By Andrew Green, Staff Reporter
Omri Evans, Fidelity Economics president. - File
THE country needs to adopt some new policies to deal with its economic deterioration, according to the International Monetary Fund (IMF).
A combination of violence, flooding and the effects of September 11, pushed the economy off track, weakening its finances during the last financial year, the IMF said in an assessment of the country issued this month. The report said policy changes are required to get the country's finances back on track so it can better withstand adversity.
The IMF is calling for "more ambitious structural reforms in the labour market and public sector, and more flexibility in the exchange rate regime," it said in its report for the 2002 Staff Monitored Programme (SMP). Jamaica no longer borrows from the Fund, but under the SMP it maintains a watch on the economy as part of a worldwide programme to promote economic stability.
Even now, Jamaica has not yet recovered from the loss in competitiveness of between 40 per cent and 60 per cent between 1995 and 1998, the report said. Exports in US dollars have declined continuously in the last five years and last year stood 20 per cent below the level in 1995/96.
"I agree with them," said Dr. Omri Evans, president of Fidelity Economics. "If you don't deal with the inefficiencies and waste in the bureaucracy, it is a big cost to the economy."
And labour costs in Jamaica are high, Dr. Evans said. "That is one of the reasons why we are so uncompetitive."
There are two ways of dealing with that high labour cost, Dr. Evans said. "You either allow the currency to find a more realistic level and work through the overvaluation on a managed basis, or you increase labour productivity. But we don't have that taking place."
The IMF is saying it would be better for the economy to operate with a more competitive exchange rate, he said. This is, "even if you end up with higher inflation."
But one University of the West Indies economist, who spoke on condition of anonymity, said there was no guarantee that devaluation would boost the export sector. He said there were persuasive arguments both for and against devaluation.
The IMF policy proposals are critical now, as during the first four months of this financial year government revenues are running at about 10 per cent below projection, Dr. Evans said. "The fiscal deficit has widened significantly to between 7-8 per cent of GDP. This is well above the 5.7 per cent last year."
Recent weakness in tourism and the impact of the May/June floods on the economy suggest that there are considerable downside risks this year, the IMF said.
The primary surplus has fallen from $8.6 billion to $4 billion this year, Dr. Evans said. The primary surplus consists of the tax revenue less recurrent expenditure such as salaries. The difference is what can be used to pay interest expense.
If the primary surplus deterioration continues, there would be a risk that the country might not be able to pay its debts, Dr. Evans said. "You risk a default on your debt."
The grim conditions being faced this year represent a continuation of the situation faced last year.
For this financial year the challenge facing the authorities is to reverse the deterioration in public finances which started last year, the IMF said. There also needs to be a reduction in the "onerous' public sector burden while maintaining macroeconomic stability and laying the foundations for faster growth.
"This is a failing grade on the fiscal side for the last financial year," said Dr. Evans. Based on the agreements on the fiscal deficit, the primary surplus target and the inflation target, he said, "what they are actually saying is that you have failed."
But a negative report from the IMF "is really not a matter of life or death for the government," said Charles Ross, Sterling Asset Management Limited chief executive officer. "There are no immediate or direct repercussions."
If there was a "violent disagreement" between the IMF and government, then this might have repercussions for borrowing from the other multilateral agencies and possibly in the international capital market, Mr. Ross said. But, "there is no lending attached. There is no money for them to hold on to."
