Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 46806JM

PROGRAM DOCUMENT

FOR A PROPOSED

FISCAL AND DEBT SUSTAINABILITY

DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US%lOO MILLION

TO

JAMAICA

December 18,2008

Caribbean Country Management Unit Poverty Reduction and Economic Management Latin America and Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

JAMAICA-FISCAL YEAR April 1 - March 3 1

AAA ASEAN-5

BOJ CAD CARICOM

CAS CPS CCRIF

CCT CDB CEM CEMBI CFAA

CIDA

CIT CPAR

CTCS

DBJ DFID

DPL ECD EIA EPA EU FTA FY GCT GDP GNI GOJ IBRD

ICBSP

CURRENCY EQUIVALENTS US$l.OO = J$77.00 (Dollars)

(as o f December 2,2008)

WEIGHTS AND MEASURES UK (Imperial system)

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities Indonesia, Malaysia, Philippines, Singapore and Thailand Bank o f Jamaica Current Account Def ic i t Caribbean Community and Common Market Country Assistance Strategy Country Partnership Strategy Caribbean Catastrophe Risk Insurance Fund Conditional Cash Transfer Caribbean Development Bank Country Economic Memorandum Corporate Emerging Markets Bond Index Country Financial Accountability Assessment Canadian International Development Agency Caribbean Institute of Technology Country Procurement Assessment Review Caribbean Technology Consultancy Service Development Bank o f Jamaica Department for International Development (U.K.) Development Policy Loan Early Childhood Development Environmental Impact Assessment Economic Partnership Agreement European Union Free Trade Agreement Fiscal Year General Consumption Tax Gross Domestic Product Gross National Income Government o f Jamaica International Bank for Reconstruction and Development Inner City Basic Services Project

IDB IFC IF1 IMF JLP JUTC LAC MDGs MF MFN MOU MP MTF

NIR NROCC

OECS PA PAJ PATH

PAYE PB PEFA

PER PFM PHRD

PIOJ PPIAF

ROSE SCJ SEA SWAP UNDP USAID

WB

Inter-American Development Bank International Finance Corporation International Financial Institution International Monetary Fund Jamaica Labour Party Jamaica Urban Transit Company Latin America and the Caribbean Millennium Development Goals Ministry of Finance Most Favored Nation Memorandum o f Understanding Member of Parliament Medium-Term Socio-Economic Policy Framework Net International Reserves National Road Operating and Constructing Company Organization o f Eastern Caribbean States Poverty Assessment Press Association o f Jamaica Program for Advancement through Health and Education Pay-as-you-earn Public Body Public Expenditure and Financial Accountability Public Expenditure Review Public Financial Management System Policy and Human Resources Development Fund (Japan-supported) Planning Institute o f Jamaica Public-Private Infrastructure Advisory Facility Reform of Secondary Education Sugar Company of Jamaica Strategic Environmental Assessment Sector Wide Approach United Nations Development Program United States Agency for International Development World Bank

Vice President Pamela Cox Country Director Yvonne Tsikata Sector Director Marcel0 Giugale Sector Manager Rodrigo A. Chaves Sector Leader Benu Bidani Task Team Leaders David Gould and

SeynabouSakho

FOR OFFICIAL USE ONLY

ACKNOWLEDGEMENTS

This Fiscal and Debt Sustainability Development Pol icy Loan (DPL) was prepared by a team l e d by Dav id Michael Gould and Yaye Seynabou Sakho and which also included Aquiles Almansi, ,Ampar0 Ball ivian, Carolina Biagini, Elizabeth Cunie, Eduardo Fernandez, Martha Garcia, Michael Geller, Armando Guzman, Zafer Mustafaoglu, Andrew Norton, Valentina Rollo, Armando Roselli, Fily Sissoko, Mar ta Sanchez, T ihomir Stucka, Ricardo Tejada, Er iko Togo, Steve Webb, and Steven Weisbrod. Valuable support was received f r o m Badru l Haque, Benu Bidani, and Todd Crawford. The peer reviewers were Jan Walliser and Sanjay Kathuria.

The team acknowledges and i s grateful for the collaboration o f the Jamaican authorities.

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

Jamaica-Fiscal and Debt Sustainability Development Policy Loan

TABLE OF CONTENTS

Loan and Program Summary ..................................................................................................... i I . Country Context ................................................................................................................... 1

I1 . Economic Context and Recent Macroeconomic Performance ............................................ 2 Economic Context ........................................................................................................ 2

Growth and Structure o f the Economy ............................................................. 2 Poverty and Inequality Challenges ................................................................... 4 Business Climate, Trade. Finance .................................................................... 6 The Structure o f Debt and Debt Dynamics ...................................................... 9

Recent Economic Developments. Impact o f the Global Crisis. and Outlook ............ 11 Growth. Inf lat ion and External Balances ....................................................... 11 Fiscal Balances and Debt Trajectory .............................................................. 13 Monetary Policy and the Financial System .................................................... 17

I11 . Government Plan and K e y Issues in Fiscal and Debt Sustainability ................................ 20

Public Sector Balances and Debt ................................................................. 21 Reducing Overall Public Sector Debt ............................................................. 21 Rationalizing Public Bodies ........................................................................... 22 Improving Efficiency and Effectiveness o f Public Service Compensation and Incentives ............................................................ 25

Pillar I1 . Increasing the Efficiency o f Financial Management and Budget Processes .................................................................................. 27

Pillar 111 . Reducing Distortions and Enhancing The Efficiency o f The Tax System ........................................................... 29

Improving the Foundation for Growth by Enabling the Business Environment ........ 30

IV . The Proposed Loan ........................................................................................................... 31 Link to the Country Assistance Strategy and Loan Design ........................................ 31

Fiscal and Debt Sustainability Projections ................................................................. 37 Fiduciary Aspects ....................................................................................................... 38 Loan Administration ................................................................................................... 39 Monitoring and Evaluation Arrangements ................................................................. 39 Consultation, Distributional, and Environmental Aspects ......................................... 40 Risks ........................................................................................................................... 44

Annex 1 . Government o f Jamaica Policy Actions to be Supported by the DPL Results Framework ................................................................................................ 47

Annex 2 . Natural Disasters and the Caribbean Catastrophe Risk Insurance Facility ............ 55 Annex 3 . Jamaica’s Latest Short Term Indicators ................................................................. 57 Annex 4 . The Growth Puzzle in Jamaica .............................................................................. 59 Annex 5 . Impact o f the Financial Crisis as o f November 18 on Revenues and Grants ........ 61 Annex 6 . Analyzing the Interest Savings from IF1 Financing ............................................... 63 Annex 7 . Debt Dynamics (2008-2014) .................................................................................. 65

Pillar I . Promoting Fiscal Sustainability through Control o f Overall

Estimated Fiscal Impact o f Reforms .......................................................................... 35

Annex 8 . Debt Sustainability Analysis .................................................................................. 67 Annex 9 . Letter of Development Policy ................................................................................. 81 Annex 10 . Jamaica At-A-Glance ........................................................................................... 93 Map ........................................................................................................................... back cover

Boxes Box 1 . Box 2 . Box 3 . Box 4 . Box 5 . Box 6 . Box 7 . Box 8 . Box 9 .

. Tourism Receipts in Jamaica ..................................................................................... 4

Structure o f the Jamaican Economy and Trade ......................................................... 6 Monetary Policy Measures to Respond to the Crisis as o f November 18, 2008 ..... 17 Government Response to the Global Financial Market Crisis ................................. 19

Links between DPL and Prior Analytical and Fiduciary Work ............................... 34

Donors’ Activities in Jamaica .................................................................................. 41

Factors Behind the Decrease in Poverty from 1999 to 2003 ..................................... 5

Government Objectives Supported by the Fiscal and Debt Sustainability DPL ..... 33

Good Practices Principles on Conditionality ............................................ : .............. 40

Figures Figure 1 . Figure 2 . Figure 3 . Figure 4 . Figure 5 . Figure 6 . Figure 8 . Figure 9 .

Figure 10 . Figure 11 .

Jamaica’s Recent Growth has been L o w .............................................................. 3 Evolution o f Total Public Debt (1980-September 2008) ...................................... 9 Foreign Denominated Debt by Currency ............................................................ 10 Total Public Debt by Interest Rates .................................................................... 10 Total Public Debt Amortization Profile .............................................................. 10 External Debt by Creditor ................................................................................... 10 Sovereign and Corporate Spreads o f Jamaica ..................................................... 18 Public Sector Net Debt ........................................................................................ 21 Overall Public Sector Balances with No-Reform and Reform Scenarios .......... 36 Net Public Sector Debt with No-Reform and Reform Scenarios ....................... 36

Tables Table 1 . Table 2 . Table 3 .

Table 4 . Table 5 . Table 6 . Table 7 . Table 8 . Table 9 .

Table 10 . . Table 11 . Table 12 . Table 13 .

Composition o f Growth. 2000-07 ........................................................................... 3 Indicators o f the Financial Sector as o f June 2008 ................................................. 7 Central Government Total Debt and Central Government-Guaranteed

Public Debt Dynamics (2001-2008) ..................................................................... 11 Jamaica Medium Term Macroeconomic Projections ........................................... 12 Impact o f the Crisis on Revenues and Grants Compared to the Budget .............. 14 Jamaica: Impact o f the Crisis on the Macro Projections ...................................... 15 Jamaica External Financing Requirements and Sources in FY2008/09-2011/12 ... 16 Overall Balances and Public Investment (percent o f GDP) ................................. 23 Largest Loss Making Public Bodies FY2006/07-FY2007/08 ............................. 25 Public Body Defici ts under Different Reform Scenarios .................................... 25 PEFA Indicators o f Financial Management Performance in Jamaica ................. 28 Fiscal and Debt Projections with No-Reforms and Reform Scenarios (as GDP percent) ................................................................................. 37

External Debt Composition ................................................................................... 10

LOAN AND PROGRAM SUMMARY Jamaica

Fiscal and Debt Sustainability Development Policy Loan

Borrower:

Implementing Agency:

Financing Data:

Operation Type:

Main Policy Areas:

Key Outcome Indicators (end 2009):

Program Development Objectives and Contribution to CAS

Jamaica

M I N I S T R Y OF FINANCE AND THE PUBLIC SERVICE

IBRD Loan Amount: U S $ 100 mi l l i on Terms: Commitment-l inked loan denominated in U S D with a variable spread over 6-month LIBOR. The loan will b e payable in 30 years (including a 5 year grace period) with level repayments o f principal. The Borrower wishes t o maintain a l l r isk management options embedded in the DPL . The Borrower’s rationale for these terms i s to al ign the loan with the objectives o f i ts debt management strategy to extend the maturi ty prof i le and reduce the cost o f servicing public debt. Development Pol icy Loan (DPL). T h i s proposed DPL will assist the government in improv ing fiscal and debt sustainability during an on-going and severe global financial crisis by supporting policies for macroeconomic stability and helping to improve the efficiency and effectiveness o f publ ic spending and investment decisions. Specifically, the proposed loan wil l support po l icy actions in the fo l lowing areas: i) promoting fiscal sustainability through controll ing overall public sector balances, debt generation, and rationalization of Public Bodies, ii) increasing the efficiency o f publ ic f inancial management and budgeting processes, and iii) reducing distortions and enhancing the efficiency and fairness o f the tax system. 1) Improved fiscal sustainability through controlled overall publ ic sector balances and debt generation.

Consolidated N e t Public Debt to GDP falls by 3 percentage points. (Baseline 123. I

2) Increased efficiency o f publ ic financial management and budgeting processes. 0 Increased training for professional capacity building provided t o senior auditors and

3) Reduced distortions and enhanced efficiency and fairness o f the tax system. Increased number o f corporate (CIT and GCT) and (non-PAYE) individual tax payers

percent in FY 2007/08)

upgraded IT and physical facilities installed in the Audi tor General Department

o n the tax rol l . (Indicator: 25percent increase of the number of corporate individual tax payers for 2008/09 compared to 2007/08)

e

K e y Program Development Objectives: Enhancing fiscal and debt sustainability. The loan supports measures to reduce Jamaica’s high level o f debt and improve fiscal sustainability, which have constrained the country’s growth potential and crowded out productive investment. The loan includes fiscal and institutional reforms to reduce financing vulnerabilities, improve public spending effectiveness and improve the country’s abi l i ty t o cope with the adverse consequences o f the on-going global economic downturn. Increasing the eficiency of public financial management and budgeting processes. The public sector modernization efforts supported by the loan are expected to improve the efficiency o f publ ic expenditures and investment, strengthen the control o f public finances, and enhance the effectiveness o f government budgeting practices. Given the potential for decreased fiscal revenues under the current global environment, these efforts are particularly important as a means to improve fiscal discipline and help foster growth in the medium term through a better allocation o f scarce public resources.

Contribution to CAS: The proposed Development Pol icy Loan supports the fiscal and debt sustainability aspects o f the Jamaica Country Assistance Strategy (FY06-09), which was presented to the Wor ld

i

Risks a n d Risk Mit igat ion:

Operat ion ID Number:

Bank Board o f Executive Directors in April 2005 and updated with a Progress Report discussed by the Board in July 2007. Th is loan supports cr i t ica l objectives o f Jamaica’s CAS, including: i) aligning the budget to medium-term expenditure priorit ies and developing a strategic public sector investment program, ii) public sector re form to improve efficiency o f public sector spending, and iii) lowering public debt to reduce macroeconomic vulnerabilities and improving the efficiency o f public investment and social spending. The Loan’s analytical underpinnings include the CEM, PER, and Poverty Assessment as we l l as work by the Government, local think-tanks, and universities. Public financial management and budgeting pol icy actions supported by the Loan are based o n the findings o f the PEFA, CFAA and CPAR.

