Keith Collister, Contributor
Dr. Omar Davies, Minister of Finance and Planning, targets a balanced budget this year. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
THE IMF released its eagerly awaited interim Intensified Surveillance Report on Jamaica earlier this week. In what is overall a very positive report, the International Monetary Fund (IMF) notes approvingly that despite the shocks experienced by the economy last year, "the authorities have adopted a balanced budget for fiscal year 2005/06 in line with their medium-term strategy".
As they describe it, the Government has "succeeded for a second consecutive fiscal year in maintaining stability following the near crisis in the first half of 2003. Domestic interest rates have declined sharply from their March 2003 peak, the exchange rate has stabilised, and inflation has decelerated markedly. In fiscal year 2004/05, the economy showed resilience in the face of severe adverse external shocks, including Hurricane Ivan and high oil prices. "
While they admit that favourable liquidity conditions have been an important factor, they argue of key importance is the Government's "commitment to the renewed fiscal consolidation since mid 2003, reflected in very high primary budget surpluses". For them, "A key factor for success thus far has been the high degree of national ownership, which has permitted, notably, continued adherence to an MoU on public wage restraint agreed in February 2004 between the Government and the trade unions, and the initiation of a comprehensive tax reform." Clearly, the IMF is attaching a large amount of importance to the current relatively high degree of economic policy consensus, as I believe they should.
According to the chairman of the Economic Policy Committee of the Private Sector Organisation of Jamaica (PSOJ) Colin Steele, of critical interest to investors is that the IMF describes the government's balanced budget target as being of "landmark importance for Jamaica's strategy to reduce the debt burden" and also indicates that they feel that this target is "within reach". Mr. Steele believes the achievement of the balanced budget target is critical for achieving continuing lower debt servicing costs.
ALLOWS FOR GREATER NON-DEBT EXPENDITURE
Non-debt expenditure consists of wages and salaries, programme expenditure and capital. The table below, prepared by the PSOJ, illustrates that non-debt expenditure shows a budgeted increase of $10,197 million or 9.5 per cent in this budget over the outcome of last year's budget. It shows the critical importance of lower interest costs in achieving this years balanced budget target. Of key importance, it also clearly shows that programme and capital expenditure are beginning to grow after years of stagnation.
2004 2005
ACTUAL BUDGET
| Programmes | 32,081 | 38,238 |
| Wages and Salaries | 63,517 | 61,387 |
| Capital expenditure | 11,106 | 17,276 |
| Total non-debt expenditure | 106,704 | 116,901 |
| Interest | 92,784 | 87,579 |
| Total Expenditure | 199,488 | 204,480 |
SLOWER PACE OF INTEREST RATE CUTS RECOMMENDED
The IMF also believes the reductions in policy interest rates implemented in fiscal year 2004/2005 were appropriate, although they advise caution with respect to the pace of further reductions in interest rates. In their view, lower interest rates "contributed to containing the budget deficit and central bank losses". They advise caution with respect to the pace of further reductions in policy interest rates " due to "inflation still above international levels and prospects of global interest rate hikes". This slower pace of interest rate reduction is in line with Government policy, and private sector projections of interest rates.
EXPIRATION OF MOU A DANGER TO DECLINE IN DEBT
The Government has targeted a reduction in the public debt to GDP level to 100 per cent of GDP over the next four years (it should be noted that at this level we would still be regarded as extremely highly indebted and thus vulnerable to shocks). The IMF believes "exceptional restraint will be needed to sustain the required primary surpluses in excess of 13 per cent of GDP". In particular, the IMF believes the Government "will have to devise policies during the current fiscal year to keep the wage bill under control after the expiration of the MoU in early 2006".
Mr. Steele concurs : "The challenge at the end of the public sector MoU will be to recognise the importance of all three main areas of non-debt expenditure. A process of prioritising expenditure areas and public sector employee groups will therefore be critical to optimising available resources."
He adds, "We have already seen the benefit of more prudent fiscal management in the access to local and international capital markets at lower interest rates as well as increased availability of resources to non-debt areas. The IMF analysis confirms the notion that if we stay the course more resources will be available to address the social and other needs of the society."
