Collin Bullock | After the extended fund facility?
Dr Bert van Selm, the senior resident representative of the International Monetary Fund (IMF) to Jamaica, recently urged the Government to make a determination as to its programmatic relationship with the IMF following the end of the current extended fund facility (EFF) arrangement in 2017.
A seamless continuation would have required almost immediate initiation of negotiations to allow for board approval of a programme likely to have prior conditions and the specification of ensuing quarterly performance criteria and structural benchmarks starting in June 2017. This call by the IMF resident representative should not be interpreted as indifference on the part of the IMF
It was reported recently that the Government of Jamaica has opted for, or is at least seriously considering, the ending of its borrowing arrangement with the IMF at the expiry of the current EFF. It is understood that the EFF is to be succeeded by a staff-monitored programme (SMP). This concept is quite possibly a creation of the Government of Jamaica following the expiry of its extended fund facility two decades ago. The SMP, like its IMF-conceived sibling, enhanced surveillance, entails the Government designing its own programme, albeit in consultation with the IMF staff, for quarterly monitoring in consultation with the IMF staff.
Personal experience is that IMF staff and board are not perfectly comfortable with this type of arrangement. It still calls for an IMF seal of approval in a context where its leverage regarding design and implementation is diminished. For this reason, the IMF staff is likely to be even more, not less, demanding in attaching its approval to programme design and performance.
In apparent response to the likely termination of the borrowing agreement with the IMF, the co-chairman of EPOC has urged that any successor programme should incorporate the essence of the current EFF. We remind ourselves of the essence of the EFF:
I. Fiscal consolidation (primary surplus target currently 7% of GDP) towards reducing the ratio of debt to GDP to sustainable levels (60%) by 2025-26.
II. Structural reforms to enhance the 'doing business' environment.
III. Strengthening and consolidating the financial regulatory framework.
IV. Enhancing the social safety net to protect the most vulnerable in a context of sharp fiscal consolidation.
The general consensus, including from the IMF staff and board, is that the programme has been effectively implemented, yielding positive results in all the areas listed above with an associated increase in business and consumer confidence. It is worthy of note, though, that at 125%, the debt-GDP ratio is still far from an interim target of 95% for end 2019-20, that growth is lagging, and some structural reforms have been behind schedule.
The Government of Jamaica, in its June 2, 2016, letter of intent to the managing director of the IMF, states:
"The Government remains fully committed to meeting the objectives of the programme, as well as its specific targets."
It is worthy of note that the objectives of the programme extend for another decade as noted above.
While being satisfied with the Government's EFF programme implementation, the IMF staff and board do have some residual concerns. For example, the IMF press release at the conclusion of the May 2016 mission includes:
"Fiscal discipline is critical for further reducing debt and creating space for productive capital spending. Combating crime, reducing the costs of energy and tax compliance, and improving infrastructure are essential to attract private investment. Greater banking-sector competition, reforming financial-sector taxation, reducing collateral requirements, improving credit risk assessment, and developing non-traditional financial services will help improve access to financial services and reduce the interest rate spread."
The IMF board press release, at the end of its conjoint 11th and 12th reviews of Jamaica's EFF, states:
"Concrete reforms are needed to sustainably reduce the government wage bill, which continues to crowd out priority social and infrastructure spending."
The parallel IMF Board Jamaica Article IV review press release cites the board as considering "reducing the wage bill and enhancing public employment efficiency to be priorities".
The release also reflected the board as considering the following macroeconomic risks:
i. Reform fatigue, capacity constraints, and the thin parliamentary majority of the current government could pose challenges to implementing key reforms. Continued sluggishness in growth and job creation may undermine public support for reform and fiscal prudence.
ii. Uncertainty regarding the revenues from the ongoing performance income tax (PIT) reforms and accompanying revenue offsets pose risks to the fiscal position, which may then translate into weaker growth if disappointing revenues crowd out critical capital spending.
iii. Government financing could be challenged by the still fragile domestic bond market, competition from potential corporate issuances, and the reliance on financing from international markets and other IFIs (both of which are dependent on continued strong programme performance).
iv. Growth could also be affected by natural disasters, a worsening of the Zika virus (particularly insofar as it affects tourism), and an economic slowdown in trade partners.
v. De-risking activities from overseas banks may interrupt international financial flows.
The IMF staff appraisal for Jamaica's Article IV review concludes:
"Important risks remain, but continued reform implementation should yield stronger growth and job creation. Risks include reform fatigue and loss of social support for the reform agenda in the absence of stronger growth; capacity constraints; thin majority of the government, which may delay reform implementation; and weak revenue performance, which could undermine fiscal consolidation and raise public borrowing costs.
Notwithstanding those risks, the Government's continued demonstrable commitment to the programme and reform implementation should boost confidence and growth and further buttress fiscal sustainability."
In looking beyond the EFF, pension reform, public-sector reform, and personal income tax reform identify themselves as major challenges. The IMF board and staff have expressed concern about government pensions and the wages bill and their impact on resources for social spending and growth. Concern has also been expressed regarding the certainty of revenue in the second phase of PIT expected to accompany the increase in the PIT threshold in FY 2016-17.
Following the delay occasioned by parliamentary elections, pension reform legislation was expected to be tabled in Parliament by July 2016. Towards the eventual moderation of the wage burden, the IMF has elicited commitments for an action plan for public-sector transformation (to be submitted to Cabinet by September 2016), centralised legal services by March 2017, the specification of timelines for rationalisation of public entities (proposed new structural benchmarks for September 2016), compensation reviews (pilot to be completed by November 2016 and total by March 2017), and a commitment for the public-sector wage bill to be reduced to 9% of GDP by 2018-19.
The specification and timing of new structural benchmarks and commitments to structural reforms gives every indication that there was anticipation of a successor programme within the medium-term commitment to debt sustainability. These benchmarks and commitments would have created the basis for specification of prior conditions and the framing of quantitative targets and structural benchmarks for an ensuing programme flowing seamlessly from the current EFF.
Having an SMP or enhanced surveillance will not avoid the concerns raised by the IMF and Jamaica's stated commitment to medium-term debt sustainability. It would represent a palpable loss of credibility on the part of the IMF staff and board should they countenance any arrangement that does not address their technical concerns and judgement.
As stated above, any SMP would require an IMF seal of approval, not only for the IMF itself, but also to facilitate loan and grant financing from the World Bank, the Inter-American Development Bank, the European Community, the Caribbean Development Bank, bilateral development partners, and international financial markets. Indications are that negotiations for this essential seal of approval outside of a formal borrowing arrangement could be no less demanding than negotiation of a formal borrowing agreement itself.
So why not a formal successor-borrowing agreement? Could it be that the IMF is perceived to be too rigid and anti-growth? Is there an expectation that jettisoning a formal borrowing agreement will give the Government more flexibility with public-sector employment, social spending, and growth enhancement? Is it to create a perception (if not illusion) of greater policy independence?
Given the written commitments of the Government of Jamaica and the recorded perspectives of the IMF staff and board, positive answers to these questions do not make sense. On the growth issue, the common diagnostic focuses on social and institutional constraints, including crime, implementation capacity, public-sector inefficiency, low and declining factor productivity, and weak transmission through the banking system. The programme and its adjustment have allowed for increased government capital expenditure.
Given the substantial policy challenges heralded for the next financial year, including pension and public-sector reform and financing the second phase of the PIT threshold reduction, it is not clear why Government would avoid the benefit of the strong institutional support of a continuing-borrowing agreement, while placing at risk its reputation for commitment.