There are signijkant risks to the program supported by the proposed DPL including: economic, political, and natural disaster risks.

Economic: The current global f inancial crisis and economic downturn are expected to dampen economic growth, cause additional strain o n the high government borrowing needs, and pressure the currency. A significant deterioration in growth may reduce popular support for dif f icult reforms including privatization efforts. Whi le current economic risks are substantial, declining o i l and food prices should help reduce external f inancing requirements. In addition, lower inf lat ion should help limit the negative impact o f slower growth o n the poor. Mitigation: Ongoing macro-monitoring and country dialogue w i l l help adjust program supported by the proposed operation if additional critical risks were to emerge. The operation supports specijic actions to improve fiscal balances and control the debt generating process-which may reduce financing vulnerabilities. Political: Poli t ical opposition may intensify, delaying progress in implementing the reforms supported by the DPL. In particular, reforms to rationalize the Public Bodies may come under increased scrutiny as interest groups m a y seek to maintain the status quo. This concern would be amplif ied if economic activity were to decrease substantially in the context o f the global economic downturn and financial market volati l i ty. Mitigation: The risk is reduced by the Government’s consultative approach to reform implementation and the facilitation of dialogue on fiscal and economic costs of inaction among country stakeholders. Natural Disasters: Jamaica is highly vulnerable to natural disaster risks-particularly floods and hurricanes-that pose significant direct threats to economic growth and poverty reduction, as we l l as indirect threats by directing government resources away f r o m long-term investment plans. The damage to the major private sector enterprises is partly covered by their own insurance. The Jamaican Government participates in The Caribbean Catastrophe Risk Insurance Facility (CCRIF), which helps to offset

financing, costs in the case of a significant disaster. The Bank is also assisting Jamaica through investments in natural disaster risk mitigation with the Hurricane Dean Emergency Recovery Loan and technical assistance for its safety net program as a way to mitigate the adverse consequences of natural disasters on poverty.

Risks and mit igating measures are Dresented in more detail in Section IV. PE-PI 01 32 1-LEN-BB

11

I. COUNTRY CONTEXT

1. Jamaica’s economic performance i s severely constrained by i t s high level of debt. Jamaica is a highly indebted middle income country with a population o f around 2.7 mi l l ion and a per capita GNI o f US$3,710. The economy’s key strengths include political stability, natural resource, tourism, and i t s proximity to i t s largest trading partners. However, the high level o f debt to GDP and the resulting cost o f servicing debt, constrain social spending and investment required for higher growth and poverty reduction. The high debt and limited fiscal space also heightens the economy’s vulnerability to external shocks, including those originating from global financial conditions, commodities prices, and natural disasters.

2. After 18 years in the opposition, the Jamaica Labor Party (JLP) won the 2007 general election under the leadership o f Prime Minister Bruce Golding. The new administration campaigned on a platform o f jump-starting the economy, combating crime and violence, and reducing poverty. Although violent crime has been falling gradually over the past several years, i t remains extremely high by international standards, and confidence in the security forces and the criminal justice system i s low. Tackling the problem o f crime requires not only improving the security and justice system, but also attacking the environment that feeds criminality, which includes l ow growth and the lack o f j o b opportunities. Reducing macroeconomic vulnerabilities and providing effective social and investment programs i s essential to addressing Jamaica’s development challenges.

3. The government of Jamaica (GoJ) has embarked on an ambitious reform program aimed at achieving higher growth and addressing social challenges. The government i s preparing a comprehensive 25 year development plan, Vision 2030, to address the many long- term challenges that Jamaica faces as wel l as a Medium-Term Socio-Economic Framework to achieve more near-term goals. The government recognizes that without reducing debt and controlling the debt generating process, public investment and social needs, such as improving health, education and addressing crime and violence, will not be met. The government has outlined critical fiscal priorities to lower debt, including rationalization o f public enterprises, comprehensive tax reform, improving public sector efficiency, and improving the business climate as a means for placing the country o n a more sustainable fiscal and growth trajectory. These priorities have become even more pertinent in the context o f the current global financial market crisis and economic slowdown.

4. Jamaica faces significant near-term challenges under current global conditions. The government’s reform program recognizes that the country’s economic and fiscal trajectory i s not sustainable and is taking actions to bring fiscal balances and debt levels under control. I t s critical importance has become evident as external financing constraints have materialized due to the global financial crisis, and interest rate spreads on borrowing in international markets have nearly tripled in the few months since September 2008.

5. The government’s program has served as a basis for the support from the World Bank through this proposed DPL and other international financial institutions (IFIs) and donors, including the CDB, the EU, and the IDB. These operations wil l provide financial support for Jamaica as i t implements difficult policy actions in an adverse global environment.

6. The proposed DPL supports the government’s efforts to improve fiscal balances and reduce costly public debt in a sustainable fashion. These efforts are immediately required for

1

dealing with the current crisis and for accelerating growth and providing the fiscal means to address social challenges in the medium term. The proposed loan wil l contribute to the financing necessary for Jamaica to minimize the effects o f near-term global financial market volatility. I t would support a broad program o f measures to control overall public sector balances and debt, increase the efficiency o f financial management and budget processes, and increase fiscal revenue. The government aims to reach a balanced central government budget with an overall public sector debt to GDP ratio below 100 in the next three to four years-depending on global economic developments.

11. ECONOMIC CONTEXT AND RECENT MACROECONOMIC PERFORMANCE

7. Jamaica i s at a crossroads. The Jamaican government is taking important steps to move away from the status quo o f l o w growth, high debt, and economic vulnerability toward a new direction o f higher growth and greater stability. Moving away from the status quo under normal conditions i s challenging, in the current global crisis i t is even more so. I t entails politically difficult decisions to change long-standing policies that benefit narrow interests o f some organized groups at the cost o f better overall economic progress. Nonetheless, and after 18 years o f being in the opposition, the new government i s committed to implementing dif f icult reforms which are now even more pertinent due to the current global crisis. Jamaica’s economic challenges are many and understanding the country’s unique economic context i s critical for assessing the impact and importance o f its reforms. The sections that fol low describe the fundamentals o f Jamaica’s economy together with the expected impact o f the global crisis on the country’s macroeconomic performance and outlook.

Economic Context

Growth and Structure of the Economy

8. In the last 10 years, Jamaica’s growth performance has lagged behind that of key comparator countries (Figure 1). Much o f the weak growth and periodic economic problems arose from various combinations o f o i l price shocks, declining export prices, natural disasters, financial crisis, as wel l as political unrest. A s a result, economic policies oftentimes have been determined by pressing needs o f the day, rather than long-term development and growth goals.

9. Annual economic growth averaged 1.6 percent in the period 2002-2007. After a period o f l ow growth in the 1990s due to the financial crisis and inflation stabilization measures, growth improved but remained under 2.5 percent. Over this period, construction grew the most (3.1 percent) fueled mainly by a shift to housing construction, while services grew by 1.8 percent-due primarily to growth in tourism and the financial sector. Mining grew by 1.7 percent-mostly from bauxite and alumina production. In contrast, manufacturing remained nearly stagnant as productivity and competitiveness flagged. Agriculture also experienced negative average growth (-2 percent) partly due to decreased competitiveness compared to regional neighbors (see Table 1). The contribution o f the agricultural sector to growth has been varied due to the occurrence o f natural disasters, with extreme fluctuations from -12 percent in 2000 to 12 percent in 2006. (See Annex 3 on natural disasters).

2

Figure 1. Jamaica’s Growth has Been Low

Table 1. Composition of Growth, 2000-2007 2000 2001 2002 2003 2004 2005 2006 2007

Agriculture -12.0 5.8 -7.0 5.5 -8.7 -7.2 11.9 -5.0 Mining -1.0 2.6 3.3 4.9 2.6 3.4 1.5 -3.8 Manufacturing 0.6 0.8 -0.8 -0.8 2.7 -1.3 -2.4 0.9 Electricity and Water 2.2 0.7 4.6 5.2 -0.1 4.1 3.3 0.6 Construction 0.7 2.2 2.4 2.8 5.4 7.3 -1.3 5.4 Services 2.4 -0.1 2.1 2.4 1.2 1.2 3.1 1.9 GDP 0.8 1.5 1.1 2.5 1.0 1.4 2.5 1.2

Source: Bank o f Jamaica and IMF projections.

10. Services contribute the most to GDP, about 68 percent, with tourism accounting for nearly a quarter of the service sector. Manufacturing accounts for about 13 percent o f GDP, construction about 10 percent and agriculture and mining each contribute to around 6 percent o f GDP. Tourism contributes significantly to the country’s foreign currency inf lows and, hence, supports financing o f the country’s current account balance. Tourism arrivals from the U S have the highest share in total arrivals to the country-around 65 percent o f total-which raises the country’s exposure to U S business cycles (Box 1).

11. At 30 percent of GDP for the past 5 years, gross investment in Jamaica has been quite strong, but has not been associated with substantial growth. The lack o f growth in the presence o f high investment has many ossible explanations. These include a large informal sector, under measurement o f GDP, periodic natural disasters that destroy installed infrastructure, investments made to prevent crime which have l i t t le impact on aggregate productivity--among other factors. Further research is needed to fully understand the high

P

1. The Jamaican System of National Accounts has undergone revisions to bring i t in l ine with the United Nations 1993 System of National Accounts (1993 SNA). This includes changes in concepts, definitions, and the methodology used in estimating output for some industries. This task was aided by the availability o f new and revised data such as the 2004l2005 Household Expenditure Survey. The base year for the constant price estimates has been changed from 1996 to 2003. See Statistical Institute o f Jamaica (www.statinja.com). As a result o f the revision, GDP levels will be revised upward, which would imply a lower debt to GDP ratio (about a 15 percentage point fall, to 114 percent o f GDP).

3

investment-low growth puzzle in Jamaica and i s planned in an upcoming Bank study-Jamaica Country Economic Memorandum (CEM). (See Annex 4: The Growth Puzzle in Jamaica).

Box 1. Tourism Receipts in Jamaica

Over the past 6 years tourist arrivals have risen, and while total tourism expenditure had remained relatively stagnant until 2007, i t grew some in 2008. Recent data on tourism indicates a moderate increase in the number o f tourists during Jan-May 2008 (2.8 percent, respect to Jan-May 2007) and also a modest raise in total tourists’ expenditures (6.5 percent, compared to Jan-May 2007). Consequently, average expenditure per visitor grew by 3.6 percent during the same period, an encouraging outcome given the start o f the U S economic slowdown in late 2007. Although the tourism sector did not show major signs o f the impact o f the financial crisis as o f May 2008, i t i s expected that as the U S and global economy slow, tourism revenues w i l l stagnate or decline in the 2008-09 season.

Box Figure la . Growth Rates of Tourism Arrivals and Expenditure, percent change yly

Box Figure 1 b. Tourism Arrivals and Expenditure

1500 14W

13:O

‘ E O ., 1 W ‘003

900

800 700

600

500

I January. May I

Source: W B staff calculations based on data from Bank o f Jamaica.

Poverty and Inequality Challenges2

12. Jamaica has had relative success in reducing poverty over the last decade and a half. The decline in poverty occurred despite very slow growth in real GDP per capita. Real mean consumption per capita has grown eight times as fast as the real GDP per capita measured by national accounts. Consumption growth has been partly fueled by income sent from abroad through remittances.

13. Between 1989 and 2004, poverty fell from 30.4 to 16.9 percent of the population. This major fal l in poverty was accompanied by a similarly large fal l in inequality. The reduction in inequality appears to have contributed significantly to the drop in poverty between 1989 and 1996. After this period, hrther declines in poverty came from overall increases in income and consumption, as measures o f inequality fe l l back to the levels o f the early 1990s. Remittances are l ikely behind the faster growth in consumption per capita relative to per capita GDP. In the early

2. most recent Jamaica Survey o f Living Conditions in 2004.

This section i s based on the 2007 Jamaica Poverty Assessment (Report No. 35882-JM). I t uses data form the

4

1990s remittances represented about 2 percent o f total household income, and by the early 2000s, they accounted for more than 6 percent.

14. Growth was pro-poor during 1989-1996 but less so during 1996-2004. During this period inflation decreased from 5 1 percent, to approximately 20 percent which benefited the poor more than the r ich (Box 2). In contrast, for the 1996-2004 period growth was not pro-poor. While on average Jamaicans experienced a positive growth rate o f per capita consumption, for the poorest percentiles, consumption growth, while s t i l l positive, was well below the mean. This is also consistent with the slight upward trend observed in the Gini coefficient and a period in which inflation decreased less dramatically.

Box 2. Factors behind the decrease in poverty from 1999 to 2003 Falling inflation helped reduce poverty in Jamaica in the context o f low growth. In Jamaica, there seems to be a strong correlation between high inflation and increased incidence o f poverty. Jamaica’s inflation jumped from 29.8 percent in 1990 to 80.2 percent in 1991, due to, among other things, a sharp depreciation o f the exchange rate and the implementation o f the General Consumption Tax (GCT) in 1991. A t the same time, headcount poverty rate increased dramatically from 28.4 to 44.6 percent. As inflation increases, i t taxes the limited incomes o f the poor much more than the assets o f the middle and upper quartiles.

