Current Affairs

Current Affairs




Davies promises IMF fiscal compression
Observer Reporter
Friday, January 04, 2002

FINANCE minister, Dr Omar Davies has promised the International Monetary Fund (IMF) to slash both capital and current expenditures, and to collect more taxes to contain what would otherwise be a major expansion in the fiscal deficit target to March 31.

Davies, in a letter of intent to the IMF in early December in which he sought the institution's backing for change in Jamaica's macroeconomic targets, says that the fallout from the September 11 attacks in the USA, had made some of the original economic targets under the staff monitored programme unattainable.

The fiscal deficit, for example, was initially set at 2.5 per cent of gross domestic product, but now seems headed for 5 per cent - a deterioration of 2.5 percentage points. Davies believes that with a combination fiscal compression, and revenue generation, the deterioration could be contained to 4 per cent of GDP.

"The government is facing a deterioration in the central government fiscal deficit of around 2.5 percentage points of GDP to around 5 per cent of GDP," said Davies, and Bank of Jamaica governor, Derick Latibeaudiere, in their joint letter of intent to the Fund on December 4. The deficit expansion, they said, resulted "largely from the need for higher expenditures on security, tourism promotion and rebuilding after the floods as well as lower revenues associated with the decline in economic activity".

Davies noted that in order to cap the slippage at 1.5 percentage points, and to contain the central government cash deficit to 4.1 per cent, revenue enhancement and cost compression measures would be necessary.

"This will be achieved by reductions in capital and current expenditures, additional revenue enhancement measures and dividend payments from public enterprises reflecting in part, lower world oil prices," said the minister and the governor in their joint letter.

The central government primary surplus target - that is the surplus before debt servicing - will be cut to around 10 per cent of GDP. For the March quarter, the target has been cut from $38.5 billion to $35.4 billion; and for the December quarter from $23.5 billion to $18.6 billion.

The net international reserves target of the BOJ would remain at the programmed increase of US$100 million for the fiscal year, the monetary authorities promised the IMF.

But Davies also promised, though tentatively, to cut by one percentage point, the central government deficit as a percentage of gross domestic product in 2002/03. Inflation is programmed at 5-6 per cent and the NIR at the current level.

The government asked the IMF to monitor its targets under a revised staff monitored programme.