to US$411.9 million of the US$1.64 billion approved, "now available at our sole discretion", he said.