The IMF agreement: transparency and debt sustainability

Colin Bullock, Guest Columnist

It has been announced that there is an IMF team in Jamaica. The purpose of the mission, we are told, is to complete the outstanding quarterly reviews for December 2010 and March 2011, and to chart the boundaries of a redesigned IMF programme.

Up to June 2009, the Government had denied both the need for and intention to pursue a borrowing arrangement with the IMF. It was comfortable with the financial support available from the other multilateral financial institutions and the European Union. In the context of a deteriorating fiscal position, a Budget fraught with uncertainty, and an external-debt bullet payment scheduled for 2011, those "development partners" must have become very concerned about Jamaica's capacity to service its debt.

A 27-month standby borrowing arrangement (SBA) was signed in February 2010. It allowed for significant financial support from the IMF and the other "development partners". As a 'prior' condition, the Jamaica Debt Exchange (JDX) provided significant near-term interest expense saving for the Government. The programme itself embraced the usual macroeconomic stabilisation targets, including fiscal and primary balance, the net international reserves (NIR) of the central bank, and its lending to Government.

Real concerns

It also contained a set of structural benchmarks in public-sector financial management and financial-sector regulation. The structural factors in public-sector financial management included establishment of a Central Treasury Management System (CTM), fiscal-responsibility legislation, tax-administration reform and "rationalisation of public employment and of public enterprises".

Despite the very real concerns about external debt refinancing and the NIR, the fundamental objective of the programme was to ensure 'debt sustainability'; that Jamaica would retain its capacity to service is debt obligations in the medium to long term. The JDX (ironically itself an avoidance of contractual terms), the macroeconomic adjustment targets, and the public-finance structural adjustment targets were all informed by this objective. The strengthening of financial regulation, while protecting holders of financial wealth, would also avoid a repeat of the elevation of public debt occasioned by the financial sector meltdown of the mid-1990s.

Financial-responsibility legislation was to specify medium-term targets and enhance transparency in the design and application of public-sector financial management. After years of missing stated public financial objectives, this increased transparency was designed as an incentive for enhanced public-policy design and greater integrity in its application. The concept is that if the public understands policy objectives and how they are to be achieved, there will be less likelihood of self-interested policy design and corrupt or inefficient application.

Jamaica passed its March 2010 assessment "with flying colours". There was a little turbulence for June 2010, but this was excused by the IMF on the bases of the Tivoli Gardens incursion and unfavourable weather conditions. In November 2010, the IMF staff was visibly unhappy about Jamaica's performance to September 2010. Some structural benchmarks had not been met and the post-mission press information notice (PIN) was less forthcoming in excusing underperformance. Subsequent to this, though, the deputy managing director of the IMF with oversight of Jamaica's programme announced that the programme was on track.

It is worthy of emphasis that data for performance review are usually available within six weeks of the end of a quarter and that the reviews for March, June and September 2010 were completed within two months of those dates. There have been no subsequent reports of completed quarterly staff reviews where, in the spirit of transparency, we would have expected a review for December 2010 by end February 2011 and for March 2011 by end May 2011. The current explanation that the completion of the reviews awaited the public-sector wage agreement begs elaboration. 'Review' refers to what happened before and a wage settlement in July 2011 cannot influence performance prior to the end of December 2010.

Without the transparency of formal reviews, we are left to our own devices. The IMF staff itself recorded several downside risks to the SBA, including international market and weather-related shocks, and emphasised strict policy implementation. There were indications that the revenue forecast for the 2010-11 Budget was optimistic. Potential budgetary shortfalls were exacerbated by the adoption of a road-rehabilitation programme that had not been anticipated in the Budget. Several commentators lamented the relatively weak economic growth promised by the programme, and while recommendations of increased government expenditure may not be affordable, the negative implications of low growth for revenue buoyancy are undeniable.

As events unfolded in fiscal year 2010-11, revenue underperformed and the overrun on primary (non-interest) expenditure was exceeded by the JDX-influenced shortfall in interest expense. We spent less on capital programmes than budgeted (with negative implications for economic growth), but there were indications of significant off-budget expenditure through the Road Maintenance Fund. With the help of a large increase in 'Other Company' taxes in March, we met our fiscal-deficit target. We, however, missed our even more important primary surplus target.

There remained questions about non-transparent payment arrears, including outstanding public-sector wage settlements, and while the SBA prohibited new arrears after end March 2010, it had no specified means of measurement. Also in "arrears" at end March 2011 was much of the structural legislative agenda, including that for financial responsibility (rules and transparency).

The Government heralds stability through single-digit inflation and policy interest rates, and substantial gross and net international reserves. Economic growth that had been negative for more than 12 quarters has been reported as positive for January to June 2011, albeit at approximately 1.5 per cent. Medium-term growth is not envisaged to exceed 2.5 per cent per annum.

The Government announced that it would be negotiating an extension of the 27-month SBA. The absence of the IMF 'seal of approval' for December 2010 and March 2011 would have had implications for loan financing from the IMF and other multilaterals. The missing of the primary surplus target, the cutting of capital projects from the Budget, the debt implications of the 'off-budget' road-rehabilitation programme, revenue underperformance, and the promise of anaemic growth would all have had negative implications for debt sustainability. This is especially challenging as it was always known that the JDX would only have given a two-year compression in public-debt servicing.

I had previously raised several matters of concern regarding the 2011-12 Budget. These included arrears, off-budget expenditure, a burgeoning public-sector pension crisis, unspecified tax reform, public-sector restructuring and outstanding public-sector wage settlements. Public-sector employment reduction was announced, but it came almost as an anticlimax.

No clear-cut details

The computation of the saving from the loss of 15,000 jobs over five years, mainly by attrition, and its compatibility with the public-sector wage burden target, have not been clearly articulated. The public-sector reform task force was not asked for a critical examination of the role, structure and functions of the public sector, which must be relevant in our extremely debt-constrained circumstance. Tax policy reform is still a Green Paper proposal and weak growth may make economic efficiency (loosely defined) more attainable than revenue enhancement in the near term.

The public-sector wage issue has been settled, for now. Government statements on the role of the IMF have added to the confusion. At first, the IMF did not permit an improved offer. Then the IMF allowed room for improvement, which suggested acceptance of a higher deficit. Then at signing, the IMF is portrayed as being unhappy at the settlement, with implications for compensatory adjustment in other elements of expenditure.

While it would be useful to get the scoresheet for December 2010 and March and June 2011, it is clear that we may be significantly off track regarding our medium-term debt-sustainability objectives. This presents the Government and the IMF mission with a challenge and opportunity to establish stronger prospects for debt sustainability. In this regard, the agenda for structural adjustment of public financial management needs not only to be advanced but also refined. For example, the breaking of the nexus between high debt and low growth demands a critical look at the size, structure and functions of government.

Operation within full recognition of the severity of the debt constraint demands that the Budget be elevated to a position of defining what is spent in the public sector. This implies that off-budget expenditure ought to be eliminated, including what are called 'credit agreements' (the son of 'deferred financing') and special funds are either being brought on Budget or made more transparent through Parliament.

Debt sustainability demands stronger growth than projected. The IMF helps to define a resource constraint but the resource allocation choices for stronger growth are more the responsibility of the Jamaican Government and non-governmental sectors. Fiscal adjustment from a debt/GDP ratio of 130 per cent cannot be without pain. Public-sector compression has to be compensated for by a dynamic non-government sector if the process is to be at all socially manageable.

Colin Bullock is a lecturer in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com and colinb3@yahoo.co.uk.