In addition, a decrease in the relative prices o f food from 1999 to 2003 may have M e r contributed to reduction in poverty. Food expenditures represent a large portion o f the budgets o f the poor. The fall in the relative price o f food clearly helped the budgets o f the poor. Between 1991 to 2003 period, the share o f the poorest quintile’s household budget spent on food declined from 66 percent in 1991 to 52 percent in 2003. Since prices o f food and he1 have increased in recent years, this i s likely to have had a negative impact on measured poverty rates.

Improving pro-poor outcomes would be helped by:

Maintaining macroeconomic stability, notably through low inflation to avoid “taxing” the poor,

Targeting social interventions to the rural areas, which have a higher proportion o f the poor, to improve health and education so as to enable the poor to take advantage o f economic opportunities, and

Reducing vulnerability to periodic natural disaster shocks as well as to developments -internal and external- that may affect negatively the poor.

15. Between 2004 and 2006, poverty declined from 16.9 percent of the population to 14.3 percent o f the population. Between 2004 and 2005, poverty declined sharply in the Kingston metropolitan area from 14.3 percent to 9.6 percent and then remained stagnant in 2006. Poverty in the other towns, at 7.2 percent in 2004, increased to 9.2 percent due to the decline in construction sector activity and consequent drop in cement output. Poverty in rural areas declined from 22 percent o f the rural population in 2004 to 19.8 percent in 2006.

16. The recent surge in inflation has had a greater impact on the poor. By August 2008, the Poor Person’s Inflation index reached 30.2 percent (year on year) versus a 26.6 percent for overall inflation, an increasing gap since the last quarter o f 2007. The high inflation i s likely to have a greater impact in urban compared to rural areas. Urban areas, where the population i s largely net buyers o f food and fuel, are likely to suffer more than rural areas due to the increase in prices.

17. Low levels o f income are correlated with lower educational attainments and human capital investments. Low human capital accumulation among poor children, whose parents under-invest in their education, i s primari ly due to liquidity and credit constraints, according to

5

the latest World Bank Poverty Assessment (2006). L o w investments in human capital during childhood and youth increase the likelihood o f poverty during adulthood because a person with inadequate schooling has reduced chances o f finding productive employment. The poverty headcount is significantly lower only if the head o f the household has completed the second cycle o f secondary school. At the same time, family income i s the strongest and most consistent determinant o f school enrollment. As many as 75 percent o f the 17 years olds in the poorest quintile are not in school compared to 33 percent in the richest quintile. The gap between r ich and poor i s even higher when measured in terms o f number o f days in school. Moreover, the rate o f decline in school enrollment and attendance i s much greater for boys than girls. Hence, maintaining adequate funding for public education i s an essential part o f the Government’s poverty reduction strategy.

Business Climate, Trade, Finance

18. Jamaica compares favorably to the rest of LAC on several business climate indicators, except for the costs of paying taxes and the costs of closing a business. Jamaica ranks in the upper third o f 181 countries surveyed on the overall ease o f doing b u ~ i n e s s . ~ In recent years Jamaica has made gains in improving procedures for obtaining construction permits, while there have been some setbacks related to enforcing contracts. Tax administration i s a major constraint to doing business in Jamaica as the country has consistently ranked low in this indicator in recent years. Reforms in tax administration geared toward simplifying tax payment procedures that the government is considering implementing are expected to have a particularly positive impact on the business climate.

19. Despite preferential access to the EU and U S markets, Jamaica has not been able to increase i t s share o f exports in world trade. Indeed, constraints to competitiveness and productivity limit the country’s ability to take advantage o f preferential access to its largest trading partners. In particular, high costs o f paying taxes and enforcing contracts, high security costs, labor market rigidities, tariff dispersion, and trade costs reduce the competitiveness o f Jamaican exports, despite the country’s favorable geographic location (Box 3).

1 Box 3. Structure of the Jamaican Economy and Trade I Production in the Jamaica i s dominated by the services sectors, as it i s for other Caribbean economies. Based on S A M S 1990, exports are dominated by tourism, included in “commerce” which represents 50.8 percent o f total exports. Agriculture contributed 5.8 percent t o value added o f the economy. Sugar cane and processed sugar together represent 3.5 percent o f total exports, which i s significant but smaller than other Caribbean countries. M in ing represents 4.3 percent o f value added and 23.3 percent o f total exports. The destination o f Jamaica’s exports i s geographically diversified, but there are significant variations across commodities. On the imports side, the U S is much more important than the EU as a source o f impor ts-43.0 percent f rom the U S compared to 11.6 percent f r o m the EU.

A recent Wor ld Bank report shows that a preferential trading agreement with a single partner (for example, the EU or US) may have welfare gains for Jamaica, but has less benefit than a multi lateral trade agreement due to the possibility o f trade diversion. However, the trade diversion effect o f a free trade agreement (FTA) can be ameliorated or eliminated by Jamaica through unilateral reduction o f tariffs against other countries.

In terms o f exports, the EU i s the destination for a l l o f Jamaica’s processed sugar exports, so Jamaica I

3. Doing Business Indicators 2008

6

potentially gains f rom any improved access for sugar in the EU market. The EU is also a significant market for other Jamaican agricultural exports. In general, EU export markets are less important to Jamaica than the US, wh ich would tend to lessen interest in Jamaica in an FTA with the EU, unless i t promised significantly greater market access.

Factor shares in production indicate that agriculture and construction are intensive in unskil led labor, so any increase in market size for these sectors should favor unski l led labor. Assuming unemployment and a f ixed real wage for unskil led labor, expansion o f sectors intensive in unskil led labor should lead to significant increases in employment. Mining and beverages and tobacco are highly capital intensive, as are many o f the service sectors, including commerce (tourism). Given the wide variation in factor shares across sectors, one might expect trade agreements which change effective wor ld prices facing Jamaica to have significant effects o n the structure o f employment and wages.

Source; Caribbean: Accelerating Trade Integration. Pol icy Options for Sustained Growth, Job Creation, and Poverty Reduction. W o r l d Bank, LAC, LCSPE, November 2008.

20. In terms of lending and credit growth, the financial sector, as o f June 2008, i s better capitalized and more stable compared to the financial crisis of the mid-1990s. With a Capital Adequacy Ratio (CAR) o f 16.7 percent as o f June 2008, solvency ratios are high and the soundness o f bank portfolios has increased with a non performing loan (NPL) to total loans ratio o f only 2.5 percent (Table 2). Credit to the private sector remains modest, at around 14 percent o f GDP, even though the loans to deposits ratio increased from 50 percent in 2004 to 63.4 percent in December 2007. In past years, pyramid schemes flourished by promising double digit returns and threatening the stability o f the financial sector. The collapse o f many these schemes over the last year has decreased the appetite for investing in such schemes.

Table 2. Indicators of the Financial Sector as of June 2008 Commercial Banks Total System

OS-Jun 07-Jun 08-Jun O7Jun Number of Institutions 7 6 14 14

Rate o f Asset Growth Rate o f Deposit Growth

Prov. For Loan Losses:Total Loans (gross) Prov. For Loan Losses: NPL (3 Mths 8 0 ) NPL (3 Mths &>):Total Loans (gross) NPL (3 Mths &>): (Total Assets

Asset Quality

14.8% 12.9% 11.5% 12.2% 10.0% 11.6% 9.9% 12.8%

2.6% 2.5% 2.4% 2.4% 120.4% 128.2% 94.3% 107.7% 2.2% 2.0% 2.5% .2.2%

+ Provision for loan losses) 0.9% 0.7% 1.1% 0.8% Capital Adequacy

Deposits + Borrowings: Capital 919.2% 948.3% 858.3% 880.0%

Capital Adequacy Ratio [CAR] 15.6% 15.5% 16.7% 16.6% NPL (3 mths &>):Capital Base+Prov for loan losses 9.0% 7.8% 10.3% 8.4%

Pre - tax Profit Margin (for the Calendar Quarter) 28.6% 26.6% 25.4% 24.7% Return on Average Assets (for the Calendar Quarter) 1 .O% 0.9% 0.8% 0.8% Income AssetdExpense Liabilities (at 30 June) 104.8% 104.3% 105.7% 105.8%

Capital Base:Total Assets 8.7% 8.5% 9.4% 9.2%

Profitability

Source: Central Bank o f Jamaica (BOJ).

21. In terms o f overall assets, the domestic financial system i s dependent on government debt, which increases the systemic risk from this asset. Almost 80 percent o f the liquid assets

7

o f the financial system are government se~ur i t i es .~ In addition, among institutional investors, insurance companies hold about ha l f o f their assets in government securities, and pension f inds hold about 30 percent o f their assets in government securities. Both commercial banks and securities dealers offer investment vehicles to the ~ u b l i c . ~ The banks provide deposit accounts and the securities dealers sell repurchase agreements (repos) collateralized by government securities.6 This strong interlinkage renders the financial sector sensitive to government performance and vice versa.

22. Banks hold over 30 percent o f their deposits in liquid government securities. Banks are required to hold 14 percent o f their deposits in liquid short-term government securities (issued by Jamaica, Canada, the United Kingdom, or the United States). Their holdings exceed the requirement and consist mostly o f Jamaican government securities. Most o f the U S dollar denominated Jamaican government securities, originally issued overseas, are brought back into the local market In addition to the 14 percent liquidity requirement, banks are subject to a 9 percent cash reserve requirement on deposits. For J$ denominated deposits, reserve requirements must be held at the Bank o f Jamaica (BOJ) and for US$ denominated deposits they must be held at an overseas bank. Banks hold about 34 percent in liquid assets (compared to the 14 percent requirement) and hold 22 percent in cash (compared to the 9 percent cash reserve requirement).

23. Liquid liabilities of securities dealers are almost twice the volume of bank deposits, while insurance companies and pension funds are also large holders of government bonds. Over 70 percent o f securities dealers’ repos are US$ denominated, and most o f these are collateralized by government securities originally issued outside o f Jamaica. Thus, dealers dominate the market for liquid liabilities and this i s heavily weighted toward U S $ assets. Insurance companies and pension h n d s are the largest institutional investors in the market, but they do not hold significant levels of foreign currency denominated Jamaican government bonds.’ Insurance companies include life, property and casualty. L i f e insurance represents J$lOO bi l l ion o f the J$148 bi l l ion in insurance assets. Most o f the government securities held by the insurance sector are held by l i fe insurance companies. While property casualty companies must hold 40 percent o f their capital in government securities, they are a relatively small segment o f the market. Institutional investors are subject to a limit on foreign denominated assets (between 5-20 percent depending on the institution).’ Because insurance companies are not allowed to issue foreign currency policies and pension f inds are not allowed to issue defined- benefit foreign currency denominated accounts, neither institutional investor group i s l ikely to hold many foreign assets even without the l imits on foreign denominated assets.

4. Liquid financial instruments include repurchase agreements backed by government securities and deposits. Banks partially invest the latter in government securities. 5. The discussion o f liquidity providers excludes analysis o f building societies, which h o l d 17 percent o f the assets o f depository institutions and credit unions, making 7 percent o f the assets o f depository institutions. Bo th serve the retail customer and therefore are impacted by the same forces as the retail customers o f commercial banks. Hence their opportunities and financial stability are subject t o the same forces as those o f the commercial banks. 6. A repurchase agreement is a security sold under an agreement to repurchase at a f ixed price at the maturity o f the agreement. In Jamaica these typically have a maturity o f 30 to 60 days. 7. The Ministry o f Finance i s the source for the information on government securities holdings. These data cover domestic issues only. Because these institutional investors ho ld so few domestic US$ securities, I have assumed that they hold no foreign-issued government bonds. 8. BOJ regulations limit i s 5 percent and Financial Services Commission limit i s 20 percent).

8

The Structure of Debt and Debt Dynamics 24. A contributing factor to Jamaica’s low growth i s its high level o f debt. Total public debt including domestic and external debt steadily increased from 84 percent o f GDP in 1997 to a peak o f 136 percent o f GDP in 2003 fol lowing the financial crisis o f the mid-1990s. Since 2003, net public debt to GDP has slowly decreased to 123 percent, mostly due to high primary surpluses and decreasing interest rates. In terms o f i t s composition, domestic public debt as a share o f total public debt increased from 10 percent in 1991 to 56 percent in September 2008, while the share o f external debt fel l from 90 percent to 44 percent over the same period (See Figure 2).

Figure 2. Evolution of Total Public Debt (1980-September 2008)

250% r 1 6 J o o o

200%

150%

100%

50%

0%

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 m

P 0 w l

4

Externa I Pub l ic D e b t - D o m e s t i c Pub l ic D e b t -Percent o fGDP

25. The composition of Jamaica’s gross public debt indicates significant exposure to currency, interest and roll-over risks.’ During recent years, the composition o f debt has been comparatively stable with about 44 percent o f debt indexed or denominated in foreign exchange, with about 80 percent o f that denominated in U S dollar debt. This indicates a high exposure o f Jamaican debt to fluctuations in the U S dollar exchange rate. The exposure o f public debt to changes in interest rates i s significant, as variable-rate instruments account for more than 40 percent o f the total public debt stock (September 2008>-about US$6.2 billion. By increasing the amount o f variable-rate instruments, the country has been able to extend the maturity o f domestic public debt, but i t has increased the exposure o f public debt to interest rate movements. With a

9. excludes central government-guaranteed domestic debt and non-guaranteed Public Bodies debt.

