PIOJ Growth-Inducement Strategy - Planning Institute of Jamaica

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1.0 Introduction 1.1 While the country has successfully passed both IMF tests, based on prudent fiscal management thus far, the PIOJ is forseeing potential danger to the socio-economic environment on the horizon if Jamaica continues with the current pace of fiscal consolidation. Given the current global economic environment, characterized by the slower than anticipated recovery, the present pace of fiscal consolidation may lead to a worse than anticipated deterioration in the socio-economic indicators. This may hinder Jamaica’s recovery efforts, possibly resulting in a double-dip recession and consequently threatening the success of the fiscal consolidation programme. 1.2 Slower than expected recovery in external demand coupled with weak domestic demand will inhibit the very critical private sector absorption. The recent socio-economic developments and trends, coupled with the pending implementation of the recommendations for Public Sector Transformation, have implications for: further contractions in output, stalling the projected recovery process in 2010 halting the positive recovery trends in employment levels further declines in consumer confidence. 1.3 The International Monetary Fund (IMF), in both reviews, highlighted that going forward the performance of the programme could be adversely affected by the costs associated with the security situation in May 2010 and recent external shocks. These concerns are critical, particularly due to the absence of shock absorbers in the current programme. 1.4 Given the pro-cyclical nature of the programme, the PIOJ is recommending, among other things: • an adjusted fiscal space, in combination with key structural changes in the IMF SBA, to facilitate the incorporation of a growth-inducement strategy which would make the financial/fiscal consolidation effort economic-growthfriendly and, hence, sustainable. 2.0 Expected Outcome of the Fiscal Consolidation Programme 2.1 Fiscal Consolidation is the process by which a country controls its rising debt and deficits through increasing revenue and/or reducing expenditure. Empirical studies suggest that reducing expenditure is more likely to be sustainable and produce better economic outcomes, as increasing taxes depress economic activities. Conditions for fiscal consolidation leading to economic growth include the following: • Private Sector - reduction in government expenditure through structural reforms, signals to the private sector that the government will be smaller. This implies less borrowing, which puts downward pressure on interest rates, thus stimulating private investment and growth and, further, reduces market expectation of future tax increases, which will spur private investment. This requires that the government withdraws from areas in the economy in which it 83
creates allocative inefficiencies, while private sector expansion is expected to replace government contraction. • Household Sector – government consolidation signals lower taxation in the future. This should lead to a higher than expected disposable income, hence to an increase in consumption (i.e. demand for goods & services). • Labour Market – expansion in private sector business activity leads to an increase in demand for labour, hence in employment, to facilitate the expansion of existing and new industries. 2.2 Thus, economic growth associated with fiscal consolidation, is underpinned by the expectations of firms and households regarding future prospects. If firms and households do not believe that the programme is sustainable and, instead, expect that the government will continue to crowd out private investment and/or raise taxes, they will not invest or increase consumption in the short-run. 3.0 Jamaica’s Current Fiscal Consolidation Programme 3.1 The Fiscal Consolidation Programme pursued by the Government of Jamaica (GOJ), includes fiscal consolidation through rationalization of the public sector (freeze in wages & salaries, cutbacks in government programmes, etc); increase in taxes; and a Debt Exchange Programme (JDX) to lower interest cost and extend maturity of government instruments. These measures, in addition to the proposed new Fiscal Responsibility Laws, have assisted in reducing instability in the economy, through reducing: (a) the market expectation of future tax increases, and (b) the crowding-out effects of government borrowing. 3.2 However, the Fiscal Consolidation Programme, which is aggressively procyclical, is being implemented at a time when Jamaica is undergoing a recession, and thus has exacerbated the recession and delayed the recovery of the economy. This is reflected in a decline in: • private sector demand for credit, despite the lowering of interest rates • demand for the US dollar and collapse of private sector demand • output in most industries, resulting in increased unemployment and privatesector job losses totalling approximately 86,600 since October 2008 30 • household demand for credit. 3.3 The Fiscal Consolidation Programme has been further hampered by shocks that have negatively affected the outlook for the Jamaica economy. These shocks include: longer than anticipated global recession (fears for double-dip recession for the US, Jamaica’s major trading partner) 30 October 2008 was the last period of recorded employment growth. 84
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i A GROWTH-INDUCEMENT STRATEGY FOR
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To the many ordinary Jamaicans who
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Preface The Jamaican economy has ex
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for making a determined start on th
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the private sector groups, listed b
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Citibank N.A. Jamaica Branch Grace
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need for “additional fiscal space
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Chapter 2 ________________ Summary
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1.0 The Economic Situation Today 1.
