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Fiscal rule legislation ...

Published:Wednesday | August 6, 2014 | 12:00 AM

Drought insignificant to trigger escape clause

McPherse Thompson, Assistant Business Editor

The fiscal impact of the current drought in Jamaica at this time is not significant enough to be considered a major adverse shock to trigger the escape clause in the fiscal rule, the Ministry of Finance and Planning said.

As part of its four-year agreement with the International Monetary Fund (IMF), the government passed legislation in Parliament in March this year entrenching the fiscal rule.

The regime is meant to impose financial discipline in the Government, including a commitment to reduce the country's debt ratio.

The legislation includes, among other things, an escape clause limited to major adverse shocks, including natural disasters that could have a serious impact on public finances. The projected fiscal impact of the adverse shock would need to exceed 1.5 per cent of gross domestic product before it can be activated by Parliament.

The Ministry confirmed on Monday that natural disasters in the context of the fiscal rule include drought and wildfires which are known to cause economic damage and loss of lives.

However, although Jamaica has been experiencing abnormally low rainfall in the last few months, leading to a shortage of water; and parched areas have triggered bush and farmland fires, the ministry said the "fiscal impact of the current drought at this time is not significant".

The drought has also driven up food prices, which could impact the Government's policy to further drive down inflation. The inflation target for fiscal year 2014-15 has been revised down to eight per cent, with projections for a gradual further reduction over the period of the IMF programme and beyond. The latest IMF country report on Jamaica, dated June 2014, emphasised that the Bank of Jamaica has been pursuing a tight monetary policy to contain inflation.

However, the drought notwithstanding, acting minister of agriculture, Derrick Kellier, has assured consumers that there is no need to panic because despite islandwide reports of a pending food shortage, depressed agricultural production has not reached crisis levels.

He urged consumers to refuse to purchase goods at unreasonably high prices and to use their skills to substitute other foods for ground provision which were in low supply.

The IMF country report does not specifically mention the types of natural disasters which would be subject to the escape clause in the fiscal rule.

However, while noting the improving outlook on the Jamaican economy, and that the steadfast implementation of planned policies will support a gradual economic recovery, the IMF pointed out that one of the most important downside risks to the programme was that the country remained vulnerable to natural disasters.

In a risk assessment matrix, the IMF staff considered the likelihood of the realisation of natural disasters as 'medium', indicating a probability between 10 and 30 per cent of it materialising because of the prevalence of weather-related disasters in Jamaica.

They also assess as 'medium' the expected impact if the threat is realised, noting that strong storms can cause serious damage and entail important fiscal costs.

Jamaica has so far not been affected by any natural disasters this year.

Bertha, the second hurricane of the 2014 Atlantic season, which runs from June 1 to November 30, was headed out to sea and away from the United States yesterday.

It started as a tropical storm, was upgraded to a category one hurricane on Monday and later downgraded.

On Sunday, rain and winds from the storm affected some Caribbean islands, including The Bahamas, the Turks & Caicos Islands and the Dominican Republic, where it caused temporary evacuation of some families. Earlier, Bertha dumped rain on Puerto Rico, which has been affected by unusually dry weather.

The first hurricane of the season was Arthur, a category two at its peak, which hit North Carolina, United States in early July.