Gross public debt includes central government total debt and central government-guaranteed external debt. I t

9

share o f almost 70 percent, Jamaica has markedly relied on credit from the private sector. Only 30 percent i s from multilateral or bilateral creditors. See Table 3 and Figures 3-6.

Table 3. Central Government Total Debt and Central Government-Guaranteed External Debt Composition*

(September 2008, expressed in percent o f total public debt unless otherwise specified) Total Public Debt (US$ million)

By Currency

14,259.9 Percent o f GDP 115.5%

Jamaican Dol lar 49.3% Foreign Currency 50.7%

Variable Interest Rate 43 3% Fixed Interest Rate 56 7%

Domestic Public Debt 55.8%

By Interest Rate

By Currency (percent o f domeshc public debt) Jamaican Dol lar 88.4% Foreign Currency 11 6%

External Public Debt 44.2% By Creditor (percent o f external publ ic debt)

Private 69.0% Multi lateral 20.0% Bilateral 1 1 .O%

*Note Total public debt in this table includes central government total debt and central government-guaranteed external debt I t excludes central government-guaranteed domestic debt and non-guaranteed Public Bodies debt

Figure 3: Foreign Denominated Debtby Currency (September ZOOS)

DUSD mEUR DJPY DGBP .CAD QOther

Figure4 TotalhrblicDebtbylnterasl Rate(Septernber2008)

Vanable Interest Rae 43% Fned h t m t Rate

57%

Figure 4 Total Public Debt Amortiratton Proflte (Asat September 2008) - - __ __ -. -

5

c 5 g 3 n 3

0

~

Figure 6: External Debt by Creddor (SeptemberZOOB)

10

26. The primary surplus, seignorage, and real GDP growth have had a significant impact lowering debt to GDP between FY2003/04 to N 2 0 0 6 / 0 7 (Table 4). Central Government primary surplus peaked at 14.3 percent o f GDP in FY 2003/04 and remained at nearly the same level in FY 2004/05. Despite this high primary surplus, debt levels hardly f e l l as other debt accumulating flows contributed substantially to debt.’’ Other debt accumulating flows are primarily attributable to the assumption o f liabilities from Public Bodies. This contributed to debt growth considerably in the past seven years (14.2 percentage points o f GDP in 2007/08), highlighting the importance o f reforms the government i s pursuing to increase control over the Public bodies’ debt generating process. Real interest rate increases have consistently contributed to the debt accumulation, although this impact weakened in recent years. Except for FY 2002/03 when the real exchange rate depreciated 12 percent on an annual basis, exchange rate and inflation movements have not exerted sizeable pressure on debt dynamics.

Table 4. Public Sector Debt Dvnamics (2001-2008)* Baseline Debt Dynamics 2001102 2002103 2003/04 2004/05 2005/06 2006107 2007/08

Public sector debt decomposition (YO o f GDP) 109.2 128.5 126.9 126.7 118.8 115.3 123.1

Change in public sector debt 14.5 19.3 -1.6 -0.2 -7.9 -3.5 7.7 A) Primary Surplus -9. I -8.3 -14.3 -13.9 -9.3 -6.9 -4.4

C) Automatic debt dynamics 6.0 13.7 4.3 -0.8 -3.7 3.2 0.2

Contribution from real domestic interest rate 6.2 6.4 4.1 2.3 -0.8 5.4 1 .I

Contribution from real foreign interest rate 1.9 2.5 3.2 2.3 1.6 1.5 1.8

B) Seignorage 0.2 -1.4 -2.0 -2.7 -0.8 -3.1 -2.3

Contribution from real GDP growth -1.3 -1.7 -2.4 -0.5 -2.5 -3.3 -1 .O

Contribution from real exchange rate depreciation -0.7 6.6 -0.6 -5.0 -2.0 -0.3 -2.2

0) Other identified debt-creating flows -0.7 2.3 -0.9 2.3 -0.2 1.2 0.0

E) Other debt accumulation 18.1 13.0 11.4 14.8 6. I 2.1 14.2

Source: Staff Calculations based on MOF and IMF data. Note; * Public Sector Debt refers here to total central government and Public Bodies’ debt as consolidated in Annex 8, Debt Sustainability Analysis.

Recent Economic Developments, Impact o f the Global Crisis, and Outlook

Growth, Inflation and External Balances

27. Economic activity i s expected to slow over the coming year due to the global crisis. During FY 2007/08 economic activity decelerated to 0.7 percent from 2.4 percent over the prior year due to the adverse impact o f Hurricane Dean in the agncultural sector. Economic activity i s expected to decline by -0.5 percent o f GDP in FY 2008/09-revised down fkom 0.8 percent, which was projected before the crisis. The impact o f the external environment includes the tightening o f international financial conditions, declining U S growth, and the lingering impact o f high energy and food prices. Growth i s expected to recover in the medium-term to 2.0 percent in 2012/13 as the global economy recovers and Jamaica’s exports o f goods and services expand with greater private sector investment (Table 5). The economy wil l nonetheless remain

10. debt assumed by the Central Government i s referred to as other debt accumulating flows.

Public Bodies’ fiscal accounts are not consolidated with the Central Government’s accounts, which i s why

11

vulnerable to external shocks (including natural disasters, commodity prices, and financial sector volatility) in the medium term.

Table 5. Jamaica Medium Term Macroeconomic Projections (Including First Year o f Reforms Implemented)

Jamaica Macro Table Projected

2006/07 2007/08 2008109 2009110 2010/11 201 1/12 2012113

Vational Accounts and Prices Real GDP growth (%) Inflation (end o f period)

Fiscal Sector Central Government (as GDP %)

Revenues Expenditures Primary Balance Overall Balance

Revenues Expenditures Primary Balance Overall Balance

Public Bodies (as GDP %)

Public Sector Net Debt (as GDP%) Public Sector Deficit (as GDP%)

External Sector Jurrent Account Balance (as YO o f GDP) 3fwhich :exports o f goods, f.0.b. 3fwhich : import o f goods, f.0.b. \Jet international reserves (in millions o f US$)

Memorandum items: J S short term interest rate (average) 3i l prices (average)*

2.4 8.0

29.3 35.1

8.1 -5.8

31.3 34.1 -1.2 -2.8

115.3 -8.5

-10.2 18.0 41.9

2,329

5.3 66.0

0.7 19.9

30.9 36.7

6.8 -5.9

32.2 36.4 -2.5 -4.2

123.1 -10.1

-16.5 17.1 46.9

2,083

4.7 81.7

-0.5 15.4

29.6 35.4

7.4 -5.8

18.3 23.1 -3.1 -4.8

119.6 - 10.6

-14.5 15.7 41.9

1,600

3.0 91.8

0.0 7.9

29.5 34.9

7.0 -5.5

18.5 22.7 -2.3 -4.2

118.5 -9.7

-10.0 14.8 37.6

1,600

3.2 69.8

1 .o 6.3

30.7 35.2

7.4 -4.6

18.5 22.6 -2.2 -4.1

116.1 -8.7

-9.4 15.6 38.9

1,760

4.7 76.1

1.5 5.1

31.0 34.9

7.7 -4.0

18.7 22.6 -2.0 -3.9

113.3 -7.8

-8.3 15.9 39.9

1,705

5.1 79.9

2.0 4.8

31.0 34.6

7.7 -3.7

18.7 22.6 -2.c -3.5

109.9 -7.6

-7.2 15.5 39.8

1,718

5.1 82.2

k A simple average o f UK Brent, Dubai, and West Texas Intermediate spot prices. Source: IMF, WB.

Note: Net Public Sector Debt refers here to net total central government and Public Bodies debt as consolidated in Annex 8. Debt Sustainability Analysis

28. T h e macroeconomic projections shown in T a b l e 5 on ly t a k e i n t o account reforms that the government has accomplished to date and d o n o t consider p lanned reforms under the second and third phase o f the government’s p r o g r a m . The impact o f the complete set o f

12

debt to GDP is expected to fal l to about 100 percent and the total public sector deficit to 4.7 percent o f GDP by 2012/13. This compares to a no-reform counterfactual (excluding reforms already taken and no future reforms) o f net public debt o f 118 percent o f GDP and a total public sector deficit o f 11 percent o f GDP.

29. Twelve-month inflation rapidly rose in 2008 fueled by high food and fuel prices, but i s now falling and i s expected to continue to moderate over the medium term. Inflation rose to 21 percent in September 2008 from 7 percent a year ago due to high food and fue l prices and Hurricane Dean’s effect on agriculture. For the remainder o f FY 2008/09, inflationary pressures are expected to gradually decrease as the global slowdown reduces foreign and domestic demand and commodity prices fall. The largest effects are expected due to the fal l in energy prices, with indirect effects on lowering transport and some services costs. Inflation i s expected to further decline to less than 6 percent over the medium term to 2012/13.

30. The current account deficit (CAD) widened to 16.5 percent of GDP in 2007/08, mainly due to sharp increases in the cost o f fuel imports, but i s expected to narrow considerably over the medium term as fuel prices moderate and imports weaken relative to exports. The C A D is expected to fall to 12.2 percent o f GDP in 2008/09 and fal l further to 6 percent o f GDP up to 2012/13 as the cost o f fuel imports declines and domestic demand moderates, reducing overall imports relative to exports. Over the last few years, the C A D grew largely as the result o f the increased cost o f imports o f manufactured goods and food and fuel that was only partly offset by increases in exports o f alumina and bauxite. The services account deteriorated due to an increase in net transportation payments associated with the higher cost o f fuel. Since then, the global economic slowdown and moderating fuel prices have softened imports and as wel l as exports. Higher interest payments on external debt and a projected decline in the imputed profi t remittances from private direct investment i s expected to reduce net foreign income. Latest data as o f June 2008 on foreign direct investment do not yet show a decline in FDI flows, although current global liquidity conditions may have slowed investment inflows.

31. Official estimates of tourism revenues and wage remittances inflows have been revised down. Tourism receipts and remittances were strong during the beginning o f 2008, but are expected to slow in the coming months. The 2009 tourist season i s receiving lower than expected advanced bookings, while remittances, which started the year at a strong pace o f 12 percent (compared to year earlier levels), have significantly slowed. Despite increased growth in tourism in the first ha l f o f the year, the forecast o f growth in tourists’ arrivals has been revised down from the 6 to 7 percent range to the 4 to 5 percent range for the fiscal year 2008/09 as a whole. The forecast for growth in remittances in FY 2008/09 has been revised down to the 6 to 7 percent range from the 10 to 11 percent range. This is expected to have an important impact on U S dollar inflows as remittances represent approximately 16 percent o f GDP. Until April 2008, the inf low o f remittances was growing at a strong pace o f 12 percent (year on year). The decline in remittances wil l also likely depress household consumption, particularly for those families with migrants working abroad.

Fiscal Balances and Debt Trajectory

32. The fiscal policy framework i s deemed adequate as fiscal balances are projected to improve while debt to GDP levels fall-however, rapid additional fiscal consolidation

13

would be required if the government's targets for fiscal balance are to be reached. The consolidated fiscal deficit is expected to narrow in the medium term from 10.1 percent o f GDP in 2007/08 to 7.6 percent in 2012/13. This projection takes into account government reforms implemented this year in tax administration and Public Body rationalizations to stem ongoing losses (and supported by this DPL) as well as the projected impact o f the global slowdown. At the central government level, fiscal deficits would decrease in the medium term from a projected 5.8 percent for FY2008/09 to 3.7 percent in 2012/13. Likewise, Public Bodies' deficits would decrease slightly from 4.8 percent now to 3.9 percent in 2012/13. While fiscal balances are expected to improve over the medium-term, the impact o f the global external environment implies that the government may not be able to balance i t s budget as quickly as anticipated prior to the global slowdown. Ideally, the composition and quality o f fiscal expenditures may be improved as a countercyclical measure to partly offset the impact o f the downturn.

33. Central government revenues have declined over the year from 27.5 percent to an estimated 26 percent of GDP in September 2008 due to decreasing export revenues and decreased general consumption taxes (GCT) revenues. The GCT wil l further deteriorate as the economy and imports slow due to lower export demand. Revenues from taxes o n interest and income and corporate profits have been boosted by improved collection on tax arrears due to the tax amnesty provided this fiscal year. Non-tax revenues have improved, but declining revenues from the bauxite levy have partly offset the increase.

34. The crisis has impacted revenues mostly through decreased tax collection and lower bauxite levies as well as lower capital revenues. Table 6 presents the projected fiscal outcome for FY08/09 compared to the init ial budgeted estimates and shows lower expected revenues for al l categories except non-tax revenues. Projected capital revenues are much lower than the amount budgeted." The effect o f crisis o n revenues for FY 2008/09 have repercussions going forward on projected revenues and grants under the next three years o f the government reform program. These projections are shown in Annex 5.

Table 6. Impact of the Crisis on Revenues and Grants compared to the Original Budget (percent o f GDP)

Revised Projected Original Outcomes 2008/09 Budget 2008/09

Revenue and Grants 29.5 31.0 Tax Revenue 25.8 27.6 Income andprofits 11.0 11.0 Environmental Levy 0.2 0.2 Production and consumption 7.3 8.4 International Trade 7.3 7.9

Non-Tax Revenue 2.5 1.9 Bauxite Levy 0.5 0.9 Capital Revenue 0.1 0.9 Grants 0.6 0.6

Source: Staff calculations based on MOF data.

