IMF warns against reform fatigue
McPherse Thompson, Assistant Business Editor
Recent data suggest that a gradual economic recovery is underway in Jamaica, but risks to the four-year programme with the International Monetary Fund (IMF) remain high because of, among other things, the possibility of reform fatigue.
The Jamaican Government has committed to implementing various reforms under the economic support programme.
However, according to the June 2014 IMF country report on Jamaica, "officials were concerned about the society's capacity to absorb ongoing painful reforms, including exchange rate depreciation, without tangible benefits becoming manifest in the form of jobs and income growth."
The report said investor confidence "is frail as doubts remain about the efficacy of the various adjustment efforts, financing constraints, and possible reform fatigue."
According to a joint study undertaken by the research department of the Inter-American Development Bank and the Federal Reserve Bank of Atlanta, the sustainability of reform will hinge on the beliefs and attitudes of the main players: voters, policymakers, opinion leaders and the international community, noting that reform fatigue refers to the lack of public support, the loss of confidence in the benefits of reforms and/or a less pro-active stance towards reform.
The IMF report noted that the slow recovery of economic confidence risks also delaying the return of liquidity to the debt market.
On the fiscal side, weak revenues, a deteriorating performance by public bodies, or a disruption in external financing, including PetroCaribe financing by Venezuela, all represent risks that could strain public finances and derail debt reduction, it added.
The report said the public debt outlook could also worsen as a result of less favourable financing terms.
In a risk assessment matrix, in which the main threats are listed and assigned from medium to high, the probability of their realisation and their expected impact if realised, IMF staff said Jamaica remains vulnerable to natural disasters, lower partner-country growth and oil price shocks, as well as the economic drag of pervasive crime.
"Failure of Jamaica's reform effort could have serious adverse regional repercussions, including through financial linkages. The main economic channels would be through financial sector entities that are also located in other Caribbean islands, and through holdings of Jamaican Government bonds. Trade linkages are limited," the report said.
Failure of Jamaica's programme could also undermine traction within the region of fundamental economic reform, it added.
"The authorities broadly shared the IMF staff's view on the economic outlook and risks," the report said.
At the same time, and notwithstanding their unwavering commitment to implementing the programme, officials were concerned about the society's capacity to absorb ongoing painful reforms.
They also highlighted the administrative and legislative capacity constraints to reform, which had already resulted in minor delays.
Finally, they stressed the difficult trade-offs between the pace of fiscal and external adjustment and the space for supporting domestic demand, particularly through delaying needed public investment.