“Structural Challenges in Jamaica and the Support of the IDB”

1. CHAIRMANS CLUB “Structural Challenges in Jamaica and the Support of the IDB” March 23rd 2010

2. Vulnerability to shocks • Chronic stagnant growth and large current account deficits • Sustained fiscal deficits and high debt • High informality and flat or falling productivity • High tax rate but very low tax base • Small open economy

3. Multiple Simultaneous Shocks • Remittances, tourism & bauxite affected by international economic downturn • Oil and food price spikes and margin calls • Negative growth forced fiscal revenue down and reversed poverty gains • Interest rates and salaries rose above 90% of revenue • Abrupt 22% devaluation

4. GOJ decided to not just muddle through but actually escape the high debt and low growth traps • Stop chronic deficits financed with costly debt • Fiscal responsibility Framework: limit deficits & move to performance based budgets • Control public bodies: Central Treasury Management • Rationalise public sector • Increase revenue (taxes, rates and coverage) and cut interest costs (outstanding JDX) • IMF Standby Arrangement approved Feb. 4

5. WHAT SUCCESS WILL LOOK LIKE: 2014 • Fiscal deficit: 1% GDP (>12% today) • Total public debt: >120% GDP (140% today) • Interest rates: <10% • Inflation: 6 - 7% • Exchange rate: Stable • Balance of payments: Surplus • NIR: Maintain 3 – 4 months throughout • Real Growth: 2% sustained

6. WHAT WILL IT TAKE TO GET THERE? • Fiscal squeeze. PM: only J$30b for investment • Cost recovery, tax collection and less waivers • Reduce wage bill from 11.75% of budget to 9.5%. Efficiency • Target benefits (PATH, SFP, Health,Tertiary) • Control & Close >50 public bodies; merge many and divest 20 to stem hemorrhage (Air J, bauxite, sugar, PETROJAM expansion, JUTC) • Interest rate trajectory consistent with JDX • Collaboration: Gov’t; Opposition; Unions; private sector

7. UNPRECEDENTED PROGRAMME NETTED UNPRECEDENTED EXTERNAL SUPPORT 2010 – March 2012 = US$2.4 billion OVER 20% OF GDP!! • IMF: US$1,300 million • IDB: $ 650 million: ALL UPFRONT! • WB; CDB & EU

8. Risks • Interest rate trajectory: mitigated by lower inflation and less GOJ borrowing • Increased demands on NIR: mitigated by massive external support • Imported inflation (more price spikes) • Natural disasters • Slippage of fiscal targets: mitigated by new fiscal discipline

9. Fiscal deficit: Deviation from Estimates

10. IDB Support

11. Lending Program: Started 2008 • 2008: Counter cyclical support of robust reform agenda amidst global economic downturn and natural disasters. $205m; and $207m NSG. Total >$400m • 2009: Curtailed credit lines to the private sector triggered a $300m Liquidity Program for Growth Sustainability. Also $31m CSJP/NWC and $75m TJH. Total: >$US400m • 2010: Support of reform programs and SBA. Total new loans programmed: US$630m. • Success of first year of the program is critical. Wait and see could undermine program so100% front loaded. • Concessional terms: 1.23%; no upfront fees; 5 years grace; 25 yrs amortisation.

12. Areas of Policy Support • Competitiveness • Public Financial Management • Human Capital Development • Education

13. 1. Competitiveness • Tax Reform (simplification & reduction) • Tax Expenditure Review: How is revenue spent • Secured Transactions (collateral) and Credit Bureau • M-Banking legislation • Land titling: reduce time and cost

14. 2. Public Financial & Performance Mgmt • Fiscal Responsibility Framework: Limitdeficits and increasetransparency. Publicbodiesaccountability and control. (Central Treasury Management) • Improved expenditure management and control: Framework for Internal Audit and Control enacted • PublicProcurement: Clearer rules and strongerenforcement. Procurement Appeals Board constituted; E-Tendering solution selected; training. • Management for Results: Performance agreements and service contracts for PSs and CEOs of Executive Agencies

15. 3. Human Capital ProtectionProgram FISCAL SQUEEZE DURING ECONOMIC DOWNTURN: Unemployment increasing (11.6% total, up 13% over past year), commodity prices increasing(food prices up 66% since Jan.2007, CPI up 51%) , thus strong indication that poverty is likely increasing. Generally ,the groups most at risk: pregnant women and very young children, poor school-aged children, unattached youth, female-headed households, and elderly. Poverty gains reversed. Policy Measures: • Protect non-salary social expenditurefromcuts: health, nutrition, early childhood development, education. • Improve targeting of safety net programs • Expand coverage and Increase benefits: Increase PATH coverage and per capita benefits by 25%, (max J$1,000/ month now) extend coverage of School Feeding Programme • Support Innovative Programs to Protect Vulnerable Groups

16. 4. Support for Education Sector Reform - Underachievement in student learning at all levels - Problems: • Centralized MOE management ineffective at local level. Distracted from focus on policy design and accountability. Shift System: Reduces teaching time. Low stakeholder participation: Weak local management of schools. Growing discipline problems in the classrooms Solutions: • Modernise MOE to focus on policy formulation, monitoring and evaluation, standard settings, and agencies coordination. Enhanced accountability through appraisals to Principals, Counselors and Teachers • Improve stakeholder and community involvement in education • Expand compulsory education from age 16 to 18 and decrease double shift by providing approximately 2,100 additional seats • Decentralize to the regions creating autonomous regional agencies 2015: Results: • 90% of children achieving mastery in all four areas of grade 1 with Individual Learning Profile • 85% of children achieving mastery on the grade 4 literacy test • 85% for each subject as national mean score at grade 6 achievement test.

17. MICRO DECISIONS DETERMINE MACRO TARGETSPM: “No more sacred cows” • Tax and duty waivers still justified? Eg 100% income tax waiver in agriculture dates back to independence • Most paved roads in the world but maintenance can’t keep up • Untargeted subsidies: health services & tertiary education • Does allocation of scarce revenue match new priorities? Safety net offers a maximum of just J$1,000 a month while Mt. Rosser hemorrhage continues • Public investment where private sector could step forward (Mt. Rosser) • Rates cover a fraction of costs but systems expanding (eg. buses, water, irrigation) • Absurd Property Taxes: eg. less than J$300 for US$1.5 million property. Tax value is less than the cost of collecting it • Land Titling: All applications to register titles must be certified by one of only three private referees in all of Jamaica, paid 1% of the value and appointed by the Governor General. • IDB supports the GOJ reform programme

18. LIFE AFTER THE IMF June 2012 • Jamaica will still have very high debt at 120% GDP but it will have started the slow hard climb out of the debt trap • General elections will have either taken place or will be imminent. • Fatigue with >two years of fiscal squeeze; but interest rates, inflation and FX will be steady • Modest steady growth as trading partners may have recovered and major shocks avoided • Development strategy will have changed from chronic deficits and high interest debt to fiscal discipline new expenditure priorities • Growing space for both public and private investment in real sector • Increased, better social spending and infrastructure

19. WHAT SUCCESS WILL LOOK LIKE: 2014 • Fiscal deficit: 1% GDP (>12% today) • Total public debt: >120% GDP (140% today) • Interest rates: <10% • Inflation: 6 - 7% • Exchange rate: Stable • Balance of payments: Surplus • NIR: Maintain 3 – 4 months throughout • Real Growth: 2% sustained

20. BETTING ON JAMAICA HISTORICAL TRANSFORMATION OF THE ECONOMY & GOVERNANCE Defining moment that will shape Jamaica for decades Understand your role and do your part!