WASHINGTON, DC – The Executive Board of the International Monetary Fund (IMF) today approved a 27-month Stand-By Arrangement with Jamaica in the amount of SDR 820.5 million (about US$1.27 billion) to support the country’s economic reforms and help it cope with the consequences of the global downturn. A disbursement of SDR 414.3 million (about US$ 640 million) will become available to Jamaica immediately.
The key objectives of the arrangement are to support the Jamaican authorities’ ample reform program to address deep-seated structural weaknesses in the country’s economy, increase its growth potential, and make it less vulnerable to external shocks.
To achieve these goals, the program focuses on a three-pronged strategy:
1) An ambitious plan that puts public finances on a sustainable path that includes much-needed public sector reform;
2) A debt strategy to lower exceptionally high interest costs and help address the problem of the debt overhang , and raise the productivity of public spending;
3) Financial sector regulatory reform to reduce systemic risks.
The Jamaican authorities are already implementing many of these actions, which are expected to improve the public sector fiscal balance by over 5 percent of GDP in FY 2010. Among them, a debt exchange aimed at generating interest savings of at least 3 percent of GDP and a 65 percent reduction in the amount of maturing debt over the next three years have been successfully carried out, with an acceptance level of almost 95 percent of bondholders. A tax package has already been enacted and is expected to produce an increase in revenues of around 2 percent of GDP. Loss-making public entities are being divested.
At the same time, the government’s economic program is designed to ensure a significant increase in social spending for targeted programs. Spending will increase by at least 25 percent (equivalent to 0.3 percent of GDP) in the school feeding program and the cash transfer Program of Advancement through Health and Education (PATH). The administration will also be pursuing efforts to expand the social safety net to assist persons below the poverty line who do not qualify for PATH assistance and improve their employability.
Approval of the Stand-By Arrangement is expected to generate about US$1.1 billion in funding from other international financial institutions. Part of the first disbursement will be used to establish a Financial Stability Support Fund, which will also include funds from other multilaterals and will help support the country’s financial sector.
Following the Executive board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:
“Jamaica’s large debt burden has magnified the fallout of the global crisis by limiting the scope for a counter-cyclical domestic policy response. Fundamental economic reforms are needed to restore fiscal sustainability, safeguard economic and financial sector stability, and enhance Jamaica’s growth potential. The ambitious economic program demonstrates that the authorities are committed to meeting these challenges.
“The authorities are to be commended for the strong measures taken to maintain economic stability. These include introducing a third tax package this fiscal year and extending the public sector wage freeze for two years. The 2010/11 budget provides for increased social spending while reducing recurrent expenditures. The government has successfully completed a domestic debt exchange operation, which has contributed to a more equitable sharing of the burden of the overall fiscal adjustment. The exchange has also struck an appropriate balance in terms of delivering necessary cash flow savings while taking appropriate account of the need to ensure financial sector stability.
“In addition to these near-term measures, the Jamaican authorities have committed to a comprehensive agenda of structural reform to help address the root causes of the deep economic imbalances. The swift passage of fiscal responsibility legislation and adoption of a central Treasury management system are necessary to enhance budget control and bolster fiscal transparency and accountability. Rationalization of the public sector, including through compensation and employment reforms and the divestment of public entities, aims to secure durable fiscal savings.
“The planned legislative and regulatory reforms will help reduce systemic risks to the financial system and strengthen the overall resilience of the economy to shocks. Key measures include the adoption of an omnibus banking law, an amendment to the Bank of Jamaica Act, and reforms of deposit-taking institutions and the securities dealer sector,” Mr. Kato said.