35. Increases in interest expenditures and the wage bill have been counterbalanced by cuts in capital spending. Interest expenditures have increased J$ l b i l l ion higher than budgeted

" Annex 3, Table A3 presents Government's Central Operations for September 2008 with more details.

14

in the first two quarters o f FY2008/09 due to increased costs o f financing and debt service. The new agreement with the teachers within the MOU a eement wil l increase the wage bill by J$2.9 billion for FY 08/09 and J$7.5 billion for FY09/10. The government is expected to slash capital expenditures by some J$3.6 bi l l ion over the budgeted amount to keep overall expenditures under control.

36. Primary surpluses at the central government level-projected at 7.4 percent o f GDP for 2008/09 are expected to remain around that level in the medium term. Accounting for the Public Bodies reduces the primary surplus by 3.1 percentage points to 4.3 percent o f GDP. The government i s planning to restructure and rationalize Public Bodies with positive implications for overall balances. Without reforms, past trends would imply decreasing primary surpluses at the central government and rising primary deficits at the Public Bodies’ level.

37. Net debt to GDP i s expected to decrease in the medium term from 123.1 percent o f GDP in 2007/08 to 109.9 percent in 2012/13. Given the global external environment, even with the implementation o f the government reform plan, net debt to GDP may not fa l l below 100 percent o f GDP by 2011/12 as originally anticipated by the government. The current financial crisis has adversely impacted the cost o f capital for heavily indebted sovereigns such as Jamaica, while depreciation pressures stemming from lower capital inf lows could increase the cost o f servicing the foreign exchange denominated component o f debt. (See Annex 7 on Debt Dynamics-2008-201 4).

IF

Table 7. Jamaica: Impact of the Crisis on the Macro Projections (Including First Year of Reforms Implemented)

Projected Growth 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Real GDP growth (%) before the Cr is is 0.7 0.8 1.3 1.9 2.3 2.6 Real GDP growth (%) with the Cris is 0.7 -0.5 0.0 1 .o 1.5 2.0

Fiscal Sector Central Government (as GDP %)

Primary Balance with the Cris is Pr imary Balance before the Crisis Overal l Balance with the Cris is

6.8 7.4 7.0 7.4 7.7 7.7 6.8 7.9 7.6 7.8 7.9 8.0

-5.9 -5.8 -5.5 -4.6 -4.0 -3.7 Overal l Balance before the Crisis -5.9 -4.9 -6.1 -5.5 -4.0 -3.1

Public Bodies (as GDP %) Primary Balance with the Cris is -2.5 -3.1 -2.3 -2.2 -2.0 -2.0 Pr imary Balance before the Crisis -2.5 -3.0 -2.5 -2.4 -2.1 -2.1 Overal l Balance with the Crisis -4.2 -4.8 -4.2 -4.1 -3.9 -3.9 Overal l Balance before the Cr is is -4.4 -4.9 -5.1 -5.4 -5.7 -5.8

Total Public Sector Deficit (as GDP%) with the Crisis -10.1 -10.6 -9.7 -8.7 -7.8 -7.6 Total Public Sector Deficit (as GDPYo) before the Crisis -10.1 -9.6 -10.4 -9.8 -8.0 -7.1 1 Public Sector Net Debt (as GDP%) with the Crisis -123.1 119.6 118.5 116.1 113.3 109.9 Public Sector Net Debt (as GDP%) before the Crisis -123.1 115.2 110.9 107.3 104.3 100.3

Source: IMF, World B a n k .

12. a n d 7 percent in FY2009/10.

T h e third M e m o r a n d u m o f Unders tand ing specif ies a n o m i n a l wage adjustment o f 15 percent in FY2008/09

15

The current crisis i s expected to have a substantial impact on growth and fiscal balances. Growth projections have been revised downward for this fiscal year and the next four due to the global economic crisis. On the fiscal side, the crisis implies lower primary balances for the central government and greater total public sector deficit. Net debt to GDP for FY 2012/13 i s projected to be 9 percentage points higher due to the global crisis compared to what was projected before the crisis (Table 7).

38. External financing requirements over the medium-term are expected to be met primarily by a combination of official government and government guaranteed sources, including the Caribbean Development Bank, Inter-American Development Bank, and World Bank. With the exception o f a €200 mi l l ion Eurobond due in February 2009, external debt rollover risk i s moderate in the near-term, as there are only modest amounts o f external debt coming due until 2011 (See Table 8). In terms o f domestic debt, amortization i s between US$SOO to $US$900 mi l l ion each year for the next two years. Because most o f the Jamaican dollar debt i s held by domestic financial institutions and Jamaicans, there i s a high confidence in the government to respect its constitutional obligations to service i ts debt.

Table 8. Jamaica External Financing Requirements and Sources in 2008/09-2011/12 201 1/12 2008109 2009/10 2010/11

Financing Requirements, USD billion 2,723 1,464 1,509 1,953 Current account deficit 2,057 1,177 1,24 1 1,300 Long t e r m debt amortizations (Government only) 666 287 268 653

Financing Sources, USD billion 2,723 1,464 1,509 1,953

Long term debt disbursements 1,342 762 605 1,170 Government direct 64 8 427 220 592

Off icial* 298 427 220 169 Commercial 350 0 0 422

Government guaranteed 267 226 50 50 Petrocaribe 328 212 247 278 Private (net) 100 -102 89 51

FDI (net) 903 702 1,063 779

Reserves Changes o f Central Bank -478 0 160 -4 *Note: Off ic ia l lending includes financing the GoJ intends to request f r o m the IDB, CDB, and W o r l d Bank. Financing sources equal to financing requirements as gaps are a residual f i l led through changes in reserves o f the Central Bank and net private flows.

39. An analysis of the sensitivity o f the debt path to shocks indicates that the debt trajectory i s sensitive to interest rate and exchange rate variations. This should be expected given the large share o f variable rate debt, on the one hand; and foreign exchange denominated debt, on the other. A one-off 30 percent shock to the exchange rate, al l else held constant, would drive the debt level above 140 percent o f GDP. Last year’s doubling o f net FDI-amounting to almost US$2 billion-as well as tourism receipts and remittances helped to support the exchange rate, which could depreciate in view o f global liquidity conditions. A shock corresponding to two standard deviations from mean real interest rates would increase debt to about 145 percent o f GDP. Real domestic interest rates are modeled as a 1 percentage point mark up over the 6- month OM0 interest rate over inflation. In both cases, the shocks exhibit persistence in the debt

16

path, which in either event would be associated with debt not below 135 percent o f GDP. (See Annex 8).

40. Under the current baseline scenario debt i s falling. Stress tests indicate, however, that had the government not taken action under i t s current program, key variables at historical levels would imply a growing level o f debt to GDP. The stress test highlights the sensitivity o f the economy to various shocks and confirms the results obtained by stochastic simulations. With low growth, high real interest rates, and a lack o f reforms to address the debt generating process, the debt path would be subject to ongoing pressures.

Monetary Policy and the Financial System

41. The monetary policy framework i s adequate as the Central Bank has intervened to moderate currency swings and has acted to increase liquidity and ease credit constraints to the banking sector. The central bank has intervened in the foreign currency market to stabilize the exchange rate as the exchange rate has depreciated about 7 percent in nominal terms from September 2,2008 to December 10, 2008. Interventions have resulted in a decline o f about U S $ 0.5 bi l l ion in net international reserves (NE), which stand at US$ 1.7 bi l l ion as o f December 10, 2008. Net international Reserves now account for about ten weeks o f imports o f goods and services. During the second week o f November reserves have begun to recuperate. Credit growth to the private sector has been slower in the past three months albeit starting from a l o w base (14 percent o f GDP). In order to stem further exchange rate depreciation, the Bank o f Jamaica o n December 1, 2008 raised interest rates by almost 2.5 percentage points on 30 day certificates o f deposit, to 17 percent, and by over 6 percentage points on 180 certificates o f deposit, to 21.50 percent. The key challenge to the authorities i s to reduce external vulnerabilities while maintaining internal balance and recovering reserves. The short term outlook envisages further nominal depreciation o f the exchange rate as strong central bank intervention in currency markets i s limited by the amount o f reserves. The medium term outlook contemplates a gradual decline in inflation and a recovery o f international reserves.

Box 4. Monetary Policy Measures to Respond to the Crisis as o f November 18,2008

17

More recently, with the urnrunty of both BOJ and GOJ secuntirs, there has been a build-up o f

Jamaica Dolfnr hqwcbty in the bankrng system that coiild threaten stability In order to retTlo-*.e this

h q u x l ~ ~ overhang and to preserve order 1 ~ i financial 1narket5. the Bank o f Jaluarca wlll inipleniezxt

the follow*mg iiieawre5.

1 The Bank m d l offer a Specd Cemficate o f D c p o s r t to Primary Dealers and Coirmrcinl

Banks, to niatlxe clll 3 December 2008. h e r e s t payable on this uistnment wi t1 be 20.50%

per aiwuni T h i s mstrument will be offered Erum Tuesday. 18 Noveniber to Wednesday, 19

No%-ember 2008. B0J-s regular ruenu o f C D s ranging from 3 0 days to 365 day will r m a m

011 offkr.

Effective 3 December. 3008. on the expiration o f a 25 &tp notice pernod, the cash rewme

reqiurenxnt of commercial banks. merchant b a n k s and budding socrehzs will be increased to

1 1 per cent o f Jamaica Dollar habilittes from the current requzrement o f 9 per cent. The hqtud

asset reqwement would therefore rise to 23 per cent from the cwrent 23 per cent I t 1s

mtended to mcrease these requirements by a furtha 3 percentage polnts

2

Source Bank o f Jamaica Press Release Nov 18, 2008

42. Current sovereign and corporate spreads reflect a higher country risk resulting from the volatile international financial environment. EMBI Global Sovereign spreads for Jamaica at 972 basis points as o f December 1, 2008 are higher than the regional average (see Figure 8). Fitch downgraded Jamaica on November 18, 2008 and the rating outlook i s negative due to deepening global crisis and the U S recession that heighten the rising macro economic pressures that the country faces given its fundamentals. Moody's downgraded Jamaica's sovereign ratings because o f the ongoing deterioration in the global environment and the resulting fiscal and external pressures. Spreads for Jamaican corporate loans above US$300 million-CEMBI spreads-are almost double the L A C average. This reflects heightened risk aversion with implications for corporate sector financing as wel l as for investment and growth.

Figure 8. Sovereign and Corporate Spreads o f Jamaica Compared to Latin America and Emerging Markets

Sovereign Spreads 1200 1000 &

800 600 400 200

0

- EMBIGLOBAL Jamaica - - - =EuroSpread -EMG -Regional

18

Corporate Spreads-CEMBI

2,500.0 - 2,000 .o - 1,500.0

1-

- c =

0.0

= = 1 CEMBI Broad Jamaica - CEMBI Broad Emerging Markets

43. The financial sector has been adversely affected by the crisis. The heavy reliance o f the financial sector on government debt implies increased sensitivity to the pressures faced by the government due to the external environment. The crisis i s revealing vulnerabilities for some Jamaican financial institutions. Some financial institutions have used government bonds as collateral for external credit lines. As markets discounted Jamaican bond prices, due to greater perceived risk, and the value o f the collateral dropped, institutions needed to present more assets to maintain the minimum value o f the collateral or close their l ine o f credit. In addition, as the global financial crisis continues, there i s a greater risk o f contagion from foreign markets to local markets through the presence o f foreign banks. Foreign banks represent 35 percent o f total bank assets in Jamaica as o f June 2008.

44. Due to global financial market volatility, it i s increasingly expensive for the government to obtain funding with longer term instruments. The government's options for financing are for now l imited to maturities o f two years or less, in contrast to the success that the government had in June 2008 when i t issued a US$350 mi l l ion 10-year fix-rate US-dollar bond with a yield o f 8.6 percent. In the domestic auction o f October 22, 2008, the government offered 90 and 180-day bills to the market. The 180-day maturity was undersubscribed, and the 90 day was wel l oversubscribed, indicating investors' preference for shorter maturities. Thus, in the near term, the government will likely finance i t s budgetary needs with shorter te rm instruments, as interest rates on longer-tern maturities have been rising higher compared to shorter-tern maturities.

I Box 5. Government Response to the Global Financial Market Crisis I In the context o f the current global f inancial market crisis and economic slowdown, addressing fiscal and debt vulnerabilities are a l l the more important. At tacking domestic institutional weaknesses that have l e d to the fiscal and debt vulnerabilities i s an important bu lwark for helping the country weather bo th the near-term and long-term economic challenges. However, addressing these weaknesses cannot guarantee that the country wil l escape the fallout o f the current global f inancial market crisis. Wh i le the government's external f inancing requirements are m in ima l over the next 24 months, w i t h the exception o f a €200 m i l l i o n Eurobond coming due in February 2008, wh ich should b e covered by planned IF1 financing, including the World Bank, the economy i s expected to suffer

19

f rom the decline in export demand and related revenues, reduction in tourism receipts, and slowdown in wage remittance inflows.

