Several years ago when this Administration completed its last
Extended Fund Facility (EFF) with the IMF we decided that, despite having no borrowing
relationship with that institution, we would seek to develop and adhere to our own
medium-term macro-economic targets.
As such, each year in my budget presentation, apart from identifying
targets for the fiscal year, we would also present targets for the following two years
– in other words a three-year programme. It was because of that approach why it was a
relatively straightforward matter for us to develop a programme three years ago, which was
endorsed by the IMF staff and became the SMP. That SMP was the basis on which the World
Bank, the IDB and the CDB provided us with loans totalling US$325 million to assist in the
resolution of the problems in the banking sector.
I wish to briefly speak to two issues. One, the fact that we do not
always make the targets which we have established and second, our future relationship with
the multilateral creditors given a recent decision taken by the IMF about SMP’s, in
general.
In terms of the targets, I have heard comments made of the fact that
over the years, several have been missed. Whilst such comments are useful for scoring
political points, it really does not do justice to the complexity of trying to manage a
small open economy where there are factors totally outside of the control of any
government, which can, and do, radically change the performance of various economic
sectors.
We have our own recent experiences where the performance in bauxite
and tourism or even in domestic agriculture can be radically changed by factors over which
one has no control. However, even if we were to look at the major economies of the world,
the divergence between actual performance and targets is nothing unique to Jamaica, and in
recent years there have been virtually quarterly revisions by the US Government of its
economic performance targets as unexpected changes take place in the macro economy.
Nonetheless, we keep aiming to do better and as we have been able to
demonstrate in several areas, that of inflation control being one prominent example, our
local technicians have the capability which we can rank with performances anywhere else
internationally.
Let me now turn to the issue of the decision by the IMF to terminate
the use of the Staff Monitored Programme. Mr Speaker, if I may, I should indicate that the
Staff Monitored Programme grew out of the recognition by the IMF that there were several
member countries in good standing, which had no need to enter into borrowing arrangements
with the institution, but wished to have the IMF staff give a formal public assessment of
their macro economic programme.
Such programmes were not IMF programmes per se but were
designed by the individual countries, assessed by the IMF staff and judged to be
technically sound. These programmes did not have to be approved by the IMF Board and there
were no formal "tests" which the country had to pass. In any event, there could
be no punishment for failure as there were no loans associated with the programmes.
I do not wish to go into the details of the deliberations at the IMF
Board about the usefulness/validity of the SMP. However, there are some observers who feel
that the decision of the Board to discontinue use of this programme was due to the fact
that SMPs excluded members of the Board from actual participation in assessing the
performance of countries (the interaction was between staff members and the Governments of
the individual countries).
It was within this context that the decision was taken to terminate
the SMP as an official programme of the fund. Unfortunately, and rather surprisingly, this
decision to terminate SMPs was taken even before any new programme to replace it was
developed. I have had occasion to say before, and I wish to repeat today, that the
IMF’s decision to end the SMP as an official programme of the Fund had nothing to do
with the Jamaican case. I know we think that we are "broad" internationally, but
in this case we were not the causal factor.
That aside, the fact still remains that there is a place for a
programme such as the SMP whereby a non-borrowing member of the Fund could have an
assessment by the Fund of its macro-economic programme. This is of benefit in a variety of
ways. In our instance it has assisted us not only in terms of the loans from the World
Bank, the IDB, and the CDB – our normal multilateral partners but also in terms of
bilateral partners who would wish to have some definitive assessment of our macro-economic
programme from the IMF.
The Government of Jamaica is indeed concerned about the decision to
terminate SMP programmes prior to the development of an adequate replacement and I would
like to indicate to this Honourable House that we are seeking to be involved in the
dialogue with other countries and with the Fund itself in terms of an adequate
replacement. We naturally, have a vested interest.
In fact immediately after the conclusion of this debate, I will be
visiting Washington to meet with the multi-laterals. High on the agenda of issues, which I
intend to discuss with the officials of the Fund are possible alternatives to the SMP.
In terms of the medium-term programme for the period fiscal year
03/04, 04/05 and 05/06, let me begin by repeating the outturn in major areas for 02/03.
For GDP for the fiscal year there was GDP growth of 1.7%; inflation for the fiscal year
was 6.2% - the seventh consecutive year where inflation has been below 10%; the fiscal
deficit as a percentage of GDP was 7.7% and the debt to GDP ratio was 151.8%.
The targets for the medium-term have been laid out but I wish to
draw particular attention to the three which are of greatest importance. The first relates
to the reduction and then elimination of the fiscal deficit within a three-year period.
The target for this fiscal year 03/04 is to bring the deficit down
from 7.7% of GDP to between 5% and 6% of GDP. This is a major undertaking but as I have
indicated before, it is one which the country must achieve, not only to restore
credibility with our creditors, but also to put the Government in the position to respond
more fully to the real needs of the country.
I believe that attainment of this target, regardless of the
domestic developments, regardless of international uncertainties, will be the signal test
by which the country will be judged domestically and internationally. We cannot afford to
fail in this endeavour.
The second critical target to which I wish to draw special
attention relates to the debt to GDP ratio. As at March 31, this ratio was 151.8% of GDP.
Although this ratio is unacceptably high, it is far from being the worst we have
experienced. In fact, over the five-year period, 1983-1987, the lowest point for this
ratio was 167.7% (1987). The highest was 216% in 1985.
There has been a great deal of debate about the need to "cap
the debt". This Administration agrees with the notion of "capping the
debt", but let us be clear as to what we mean precisely. To cap the debt can have two
interpretations – either to cap it in absolute terms in billions of Jamaican dollars
or otherwise to cap it as a percentage of GDP. There are many persons who endorse
"capping the debt" without clarifying which is meant.
Let me make the Administration’s position clear - it is not
possible for us to cap the debt in terms of the stock of debt. To begin, the stock of debt
exists and unless we can find ways of paying down that debt immediately there is bound to
be an increase in the actual stock of debt until we have eliminated the deficit.
As can be seen even the task of reducing the deficit from 7.7% to
between 5% and 6% of GDP is a formidable challenge and as long as you have a deficit it
means that the stock of debt will increase. Therefore, let us focus on containing and then
reducing the debt as a percentage of GDP. If that is what is meant by those who make this
recommendation, then there is nothing which divides us.
In terms of specific targets, devaluation has increased the stock
of debt, expressed in J$ and for FY 03/04, the best we can do is to hold the ratio stable.
However, in 04/05 and 05/06 we project reductions, leading to a ratio of 123% at the end f
the medium-term..
The third major indicator by which the country will be judged is
the primary surplus. As I have mentioned before in the presentation, Jamaica has earned
positive assessments from the multilaterals, the bilaterals and private sector creditors
by having maintained a high primary surplus averaging approximately 12% over a three year
period.
In order to attain the fiscal targets leading to a balanced budget
in 05/06 and to reduce the debt to GDP ratio a similar performance, in terms of the
primary surplus is needed. That we have done it in the past is a clear indication that we
can do it again. We have therefore targeted primary surpluses of 12% or above for each
year of the medium-term programme.
The medium-term framework is not simply a collection of numbers
which have been put together in a matrix in order to impress creditors. It represents a
technical programme built around our present situation, our best assumptions as to changes
in critical variables, as well as explicit policy positions.
It is very rare that all assumptions will hold. No one can speak
with any certainty about the weather, oil prices, the travel trade, or the spread of
disease. Any of the above can create chaos in critical economic sectors thus neutralizing
the best laid plans.
Despite all the above, we have prepared this medium-term framework
which is being presented now and will be presented to our creditors as our blue print for
emerging from this difficult situation.