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expected to provide an essential an
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Table 2.1. The Policy Framework: A
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programme of social inclusion that
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Strategic Focus Table 2.2. Growth S
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6.0 Short-Term Growth Stimulus 6.1
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decline of 2.0 - 2.2 percentage poi
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Table 2A.2. NWA Projects To be Fast
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Table 2A.5. Community Renewal Proje
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Table 2B.3. Impact of Repairing Far
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Appendix 2C Methodology of the Grow
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Part I _________ Overview 28
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2.0 Vision 2030 Jamaica Before delv
Page 43 and 44: 3.0 May 2010 Security Event and Aft
Page 45 and 46: the longer than anticipated global
Page 47 and 48: April July October January April Ju
Page 49 and 50: Three industries recorded increases
Page 51 and 52: 9.0 Proposals for Growth-Stimulus I
Page 53 and 54: targeted economic and social infras
Page 55 and 56: partnering with government to disco
Page 57 and 58: 3.0 Growth Inducement Strategy The
Page 59 and 60: Growth-Inducement Strategy Alignmen
Page 61 and 62: 50 Part II _________ Situational An
Page 63 and 64: inadequate provision of public infr
Page 65 and 66: 2.0 Macroeconomic Assessment 2.1 In
Page 67 and 68: Increased global oil consumption wa
Page 69 and 70: $4,742.0 million and $688.4 million
Page 71 and 72: Non -Traditional Domestic Exports E
Page 73 and 74: negative impact of the Jamaica Debt
Page 75 and 76: ethanol and paint, whereas lower de
Page 77 and 78: Analysis of preliminary GCT data re
Page 79 and 80: The number of ship calls to the isl
Page 81 and 82: industry was, however, estimated to
Page 83 and 84: 4.0 Projected Performance 4.1 Calen
Page 85 and 86: increased marketing and extension s
Page 87 and 88: Electricity & Water For FY 2010/11,
Page 89 and 90: J$ Million Figure 5.1. Private Sect
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Page 97 and 98: Million $ Per cent Jun-10 Mar-10 De
Page 99 and 100: Table 6.1. Employed Labour Force by
Page 101 and 102: J$ million Mar-10 Dec-09 Sep-09 Jun
Page 103 and 104: FIGURE 7: GROSS NATIONAL SAVINGS RA
Page 105 and 106: 4.10.2. However, the extent of the
Page 107 and 108: Part III ____________ Analytical Fr
Page 109 and 110: functional relationship between the
Page 111 and 112: It follows that: (5) s = I/Y = [S -
Page 113 and 114: However, the existence of measureme
Page 115 and 116: (d) v* = Y*/K* This is a measure of
Page 117 and 118: in Chapter 8. The mutual interactio
Page 119 and 120: Transforming the complex set of str
Page 121 and 122: Appendix 7A A Methodological Note T
Page 123 and 124: Chapter 8 ____________________ Asse
Page 125 and 126: The DBI focuses more narrowly on qu
Page 127 and 128: to ask, is it possible to predict g
Page 129 and 130: can be made to serve a very useful
Page 131 and 132: For further elaboration of the cons
Page 133 and 134: progressive Jamaica-based firms and
Page 135 and 136: Table 8.2. Jamaica: Doing Business,
Page 137 and 138: Table 8.4. Global Competitiveness I
Page 139 and 140: Table 8.5 (continued) Rank Indicato
Page 141 and 142: Rank* Constraint Table 8.7 Business
Page 143 and 144: Chapter 9 ___________________ Inter
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3.0 The Burdens of LAC’s Logistic
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conditions. These combined with a p
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Figure 9.4. Proportion of Primary A
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6.0 Logistics are Essential for Tou
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7.0 Fundamental Steps Forward for J
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Part IV ________________ Policies a
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Current Status: Cabinet by decision
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e more than compensated for by the
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B ____________________ Eliminating
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Commercial Bank loan rates have als
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5.0 Expected Outcomes These measure
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capital, mainly in the form of equi
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oth local and overseas (including t
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Table C.1. Proposed Implementation
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Locally, the Scientific Research Co
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Develop formal and informal links t
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D ____________________ Business Pro
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5.0 Recommendations Based on the ma
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2.5 Coexistent with the levels of u
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industry as well as provide funding
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Table E.2. Unemployed Labour Force
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indirect losses experienced when th
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Table F.1 (continued) Area Type of
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G ____________________ Community Re
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Figure G.1 Community Renewal Progra
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Table G.1 Priority Initiatives Obje
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Table G.2 Phased Implementation Pla
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H ____________________ Proposed Wes
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3.0 Transparency Guarantees By desi
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and Coordinating Unit (PCMU) was es
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therefore need to have sanctioned o
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Figure I.1. Functions of National P
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The rationalisation was guided by t
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deliver services in an efficient an
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efurbishing to allow for accommodat
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Part V _______________ Panelists’
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With the benefit of hindsight, some
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ight. Where we as a society fail is
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and exclusion of the majority of th
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the elders, youth, children. What f
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C __________________ Enhancing Nati
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Figure C.1. National resilience is
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