Thu | Aug 17, 2017

Constant Lonkeng Ngouana | Jamaica at a crossroads: leveraging macroeconomic stability for growth

Published:Sunday | September 25, 2016 | 9:00 AM
Constant Lonkeng
Karen Thomas, First Global Bank customer, is excited as she enters the newly reopened Liguanea branch. Welcoming her (from left) are Chad-Paul Priestly, branch manager; Bernadette Barrow, senior vice-president - personal and business banking; and Sonia Beaton Bogle, assistant vice-president - personal and business banking strategy and support. IMF resident representative Constant Lonkeng Ngouana says although Jamaica's macroeconomic situation is improving, access to private credit, from banks and other financial institutions, is still disappointing.
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Only three and a half years ago, Jamaica was on the verge of an economic meltdown - net international reserves were below US$1 billion; the current account deficit was in double digits; public debt was at around 150% of GDP; investor confidence was shaken; and the country was shut out of international capital markets, with looming refinancing risks.

Fast-forward to September 2016, Jamaica's economic landscape looks very different. The current account deficit has shrunk to low single-digit; net international reserves have nearly tripled; public debt, while still elevated, has been placed on a firm downward path; and risks to the public sector's balance sheet have been significantly contained.

Access to international and domestic capital markets has been restored and external sovereign bonds are now trading on par with other emerging markets on the back of several upgrades from credit-rating agencies and record-high investor confidence.

These major gains were achieved through the implementation of a decisive macroeconomic policy adjustment that was supported by the IMF's Extended Fund Facility. It embedded a strong and sustained fiscal consolidation, and a substantial external adjustment, reflecting a more competitive exchange rate and low domestic inflation, supported by low international oil prices. There were major institutional reforms to tackle deep-seated growth bottlenecks. Tax and custom administrations are being revamped to facilitate paying taxes and improve compliance. Meanwhile, financial-sector resilience has been strengthened and the Bank of Jamaica (BOJ) is reforming its monetary policy and institutional frameworks for an eventual move to full-fledged inflation targeting.

 

Challenges Remain

 

Despite these hard-won gains, economic activity has remained sluggish, poverty remains elevated, and unemployment is still high. Growth has underperformed relative to expectations, in part because of unexpected shocks (such as the chik-V outbreak, prolonged drought, and weak global demand), highlighting Jamaica's vulnerability to exogenous factors. Agriculture - a large source of employment, including for the poor - remains at the mercy of mother nature.

Although tourism has been the main source of growth, the globally appealing Brand Jamaica could be better leveraged for growth purposes - tourist arrivals grew by an average 3% per year over the past two decades, only about half of the growth rate recorded in the Dominican Republic. More important, the linkages between tourism and the rest of the economy have remained weak, at best.

On the social side, the Government has consistently sheltered the public social-spending floor from the fiscal adjustment, but there is wide scope for strengthening the design and coverage of the social safety net to ensure that the most vulnerable groups of the population are included in the development process, as envisaged by the Government.

 

Passing The Baton

 

Interestingly, Jamaica has embarked on a journey of moving from a government-led economy to private-sector-led growth. Government net borrowing from the banking system is almost non-existent now, thanks to the central government's near-balanced budget.

The retrenchment of the Government from the financial system, however, is yet to translate into broad-based private credit expansion. Domestic private credit is still only about 20% of GDP (nearly three times lower than domestic public-sector liabilities), one of the lowest among emerging market economies.

Implementation of policies for improved access to finance ought to be an integral part of any private-sector-led growth undertaking in Jamaica.

Decisive policy actions are needed to effect comprehensive public-sector transformation that would sharply improve public-service delivery, remove burdensome red tape, and generate efficiency gains.

This would also provide additional fiscal space for much-needed social and development spending to foster sustained and inclusive growth, shared among all Jamaicans.

 

Addressing Crime, Brain Drain

 

The newly formed Economic Growth Council (EGC) identifies crime as a major impediment to Jamaica's growth - an unsafe environment affects citizens' well-being, imposes a huge cost on businesses, and makes it harder to maximise Jamaica's tourism potential. Containing crime would require an approach to national security that embeds not only a 'corrective arm', but also, and perhaps more important, a 'preventive arm', including through community-based social programmes and a clearly articulated communication campaign.

One of the symptoms of lacklustre economic activity and perceived limited job opportunities in Jamaica is the high propensity of Jamaicans, particularly skilled ones, to migrate - nearly as many Jamaicans live outside of Jamaica as they do in the island.

This brain drain could, in principle, be thought of as an implicit subsidy by Jamaica to migrants' host countries in the form of a highly educated labour force. This poses the dual policy challenge of leveraging the diaspora in the short term (beyond remittances) and maintaining an economic environment conducive to a vibrant labour market that would retain Jamaica's trained labour force within its boundaries over the medium term.

Yet another unique Jamaican brand is the significant ownership, engagement of various stakeholders, and substantial local communication around the Government's reform agenda and its implementation. The Economic Policy Oversight Committee has been actively monitoring the Government's commitments and progress under its reform programme and reporting to the wider public.

This has been an enviable mark of domestic ownership that is being replicated in other IMF-supported programmes (in Grenada, for example).

This model could extend well beyond the IMF's financial engagement in Jamaica, including for monitoring adherence to the country's Fiscal Responsibility Law, anchored around a debt ceiling of 60% of GDP in 2025-26.

Leveraging the tremendous macroeconomic progress over the past few years and overcoming a long history of weak policy credibility provides a golden opportunity to pursue policies that further improve Jamaica's resilience to domestic and external shocks, unlock the economy's growth potential, and promote job creation in a safe and secure environment.

• Constant Lonkeng Ngouana is resident representative for Jamaica (International Monetary Fund). Email feedback to columns@gleanerjm.com.