Jamaica: Macro-Socio-Economic and Environmental Assessment of ...

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2. Economic policy
a) Fiscal policy
During FY 2003/2004 the authorities adopted a contractive policy managing to reduce the
previous fiscal year’s deficit from 7.3 percent to 5.8 percent of GDP. This result was
mainly achieved through expenditure restraint and the implementation of a set of revenue
enhancing measures between the months of May and June 2003.
Total expenditures remained at the level of the previous fiscal year (36 percent of GDP)
due to a contraction in social programme expenditures, which managed to offset the rise in
the wage bill and interest rate payments.
The same revenue measures proved effective, in spite of the fact that their effects fell below
the expected target, and resulted in an increase in the tax to GDP ratio by 1.7percent points
(24.56 percent and 26.36 percent of GDP in FYs 2002/2003 and 2003/2004 respectively).
The most important ones included the expansion of the General Consumption Tax Base and
an upward movement in the rate in telephone services and customs user-fees on specified
imports.
Notwithstanding these fiscal efforts on the expenditure front, the rising stock of public debt
remains a source of concern to the monetary and fiscal authorities (150 percent and 187
percent of GDP at the end of 2002 and 2003) as it significantly constrains the margin of
manoeuvre as well as the composition of government expenditures. When classified by
functional category debt management, expenditures are found to be the single most
important category within total expenditure absorbing 65 percent of the total followed by
human capital enhancement expenditures such as education (4 percent of total
expenditures). The debt situation also explains the decision of international agencies to
downgrade Jamaica’s long-term sovereign local currency rating in January 2003 and in
February 2004.
b) Monetary and exchange rate policies
In 2003, policy responded to the dual role played by the Central Bank as the guarantor of
monetary and price stability on the one hand and as the lender of ultimate resort to the
government, providing liquidity needs and sustainable financial conditions for the servicing
of the government’s debt on the other. Both roles were assumed sequentially in the first and
second semesters of the year.
As a result, monetary policy underwent two stages. In the first stage (January to June) the
Bank imposed a series of measures destined to reign the fall in the nominal exchange rate,
which was visibly intense in the first five months of the year. The monthly exchange rate
depreciated by 18 percent between January and May 2003 ($51.59 in January and $61.08 in
May per 1 US$). The depreciation was triggered by the significant deterioration of the
fiscal accounts in FY 2002/2003.
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