IMF open to new standby agreement with Jamaica

Published: Friday | February 18, 2011 Comments 0

● Warns of legal sanctions if programme derails

● Defends unused US$950m rescue fund

Lavern Clarke, Business Editor

THE TOP two technocrats that interface between Jamaica and the International Monetary Fund (IMF) are backing the Golding administration's moves toward a pro-growth programme, a direction that implies some amount of new spending; but are holding back on a full endorsement until the policies are crafted to match the rhetoric.

Dr Trevor Alleyne and Gene Leon have signaled that they expect any additional spending to be smartly targeted at prodding aggregrate demand, but would also want a clear demonstration of offsets that maintain performance targets under the standby agreement.

Leon says Jamaica faces "a terminal-point problem" - meaning that there are certain targets it is legally obliged to deliver on over the medium term - but said the IMF programme does allow for spending on growth-oriented activity.

The IMF, however, is clearly unenthused by infrastructure spending and transport and has suggested the postponement of yet another road project, the Palisadoes Highway and some recurrent spending cuts for training, advertisements and travel.

"If growth is the big question, it is how you channel spending to [spur] growth activity," said Leon, the senior IMF country representative in Jamaica.

Jamaica has completed one year of the 27-month US$1.27-billion IMF loan programme, which commenced February 4, 2010, and while Leon and Alleyne are buoyed by stability in the financial system and other signs of recovery, they say structural defects remain.

They refused to comment on Jamaica's December-quarter performance, saying that was not the focus of the current mission, and absent a new forward-looking plan from the Jamaican Government, which was still outstanding.

Still there were some signals that the Fund is not as encouraged by the current data as in previous periods. The economy continued to contract in September and December, while the standby agreement had been crafted initially on expectations of GDP expansion, even if on a limited basis.

Leon said "almost every" conditionality had been met, but noted the IMF technical staff were still poring over the year-end data.

"Certain structural benchmarks envisaged have been delayed somewhat, but they have been brought up-to-date since January," added Alleyne, the Caribbean II IMF division chief and head of mission to Jamaica. "The next stage is to see how they will be folded into the programme going forward."

Delays identified in the September quarter IMF staff review of Jamaica include a public employment and com-pensation reform plan, amended financial legislation and regulations, costing of the different reform pro-grammes, and the failure to finalise recruitment of a resident technical financial adviser and project manager to work with the finance ministry over 1-2 years.

Of the 43 structural agenda items under the Medium-Term Economic Framework (MEFP), 23 have been met; 16 were in progress; 3 delayed; and one, the hiring of the technical adviser, was unmet.

Alleyne said the IMF was open to renegotiating the current standby agreement, if asked, saying the country would likely need additional support, ostensibly beyond the agreement's 2012 end date, which coincides with a new election cycle.

Wek spending control

The latest IMF Staff Report prepared on December 28, but released publicly just this week, itemises off-budget expenditure equivalent to 1.4 per cent of GDP and knocks the Jamaican Government for lax spending.

"In a number of cases, the emergence of spending pressures reflected weak enforcement of spending-control policies in government agencies and less than effective early-warning mechanisms for detecting emerging pressures," the report said.

Unbudgeted spending amounted to 1.4 per cent of GDP, including losses from Clarendon Alumina Production, the acquisition of 100 buses, the fallout from Tropical Storm Nicole, and the state of emergency triggered by the west Kingston incursion. Nominal GDP was assessed at J$1.23 trillion.

Leon warned on Wednesday that flaunting of targets in the short term, will only lead to stronger adjustment down the line.

But the IMF, too, appears to have made at least one misstep. A US$950-million Financial Sector Support Fund (FSSF) that it included in the programme to cushion the sector from JDX and reform shocks was found to be unnecessary.

The JDX, which lowered interest rates and bent the yield curve on government debt, has depressed net interest income on financial institutions' income statements, and investment income of institutional investors, and was identified as being responsible for 2.8 per cent contraction in financial GDP in the September quarter.

But the effects were not sufficient to drive companies to the central bank for bailout cash.

The proceeds of the FSSF, on which Jamaica will have to pay interest, are now officially treated as a buffer to the country's foreign gross reserves.

Asked by the Financial Gleaner how the IMF could have got it so wrong, Leon and Alleyne said the FSSF had been important for psychological reasons and served its purpose as a booster of confidence in the financial markets at a time when institutions were concerned about the pending bond-exchange programme executed February 14, 2010.

"That was the thinking," said Alleyne. "We wanted to have enough resources available that would inspire confidence in the system."

In that regard, the IMF did not get it wrong, he countered. "I take the opposite view," the mission chief said. "We wanted to bring sufficient force to accommodate any eventuality."

Alleyne argues that having the FSSF in place served to "reduce the probability" of fallouts in the system.

It was put there as "insurance, a cushion", added Leon - to be used if needed.

Alleyne leads an IMF mission to Jamaica this week for talks with the finance ministry on economic policy initiatives and parameters for the upcoming 2011-12 budget.

He told the Financial Gleaner that the IMF expects Jamaica to demonstrate an appreciation for continued adherence to fiscal discipline.

The new central treasury management system under construction partially addresses that issue, but more importantly, he said, a commitment to fiscal discipline requires the Government to rein in its budget officers and other officials so they can no longer authorise spending not previously accommodated in the country's budget

On Wednesday, midway through the talks, which began February 14 and closes today, Alleyne said at a media briefing it has hardly been reported to now that Jamaica does face legal impediments if it fails to meet its obligations under the medium-term programme, ending 2016.

Jamaica has been set a host of targets linked to inflation, debt ratio, tax and financial reform, fiscal discipline, and more.

"Sanctions are on the broader targets, but we are trying to ensure that we don't reach that stage," Alleyne told the Financial Gleaner.

The answer, he said, is to add "accountability provisions" to the medium-term fiscal accountability framework, which were never included in the programme. Jamaica is currently drafting the new provisions, he said.

The IMF also remains concerned about blockades in the system that limits access to credit and portability of loans.

"We want to see policy articulated that identifies the key impediments to growth and clear policy interventions that address them."

He knocked Jamaica's focus on infrastructure as stimulative activity for the economy, saying faster travel time and highways "can't be the only thing" driving growth.

Crime has been identified as a top impediment to business activity, and there are signals that the IMF is sympathetic to social spending inside poverty-stricken and even violent-prone areas, a position that appears to have cemented with the fallout from the west Kingston clash over strongman Christopher Coke's extradition. That cost Jamaica 0.1 per cent of GDP, according the IMF's December 28 report.

Alleyne said the IMF was, on its own volition, studying Jamaica's bank spreads and the underlying causes; but he notes the financial authorities must look at stamp duties, transfer taxes and other transaction fees that add to the cost of money and limit commerce.

The IMF will visit again in March to finalise the 2010 year-end review.

lavern.clarke@gleanerjm.com


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