As in many countries throughout the world, the government i s carefidly monitoring and responding to potential liquidity constraints for the economy as they emerge. The government’s response to date has included:

providing emergency credit l ines to financial f i r m s that are suffering dollar liquidity constraints due to a drop in the value o f collateral (so far only US$168 m i l l i on has been drawn f r o m this facility), requesting access to the IDB’s Growth Stabil ity Fund (for some US$200 mil l ion) for on-lending to commercial financial institutions to support credit t o firms that suffer f inancing constraints from the loss o f suppliers’ credits and the like, and expanding the coverage o f the conditional cash transfer program (PATH) to poor families to offset the impact o f the growth slowdown on the poor.

111. GOVERNMENT PLAN AND KEY ISSUES IN FISCAL AND DEBT SUSTAIN ABILITY

45. The government’s fiscal and debt sustainability reform program i s part of its medium-term socio-economic policy framework. The framework sets out the broad package o f policies, strategies and programs proposed by the Government for implementation over the period 2009-2012. I t supports the overall vision, goals and outcomes o f Jamaica’s long term development plan, Vision 2030, and i s the vehicle that transforms these long term goals and outcomes into short term priorities, strategies, programs and measures over the next three years. The government’s program for maintaining macroeconomic stability contains three priorities: fiscal and debt sustainability, establishment o f an efficient and equitable tax system, financial system stability and price stability.

46. Fiscal and debt sustainability are centered on containing and reducing debt, enhancing revenues, and increasing the efficiency of public sector spending and investment. After 18 years o f being in the opposition, the new JLP government o f Prime Minister Bruce Golding seeks to address serious fiscal and debt challenges facing the country. The government’s program consists o f three key pillars:

The first pillar aims to contain expenditures through greater control o f public sector balances and debt. Under this pillar, reforms include consolidating the budget (Central Government and Public Bodies), rationalizing the functions o f Public Bodies, divesting loss making commercial Public Bodies, as wel l as containing the growth o f the public sector wage bill. The second pi l lar addresses constraints in the efficiency o f the central government financial management and budget processes. Under this pillar, reforms aim to improve the prioritization o f investment o f the public sector, enhance the monitoring, evaluation and performance o f public spending and procurement. It also supports improving accounting and financial reporting, as wel l as mechanisms to control spending. Policy actions under the third pi l lar target reforms to improve both tax pol icy and tax administration and are geared toward reducing tax distortions and enhancing equity.

20

.

PILLAR I. PROMOTING FISCAL SUSTAINABILITY THROUGH THE CONTROL OF OVERALL PUBLIC SECTOR BALANCES AND DEBT

47. Throughout the implementation of its reform program, the Government i s committed to maintaining fiscal discipline, controlling deficits, generating strong primary surpluses, and, thus, reducing the costs of debt service. Jamaica i s undertaking actions to reduce i ts debt to GDP ratio by keeping debt in check (the numerator) and by enhancing the environment for growth (the denominator)-thus, outgrowing i ts debt. It has committed to constraining and controlling the debt generating process while improving the environment for private sector growth. The GoJ i s also committed to improve i ts strategic management o f debt as an additional instrument to reduce the size and cost o f debt.

Reducing Overall Public Sector Debt

48. Jamaica has a high burden of public sector debt (123 percent of GDP in net terms) that i s about J$410,000 or US$5,300 per person. Roughly 50 percent o f the debt i s indexed to or denominated in foreign exchange. The high public sector debt has led to large interest costs, which limit and crowd out other public expenditures such as education and infrastructure. In the last three fiscal years, high primary surpluses o f the central government-averaging 8 percent o f GDP-have helped reduce debt. This, however, has come at the expense o f needed capital expenditures or has been offset by borrowing and investment by Public Bodies. Accounting for central government liquid assets, and consolidating together with debt o f the central bank (BOJ) and other public entities, the net debt o f the total public sector i s around 123 percent o f GDP and has risen in the last year. To reduce the net public debt, stronger control o f Public Bodies i s key (Figure 9).

Figure 9. Public Sector Net Debt

155 I

-NET PUBLIC DEBT (% GDP) - - CG TOTAL GROSS PUBLIC DEBT -TOTAL PS GROSS DEBT 1 85

200011 200112 2002/3 200314 2004/5 200516 200617 200718

21

49. T o realize its commitment to reaching a balanced central government budget during its term in office, as well as achieving sustainable fiscal targets for the public sector as a whole, including Public Bodies, the GoJ will pass and implement a Fiscal Transparency and Responsibility Framework. A key element o f i t wi l l be to control the consolidated balances o f the entire public sector, including the Public Bodies. In FY 2008/09 the government’s target i s to reduce the central government fiscal deficit to 5.5 percent o f GDP (from 5.9 percent in 2007/08) and for the rest o f the public sector, maintaining a realistic, but restrained increase to 4.7 percent o f GDP (from 4.2 percent in 2007/08) as some costs associated with the init ial divestiture process are realized. In the medium-term, the Government aims to reduce the consolidated public sector fiscal deficit to roughly 5 percent o f GDP in 201 1/12 and increase the consolidated primary surplus to 8 percent (from 4.4 percent o f GDP in 2007/08).

50. Actions Supported by the DPL: Government reforms in controlling the overall public sector balances and debt that are supported by this DPL focus on the critical building blocks to the Fiscal Responsibility Framework and consolidation o f fiscal accounts o f the Central Government and Public Bodies. In addition, the Minister o f Finance has committed to not use deferred financing in the Central Government and intends to amend the Financial Administration and Audit Act to repeal the authority o f the M o F to permit deferred financing, which in the past has led to significant expenditures outside the normal government budgetary review process. Actions include:

The M o F has submitted to the Cabinet proposed amendments to the Financial Administration and Audit Act and the Public Bodies Management and Accountability Act, which introduce a fiscal responsibility framework.

The M o F has developed and approved an action plan for the consolidation o f Public Bodies’ and Central Government accounts. The MoF has: (a) ceased authorization o f deferred financing in the Central Government since 2005; (b) communicated i t s commitment to the Cabinet (on December 10, 2007) and Parliament (on December 11, 2007) not to utilize any deferred financing arrangement.

Rationalizing Public Bodies

51. Improving the efficiency of public spending and investments by Public Bodies i s a key priority o f the government in order to control the accumulation o f public sector debt and to target scarce public resources more efficiently to development priorities. Public Bodies generate about as much revenue and expenditure as the central government, and account for the majority o f capital spending. They also contribute substantially to debt creation. Public sector debt has increased due to ongoing losses from Public Bodies, such as Air Jamaica, Clarendon Aluminum and Jamaican Urban Transit Company, and because o f sharp increases in borrowing by others such as The National Road Operating and Constructing Company (NROCC), Development Bank o f Jamaica (DBJ), and PetroCaribe. Air Jamaica accounts for most o f the jump in 2005106, while NROCC accounts for much o f the increase in 2007/08.

22

Table 9. Overall Balances and Public Investment (percent of GDP) Overall Actual Estimated Projected Balances 2006107 2007108 2008109 Public Bodies -2.8 -4.2 -4.7

o f which capital spending 4.1 6.2 5.7 Central Government (excl. BoJ losses) -5.8 -5.9 -5.5

o f which capital spending * 3.3 4.9 4.1 Consolidated Public Sector -8.5 -10.1 -10.2

Sources: MF website, Yellow Book 2009, with a downward adjustment in 2008109 for capital spending in the Jenny project undertaken by PAJ, amounting to 0.4 percent o f GDP, and excluding one-off redundancy costs for SCJ and JUTC amounting to 0.3 percent of GDP

52. Historically, the Central Government assumes losses of Public Bodies when they cannot service their debt, but it does not normally receive transfers from profit making Public Bodies. By consolidating the Public Bodies into the overall government budgeting process, though the Fiscal Responsibility Framework, the government wi l l have greater control over the fiscal balances and debt and budget constraints could then be improved. Even when Public Bodies do not have fiscal deficits, they have an opportunity cost to the government and to society if the quality o f services and efficiency i s low.

53. Reform Actions. The government’s new plan for Public Body reform takes into account whether their fhc t i ons are better suited for public or private sectors and calls for three main categories o f action. While the plan i s comprehensive and init ial actions already have been taken, the context o f near-tern the global economic slowdown may delay progress, particularly with respect to divestitures o f commercial Public Bodies.

Divest Public Bodies involved in activities that can be fully provided by the private sector. The government has identified several entities in this category; they include, the Sugar company and Petrojam Ethanol Ltd. (in process o f divestiture), PetroJam (completed divestiture o f 49 percent o f stock), and Air Jamaica (divestiture publicly announced). Many o f these are making losses, but the l i s t also includes some profit- making entities in order realize possibilities for increased productivity. Over the next three years, the government plans to bring additional 12 Public Bodies with commercial functions to the point o f sale. Strengthen financial management and improve delivery o f public service for the PBs that, given their functions, should be in the public sector. Their investment programs wil l be within a coherent public sector investment program that also includes the investments carried out by the central government. The assets and liabilities o f the Public Bodies that remain in the public sector wi l l be centrally coordinated and managed using a single- treasury account. For about 14 Public Bodies, such as the Port Authority o f Jamaica, the program would divest the part o f the entity providing commercial services and would strengthen the regulatory aspects that remain in the government sector. Close inactive Public Bodies and liquidate their assets. This category includes up to 63 entities. They are not active sources o f fiscal losses, but they may have substantial assets (mainly real estate) that could be sold for revenue and made available for private development. In addition, closing inactive Public Bodies renders them unavailable as off- budget fiscal windows in the future.

23

54. Actions Supported by the DPL: The DPL focuses o n supporting key government actions to divest Public Bodies involved in activities that can be fully provided by the private sector. This should reduce fiscal losses incurred by the government as well as expand economic opportunities for private sector growth and employment.

55. following actions have been taken by the GoJ consistent with the plan:

The M o F has approved a plan to achieve the rationalization o f Public Bodies; and the

0

0

0

56.

The divestiture o f forty-nine percent o f Petrojam Limited and significant advances in the divestiture o f the GoJ’s sugar cane industry assets and Petrojam Ethanol Limited, as evidenced by the Heads o f Agreement signed by the GoJ with a potential buyer on June 27,2008; The engagement o f privatization advisors for the divestment o f Air Jamaica Limited; The arrangement reached by the GoJ, in principle, to privatize Clarendon Alumina Partners, an entity which represents the GoJ’s equity in the Jamalco refinery; The preparation o f a draft information memorandum in respect o f the privatization o f Mavis Bank Coffee Factory Ltd. to be issued to prospective bidders; and The identification o f fifteen entities (including Wallenford Coffee Company Ltd. and Caymanas Track Limited) o f commercial nature for privatization.

The anticipated fiscal impact from rationalizing Public Bodies i s large, but not immediate, since there are substantial up-front costs related to restructuring (e.g. severance payments), preparing for sale, and (for loss-makers) assuming unguaranteed debt (including pensions) that may not be assumed by the new owner. The restructuring, pension payments, and debt are not extra costs relative to non-privatization. This debt is implicitly government debt and the costs to the government would be the same in the absence o f privatization. Receipts from privatizations are not expected to be significant because o f l ow net asset values, especially in the current economic environment, and are assumed to be partially offset by severance payments to workers. Nonetheless, for the medium and long term the benefit i s that the country will avoid ongoing operating losses by privatizing entities. Table 10 shows the largest loss making Public Bodies, including revenues, expenses, capital spending, and their balance in FY2006/07 and FY2007/08. Table 11 shows the estimated impact on reducing Public Bodies’ deficits from the privatizations and restructurings planned for each o f the following three years (see Annex 8 for details on calculating the Public Body deficits and debt). Thus, with the full set o f reforms, annual fiscal deficits would be reduced by over 3 percent of GDP in 201 1/12 and thereafter.

24

Table 10. Largest Loss Making Public Bodies: FY06/07-FY07/08 Jamaica National Road Urban Port Urban Operating Clarendon Air National Airport

Water Development Commission Authority Authority Company Transport Construction Alumina Jamaica' 2006/07 Comp. Company Revenue 9,579 2,190 12,380 467 2,651 1,29 1 9,744 25,480 Expenses 9,446 1,366 9,457 547 3,822 1,730 11,491 32,630 Interest payment 56 1,458 1,944 2,795 Capital spending 1,492 2,834 6,232 5,339 689 218 4,761 Balance (1,359) (2,010) (3,309) (5,419) (1,916) (2,175) (8,452) (9,945) % GDP -0.2 -0.3 -0.5 -0.8 -0.3 -0.3 -1.2 -1.4

2007/08 est

Revenue 10,303 2,2 16 1 1,073 1,040 2,412 1,355 14,104 28,814 Expenses 1 1,026 1,424 10,345 1,117 4,027 4,265 11,289 36,530 Interest payment 93 1,770 1,532 4,217 Capital spending 3,204 3,556 4,435 2,426 913 9,010 4,762 Balance (3,927) (2,764) (3,707) (2,503) (262 1) (13,690) (3,479) ( 1 1,933) % GDP -0.5 -0.3 -0.5 -0.3 -0.3 -1.7 -0.4 -1.5

Source: Yellow book 2008,2009; MoF. ' Air Jamaica's 06/07 data are estimates

Table 11. Public Body Deficits under different reform scenarios (percent of GDP) Estimated Projected Projected Projected Projected

2007108 2008109 2009110 2010111 2011112 No-Refom 4.2 4.4 4.7 4.9 4.9

4.2 4.7 4.4 4.3 4.0 2007-08 reforms (1" year) 2009 reforms (znd year) 2010 reforms (31d year)

2.9 2.8 2.7

1.4 1.1

Source: estimated with data from the Yellow Book (2008,2009).

