Left: The IMF has advised Finance Minister Audley Shaw, seen here in a November 2007 Gleaner photo, to cut non-productive spending from his near half a billion dollar budget. Right: Derick Latibeaudiere, Bank of Jamaica governor, has been advised by the IMF to raise interest rates. - File

The International Monetary Fund (IMF) this week gave thumbs up to the Jamaican government's efforts at creating what it referred to as 'a virtuous cycle of lower debt and higher growth', but suggested the administration could better meet its fiscal targets by spending less.

At the same time, the IMF, in the wake of Cash Plus's collapse, has again placed on record its disquiet about the rise of unregulated financial schemes and their potential for harm.

But this time the multilateral has gone further to suggest cross-border collaboration among financial regulators to help contain them and greater vigilance domestically in apparent concern over contagion.

The Bruce Golding administra-tion has crafted a $497 billion budget, but with a near $8 billion of fees generated by ministries that are not required to be remitted to the treasury - referred to as appropriations in aid - has $489 billion of spend to finance.

The recurrent side

The IMF has not said what government ought to cut from the budget, but the tone of its public information notice published Tuesday suggests it should be on the recurrent side or otherwise skewed to programmes that consume revenues but generate none.

"Most directors considered that a stronger fiscal adjustment in the current budget year would make a good start to the substantial effort needed over the coming three years to implement the authorities' programme," the agency's board of directors said, referring to Jamaica's medium term plan to balance the budget by 2010/11.

Weakening primary surplus

"Against this background, they encouraged the authorities to examine carefully the scope to reduce non-productive expenditures, noting that this would help reverse the weakening primary surplus projected for FY 2008/09."

In that regard the IMF, which has urged swift movement toward investment spending, would likely endorse the investments being made in funding sources for small businesses but frown on programmes such as subsidised health care.

This year's budget is split $304 billion in recurrent spending, which is most heavily weighted to wages and debt servicing, and $185 billion for capital programmes.

To fund it, government is going after close to $263 billion of taxes, and $183 billion of new debt issues.

On the monetary side of the economy, the agency has proposed another hike in interest rates, saying a moderate adjustment may be needed to stem capital flight and act as a check on inflation, which edged close to 20 per cent last year, and is projected at 14.5 per cent in the current period.

It also wants the Bank of Jamaica to give freer rein to the currency - the BOJ has generally ignored such entreaties in the past - saying the JMD should be allowed to adjust if pressure builds on the balance of payments.

That pressure is expected to come from still rising commodities - largely grain/food and oil - which last year widened the current account deficit by 15 per cent on the back of a bigger import bill.

The central bank has already hiked interest rates twice this year in defence of the dollar, but only after sustained pumping of hard currency in the system failed to steady the exchange rate.

The benchmark treasury bill is now at 14.2 per cent.

The IMF's recommendations came alongside its pronouncement that the country, overtaken by external shocks and buffeted by a devastating storm, grew by only one per cent in the fiscal year just ended - Finance Minister Audley Shaw had reported 0.9 per cent growth - against a target of 2.5 per cent.

Below expectations

It also assessed the fiscal deficit at 4.9 per cent, slightly worse than the 4.7 per cent reported by Shaw.

Jamaica's primary balance - the metric used to weigh the country's financial health outside of its debt servicing obligations - was below expectations at 9.0 per cent of GDP, the IMF said. While this outturn bettered the 8.1 per cent balance in 2007/08, it was more than a point off the original 10.25 per cent target.

On the plus side, the IMF has also pronounced Jamaica's banking system healthy, saying the institutions appear to be in control of a growing credit market, but twice referenced its concern about unregulated financial institutions and promised technical assistance for greater monitoring of the wider financial sector.

"The growth of unregulated investment schemes promising implausibly high rates of return has been a worrisome financial development with potentially adverse macroeconomic cons-equences," said the IMF.

"Given the cross-border risks posed by such schemes, directors also encouraged enhanced regional cooperation among supervisors."

lavern.clarke@gleanerjm.com