Improving efficiency and effectiveness of public service compensation and incentives

57. The public sector wage bill and compensation strategy i s another key area for sustainable fiscal reform. Since the early 1990s, the wage bill has mostly fluctuated in the range o f 10-12.5 percent o f GDP, with dips in 1995/96 and in 2005/06. Starting in 2004, the government has signed three Memoranda o f Understanding (MOUs) with the c iv i l servants' unions, each M O U covering two years, which has helped moderate the growth o f the public wage bill. While these agreements have consolidated negotiations with a number o f unions, substantial parts o f the public sector workforce remain outside the formal scope o f the MOUs. Unions outside the explicit MOU framework include the teachers, police, and nurses. These groups have received basic increases in keeping with the M O U . However, based on previously agreed job market evaluation proposals, additional pay adjustments have been implemented for these groups. The M O U instrument has modulated wage agreements and is credited with bringing the overall wage bill down by roughly one percentage point o f GDP since the early 2000s. The government i s now embarking on a more comprehensive medium-term strategy to address public sector personnel requirements, incentives, and compensation.

25

58. Reform Actions. A medium term strategy for public sector labor relations combined with further negotiations to limit the growth in the wage bill i s critical. The 2008 M O U (2008- 10) not only keeps the wage bill in l ine wi th previous M O U achievements, i t also furthered the consolidation o f wage bargaining and harmonization o f benefits across a number o f unions and laid out the principles for increased social responsibility in public sector labor relations in various dimensions, including productivity enhancement, expenditure restraint, cost saving, and macroeconomic management. The government i s preparing a medium term strategy for implementing these principles. Two o f its key pillars are tying public sector wages to performance and adjusting salaries to levels that wi l l retain qualified personnel in key groups o f employees who are critical to public sector performance. In preparation o f its strategy, the government wil l be seeking world-wide best practices in public sector compensation policies and adapting these to the Jamaican situation. A critical element in this rocess i s conducting a study to analyze public sector employment, compensation and incentives.' The survey has begun with the education sector, which represents over 25 percent o f the public sector workforce. The nurses are another critical sector for review. While this is on-going for selected groups, the M O U s wil l continue to manage across-the-board salary decisions for select groups, in order to keep the overall wage bill in l ine with macro-fiscal realities. Censuses o f public employment- actual and positions-will reassess the needs and provide the information basis with which to avoid overstaffing.

59. This work on the public labor force i s being coordinated with an economy-wide productivity enhancement program, which i s spearheaded by the Jamaica Productivity Center. This i s under the Ministry o f Labor, and i t s Board includes representatives f iom the public service branch o f the Ministry o f Finance and Public Service.

60. The DPL supports critical government actions including the initiation o f a survey on public employment as part o f a broad evaluation o f public sector Compensation and incentives. The f i rst sector to be evaluated i s the education sector- which represent over one-quarter o f total public sector workforce-laying the groundwork for a comprehensive public sector workforce compensation study.

Actions Supported by the DPL:

The GoJ has completed an education sector employment survey which is the first step o f an employment survey o f the public sector to be included in a study to evaluate a medium-term strategy for public sector workforce skills needs and compensation.

13. The 2005 PER found that salaries at the entry level in the education sector were no t l o w by international standards (as a ratio o f per capita GDP). However, the overall salary structure did no t encourage the more experienced and effective teachers to remain in the system (the same was found in the health sector) and hence the heavy migration to the US, UK and Canada o f the more experienced teachers (and nurses). In addition, increases tend to be across the board and there i s n o performance-based pay. A recommendation o f the study was to reduce the compression at the top end to provide the incentive for good teachers to remain in the system and also for pre- trained and younger teachers to improve their qualifications. The way to do it without increasing the overall wage bill (since there i s l i t t le fiscal space) i s t o give smaller percentage increases for pre-trained teachers (incentive to go to teachers college) and larger increases to the more experienced teachers. In addition, the problem o f l o w pay at middle and upper management i s a general one for the public sector where there i s a general issue o f productivity given the size o f the service.

26

PILLAR 11. INCREASING THE EFFICIENCY OF FINANCIAL MANAGEMENT AND BUDGET PROCESSES

61. Jamaica has an adequate legal framework for good public financial management (PFM), and an explicit definition of roles, processes and timetables already exist. Nonetheless budgeting, PFM and public procurement processes are not sufficiently transparent and manageable in practice. The most important challenges include:

Need for forward looking process for budget and prioritization o f expenditures, within the Central Government and especially PBs. This wil l lead to more efficient allocation o f expenditures to achieve results intended. The exercise o f a medium-term public sector investment program, done in the past with positive results, has not been done in recent years. Better budgetary control for Public Bodies, as elaborated above. Importance o f reducing the divergence between the originally approved budget and what is actually implemented. Although a revised budget i s formally approved, this is ex post after a variety o f ad hoc revisions that are not reviewed or approved ex ante by even the cabinet. As a result, the strategic coherence o f the original budget is considerably diminished in the execution. Need for reducing delays in reporting o f the accounting, auditing and publication o f results (including with cabinet and parliament). Hence, decisions about the future allocation o f funds wil l be made with adequate knowledge o f how money was used in the past and what i t achieved. Need to render the public procurement system more efficient and transparent by improving procurement performance and monitoring. Specific issues which can be addressed within the existing legal framework include, inter alia: delays in contracting caused by bottlenecks in the contract approval process, the limited quality and availability o f procurement statistics, inefficiencies in the supplier registration process and capacity constraints in individual procuring entities. Need to expand the scope o f the Internal Control Unit to procurement activities carried out by public agencies and project implementing units. 14

62. Accounting, recording and reporting standards exist but are not in line with international standards. Relatively good institutions, l ike Auditor General, are thwarted in the execution o f their duties by the delays in submission o f the financial statements and the absence o f a timely follow-up on the audit reports. A Public Expenditure and Financial Accountability (PEFA) assessment, completed in 2007, showed strong performance in many areas (A i s the highest rating) such as in revenue outturns compared to estimates, classification o f the budget, and oversight o f aggregate fiscal risk. I t also revealed some areas needing improvement, such as, multi-year fiscal planning, and expenditure policy, quality and timeliness o f annual financial statements, external audits, payroll controls, and controls for non-salary expenditure (Table 7).

63. Reform Actions. The government intends to implement several steps to enhance financial management and budget processes:

14. See CPAR 2006.

27

0

0

0

0

64.

To strengthen investment prioritization and effective allocation o f resources, the GoJ wil l develop an institutional framework for National and Sectoral Planning, enhance instruments to evaluate, compare and prioritize projects in l ine ministries as well as the capacity to control their quality and consistency in the MoF. To tighten and enforce rules for response to budget calls, the GoJ wil l introduce multi- year fiscal and expenditure frameworks, strengthen enforcement o f spending envelopes, eliminate ad-hoc allocation through supplementary budgets, and quantify and present a plan for reduction o f arrears. To improve monitoring and evaluation o f budget results, GoJ wil l ensure implementation o f the Performance Management and Evaluation Framework. To improve accounting and financial reporting, GoJ wil l develop and implement systems for integrated financial management information and accrual accounting. To enhance internal and external control systems, GoJ will strengthen the Internal Audit Directorate and expand the scope o f the Internal Audit Units to the overall internal control environment, including strong attention to procurement. The Auditor General wil l make more timely review o f financial statements and expand the scope o f audits to include performance audits.

These reforms will enhance the ability o f the government to spend its resources more efficiently and reduce the risk o f budget overruns, although it i s difficult to estimate the quantitative fiscal impact. The PEFA exercise provides a way to measure the extent o f institutional improvement, even if i t does not translate directly to a fiscal number (Table 12).

Table 12. PEFA Indicators of Financial Management Performance in Jamaica-Current and Expected in the Future

Baseline Indicators Current Performance Expected Performance (PEFA code number) (2007) After Reform Multi Year Perspective in fiscal planning, C+ A by 2010 expenditure po l icy and budgeting Quality and Timeliness o f Annual Financial D B by 2009 Statements Scope, Nature, and Fol low up o f External B by 2009 Audits Internal Audit (2 1); T imely Account D+ B by 2010 Reconcil iation (22); Annual financial statements (25) Collection o f tax payments (1 5 ) D+ B by 2010 Predictability in availability o f funds for D+ B by 2010 commitments o f expenditures (1 6) Payrol l controls (1 8) D+ B by 2010 Internal controls for non-salary expenditure D+ B by 2010

C+

(20) Source: GoJ, Final Report o f the PEFA Assessment, M a y 2007.

65. Actions Supported by the DPL: The key steps to enhance financial management and budget processes supported by the D P L include:

28

0 The Public Sector Modernization Division o f the Cabinet Office has prepared a draft technical framework for the capital investment prioritization, establishing the link between policy, planning and budget allocation.

0 The Auditor General i s implementing its action plan for institutional and professional capacity building; and the Minister o f State in the Ministry o f Labor and Social Security and the Deputy Leader o f the House, on behalf o f the MoF, have submitted to Parliament for approval a proposal to update legislation governing the internal audit departments and audit committees (the Financial Administration and Audit (Amendment) Act, 2008).

PILLAR 111. REDUCING DISTORTIONS AND ENHANCING THE EFFICIENCY OF THE TAX SYSTEM

66. The Government of Jamaica plans to reform i ts tax regime in line with the reviews and recommendations from a team of top experts from Georgia State University (2002), the Matalon Group in Jamaica (2004) and the IMF (2008). Highly variable rates with many exemptions, special regimes, and zero-rating reduce tax revenue by an estimated 30 percent and also distort and hinder growth o f the economy. Tax administrators also face barriers to getting information and pressing enforcement, making tax evasion and avoidance relatively easy. For taxpayers who seek to comply, the complexity o f the system makes i t dif f icult to do so.

67. Reform Actions. The Government o f Jamaica has taken measures in the last few years to increase uniformity o f indirect tax rates, including converting some G C T zero-rating into exemptions in 2006, making custom duty rates more uniform and with fewer exemptions. I t wil l also eliminate the authority o f the Minister o f Finance to make ad hoc exemptions. The government has increased rates (and fees) on tobacco, guns and cars in 2008, which has raised revenue and addresses some the social costs o f these activities.

68.

0

0

69.

0

0

Tax policy reforms include:

Report to Parliament on the cost o f al l tax exemptions and special rates. This would help to build political impetus for reform and increased transparency. Eliminate GCT exemptions for some purchaser categories and for non-food product categories Assure that corporate profits are taxed at least once, by taxing individuals on dividends that were not taxed at corporate level. Phase out special sector “incentives.” Adjust the individual income tax threshold to reduce the tax burden on poor.

Reforms to improve tax administration include measures to

Facilitate compliance Consolidate payroll tax and reduce filing requirements Strengthen enforcement, as a follow-up to the amnesty Each year add 4000 non-PAYE taxpayers to the ro l l o f taxpayers For cases o f tax fraud and evasion, increase tax authority’s ability to verify financial information (credit cards, bank accounts, etc).

29

Improve cross-checking information-improve collection and usage, single tax-payer accounts Improve collection o f property tax, including enforcement o f confiscation for tax liens

70. K e y government reforms supported by the DPL include:

The M o F has issued: (i) the Provisional Collection o f Tax (Income Tax) Order, 2008 on June

Actions Supported by the DPL:

20,2008 to increase the threshold above which individual income tax is due; (ii) the Provisional Collection o f Tax (General Consumption Tax) Order, 2008 on M a y 9,2008 to simplify the general consumption tax on motor vehicles; and (iii) the Provisional Collection o f Tax (Stamp Duty) Order, 2008 on April 11,2008 to simplify the special consumption tax on tobacco; and (iii) submitted to Cabinet a proposal for amalgamation o f statutory payroll deductions.

The GoJ has: (i) issued a six-month tax amnesty for taxpayers with arrears due and payable on or before April 1 1 , 2008; and (ii) published a plan to continue its efforts to reduce tax arrears and improve revenue collections during its fiscal year 2008/2009 and beyond.

IMPROVING THE FOUNDATION FOR GROWTH BY IMPROVING THE BUSINESS ENVIRONMENT

71. To complement the pillars supported by the proposed loan, the Government i s also following policies to encourage private sector growth. The government recognizes that much o f the intended reduction o f the debt to GDP ratio will have to come through growth in output and that the private sector must be the engine o f this growth for these gains to be sustainable. The main focus o f the government’s program includes:

72. Improved Business Processes. Bureaucratic institutions and regulations continue to be cited as sources o f problems that affect the ability o f businesses to operate competitively in Jamaica. Development projects in Jamaica face delays in the licensing process for building and environmental approvals that add significantly to transaction costs and reduce the competitiveness o f the business environment. Other areas o f particular concern include problems in acquisition, titling and transfer o f land, a complex and inefficient court system for resolution o f commercial cases, and lengthy and costly import and export procedures. The government is committed to the removal o f barriers and to improving the environment for competitiveness and growth during the medium term.

73. Intellectual Property. Intellectual property i s the fundamental resource o f innovation. Jamaica already possesses the basic legal framework for protection o f intellectual property. However, this framework has a number o f weaknesses, including limited capacity o f collecting agencies and other institutions, existing high levels o f piracy, and relatively l ow public appreciation o f the importance o f intellectual property rights. Jamaica i s not part o f a number o f critical intellectual property treaties and conventions including the Madrid Treaty. The long-term development o f innovative potential wi l l require planning to address these weaknesses.

74. Trade and Foreign Relations. As barriers to trade fall, Jamaica l ike other nations with small domestic markets i s able increasingly to achieve economies o f scale through access to

30

large international markets. The trade relations between Jamaica and the rest o f the wor ld therefore become important in creating the conditions for firms to benefit from increased market size. This nevertheless has serious implications for the ability o f companies to compete in international markets for goods and services. During the medium term, Jamaica will seek to expand trade through greater integration with the global economy as wel l as to mobilize investment from foreign and domestic sources. Another important external factor is the existence o f the Jamaican Diaspora, which represents a major resource that can play a strategic role in the long-term economic development o f the island including as a source o f investment and entrepreneurship for business ventures in Jamaica and as a market for tourism and exports o f Jamaican goods and services.

75. Labor Market and Labor Productivity. Improvement in labor productivity is fundamental to improve the competitiveness o f productive enterprises in Jamaica, while the efficiency and flexibility o f the labor market wi l l contribute to optimal allocation o f an important and abundant factor o f production. A number o f factors reduce the efficiency and f lexibi l i ty o f Jamaica’s labor market. Some o f these factors include lack o f flexible work times, high levels o f redundancy payments in the case o f staff reductions, outdated laws governing various aspects o f the local labor market (e.g. opening hours), weak linkages between labor supply and demand, and inadequate labor dispute settlement mechanisms. During the medium term the government wil l undertake measures towards the development o f an efficient labor market and to improve the labor environment to enhance labor productivity and worker satisfaction.

76. Micro, Small and Medium-sized Enterprises (MSMEs) Development. Micro, Small and Medium-Sized Enterprises (MSMEs) represent a particularly important component o f the Jamaican economy. Despite their importance to the economy, MSMEs are subject to a range o f capacity constraints which must be addressed to enable their full development. These include l imited access to credit; l imited technical, human and institutional capacity, high levels o f informality and relative lack o f economic linkages and market access. Recognizing that MSMEs represent an important source o f new business start-ups with the potential to contribute to economic growth and innovation, the government wil l pursue actions to foster their development during the medium term.

77. The IDB and the EU are supporting government efforts to enhance the environment for private-sector growth. Under the government’s plan the key areas o f support include:

Streamlining o f key business processes geared to reducing approval time for building permits and new business licenses) to within 90 days once al l stipulations are met Reducing transfer tax and stamp duties for land transactions and lowering costs (in time as well as fees) o f registering and titling informal land holdings. While most such holdings are in rural areas, there are also areas in urban areas and these are the ones with the greatest immediate potential gains. Improving access to finance and financial market development: financial market information-registry o f pledged assets, credit bureaus, electronic assets. Establishing a Public-Private trade steering committee.

31

IV. THE PROPOSED LOAN

Link to the Country Assistance Strategy and Loan Design

78. The proposed DPL intends to support the fiscal and debt sustainability development policy aspects of the Jamaica Country Assistance Strategy (FYO6-09), which was presented to the World Bank Executive Board for discussion in April 2005 and updated in July 2007. The new government o f Prime Minister Bruce Golding has expressed i t s keen interest in maintaining and deepening the country’s strategic dialogue with the Bank. A new Country Partnership Strategy with Jamaica i s now being prepared with the current administration and, as such, wil l reflect the government’s renewed focus on addressing, in a sustainable fashion, the country’s fiscal and debt challenges. This DPL, rooted in the current CAS, also reflects the new government’s development plan and desired ongoing engagement with the Bank. The CAS envisioned a total lending envelope o f $150 mi l l ion over the fiscal years 2006-2009, o f which $75 mi l l ion would be investment lending, focused on health, education, and improving basic services to mitigate inner city crime. The remaining $75 mi l l ion was expected to be in the form o f budget support through a DPL focused on fiscal reform and debt reduction. Due to changes in the prior government’s strategy, the 2007 CAS Progress Report outlined a reduction in budget support, to $50 million, and an increase in investment lending by $25 mi l l ion for a Social Protection SWAP. The strategy o f the new government i s to reengage the Bank on fiscal and debt sustainability issues, given the primacy o f the macroeconomic vulnerability issues, and develop a longer-term engagement on strategic liability management and growth issues under a DPL. This DPL for $1 00 mi l l ion i s viewed as that beginning o f a multiyear engagement with the country under a new Country Partnership Strategy (CPS), planned for World Bank presentation at the end o f FY2009.

79. The DPL i s designed to support the implementation of the Government’s medium- term development strategy, and draws upon the Bank’s analyses o f key issues and desirable pol icy directions through country analytical work, including: the Poverty Assessment, CEM, PER, PEFA, CFAA, and CPAR. Within this framework, i t focuses o n policies and institutional aspects related to fiscal and debt sustainability that are most amenable to support via a single- tranche. The DPL i s also designed to complement the ongoing and planned investment lending program under the upcoming CPS by supporting the government’s efforts to provide a stable macroeconomic framework and improved public sector effectiveness to stimulate growth and fund priority social and investment programs (see Box 6). The Government’s pol icy actions to be supported by the DPL and expected outcomes are outlined in the pol icy matrix in Annex 1.

80. The Bank will consider future additional DPL support to the continued implementation of the Government’s medium term strategy under a new CPS-currently under preparation. I t i s envisioned that further progress towards a solution to Jamaica’s high debt wil l be a key theme o f the CPS. Accordingly, i t i s expected that such future additional financing wil l support maintenance o f an appropriate macroeconomic framework and reform agenda that wil l include adequate fiscal policy, systematic debt reduction, and control o f expenditures in the central government and Public Bodies, while maintaining strong safety net programs.

32

Box 6. Government Objectives supported by Fiscal and Debt Sustainability DPL

I. Promoting fiscal sustainability through control of overall public sector balances and debt I. 1 Maintaining macroeconomic stability 1.2 Control o f overall public sector balances and debt 1.3 Rationalization o f Public Bodies 1.4 Improving efficiency and effectiveness o f public service compensation and incentives.

11. Improving the efficiency of financial management and budget processes 11.1 Achieving fiscal discipline and strategic allocation o f resources 11.2 Improving the accounting and financial reporting system 11.3 Improving internal and external control systems

111.1 Enhancing tax policy 111.2 Strengthening tax administration

111. Reducing distortions and enhancing the efficiency of the tax system

I I

8 1. The focus of the DPL i s on the strategy and design of policies and legislative reforms to be undertaken during the first years of the new Golding Administration. The actions are designed to achieve realistic but important improvements in the overall efficiency o f government spending and achieve significant and sustainable reduction in public debt. Achieving progress in these areas wil l allow for the government to make greater advancements on social and poverty goals. Emphasis i s o n consolidating overall public sector balances, controlling Public Body spending, improving the efficiency o f financial management and budget processes, and increasing revenue collection. These efforts recognize three critical and interrelated development challenges in Jamaica.

First, the need to consolidate public sector balances to adequately control the spending and debt generation by the Public Bodies. Public Bodies generate about as much revenue and expenditure as the central government, and account for the majority o f capital spending and debt creation, but are outside the normal budgeting process. Controlling the debt generating process in Jamaica wil l require not only a clear understanding o f the overall levels o f fiscal balances and debt (both o f the Central Government and Public Bodies), but also the rationalization o f the activities o f the Public Bodies to focus on activities with a social or regulatory function, rather than commercial function. Second, the importance of improving transparency and efficiency of financial management and budget processes. While the legal framework for effective budgeting and transparent financial management exists, in practice this i s not always the case. To ensure an effective use o f public resources and development results, a forward looking process for budget and prioritization o f expenditures in the Central Government and Public Bodies is needed. This requires reducing the number o f ad hoc revisions that are not reviewed by the Cabinet, so that the strategic coherence o f the original budget i s maintained, as well as lowering delays in reporting o f accounts and results, so that the allocation o f funds is made with adequate knowledge o f how funds were used and what results were achieved. And third, reducing distortions and enhancing the efficiency of the tax system. Reducing tax distortions and improving equity are necessary for expanding public spending and investment in a tight fiscal environment. Highly variable rates with many

33

exemptions, special regimes, and zero-rating, reduce tax revenue by an estimated 30 percent. They also distort economic incentives, and hinder economic growth. To reduce distortions, raise fiscal revenues, and improve equity, the government i s reducing the number o f special tax regimes and exemptions, as wel l as taking measures, such as cross- checking o f accounts, to increase tax compliance and collection. The government i s also taking actions to directly reduce the tax burden on the poor, namely to adjust the individual income tax threshold for inflation.

82. The DPL i s underpinned by the substantial body of analytical work carried out by the Bank in partnership with the Government of Jamaica (See Box 7), the design o f key prior actions and indicators for the DPL supports progress in each o f the above three main areas. The primary analytical underpinnings, pol icy objectives, and development constraints identified are highly relevant to the country and have informed the design o f the DPL.

Poverty Assessment (2006)

Box 7. Links between DPL and Prior Analytical and Fiduciary Work Links to DPL

Actions: Annex 1) A. Analytical Reports-Recommendations

Maintain macroeconomic stability, notably through l o w inflation, t o

Expand the Program o f Advancement through Health and Education (PATH) program to new ly displaced households [which a reduced burden o f debt service would allow] t o prevent economic shocks f r o m doing

avoid “taxing” the poor. 1.1

1.2

permanent harm to the poor. . Reduce payrol l taxes and increase the value added tax [e.g., by

labor demand.

Reduce growth o f publ ic sector wage bill.

expanding coverage o f the base] t o reduce the wage wedge and increase

Undertake regular monitoring and evaluation o f program outcomes. Country Economic Memorandum (2002)

111.1

11.1 1.4

Public Expenditure Review (2005)

Privatize public entities and reduce contingent liabilities Reduce tax rates and expand the tax base Maintain credible macro policies

Make sustained reduction in the debt a Government priori ty

publ ic sector loans such as in sugar and highways), and make them more Reduce contingent l iabil i t ies (arising f r o m deferred financing and f r o m

transparent. Rationalize the tax system to reduce the wide dispersion o f effective

rates.

~. ~

1.3 111.1 1.1

I.1& 1.2

11.1

1.2

B. Fiduciary Reports-Recommendations

expenditures in consideration o f the fiscal situation.

predictability o f the budget and the link between policy, planning and budget allocation. Improve the quality and timeliness o f financial reporting. Expand oversight coverage o f publ ic enterprises by Parliament and the Auditor General.

Improve effectiveness o f the Audit Committees and Auditor General, inter alia, through more t imely submission o f financial statements.

Country Fiduciary Address the fundamental issues o f indebtedness and efficiency o f Assessment (CFMCPAR M o v e to a Medium-Term Expenditure Framework to improve the 2006)

PEFA (2007) Expand coverage o f effective fiscal controls to include off-budget entities.

Improve fiscal discipline and strategic allocation o f resources.

34

1.2,II.l

1.2,

II.2,11.3 1.2, 1.3,11.2,11.3

1.1 & 1.2 11.2 & 11.3

1.1 & 11.1

CARTACDMF: Jamaica: Strategy for Reform of Tax Incentives (2008)

Grant n o n e w tax holidays, and phase out existing holidays. Repeal o r scale back significantly the powers o f the Minister o f Finance to grant discretionary waivers of taxes.

Tax Policy Review Committee (Matalon report) (2004)

111.1 111.1

Reduce the corporate tax rate to 30 percent. 111.1 Develop systematic costing o f a l l expenditures, t o b e included in tax

Estimated Fiscal Impact o f Reforms

1.2

83. Each of the reforms described in the policy matrix has an impact on public spending and investment efficiency and the fiscal and debt position of Jamaica. Their combination with World Bank and other IF1 financing (replacing more expensive private financing) will have a magnified impact. The size o f the multiplied impact will depend on the way that the savings from the reforms supported by IF1 financing are utilized and their impact on growth. In the analysis below, i t is assumed that the savings from the reforms are directed toward reducing government debt, but there i s no impact on growth. The savings from IF1 financing i tself (i.e., lower debt service costs) are not included this analysis because it i s not a direct result o f the reforms, but are evaluated separately in Annex 3. Consequently, the results described below are a lower bound to the fiscal savings and debt reduction impact o f the pol icy reforms supported by the DPL.

84. Despite reforms on the revenue side and attempts to keep the wage bill under control, this fiscal year the public sector deficit i s unlikely to decline below last year’s 10 percent o f GDP. Half-year fiscal outcomes indicate a likely minimal adjustment in the central government budget from last year’s 6 percent o f GDP, while the primary surplus remains at close to 4.5 percent o f GDP. The smaller deficit is supported by a slowdown in capital and primary spending. However, this spending shortfall wil l in part be offset by higher-than- budgeted interest payments and wage bill. The latter is set to accelerate in the second ha l f o f the fiscal year to roughly 11.5 percent o f GDP, after the wage settlement wi th the teachers in October. This assumes a postponement o f another outstanding wage agreement with health workers until next fiscal year. If the government implements a 3-year reform program, the central government deficit i s expected to almost halve to 3 percent o f GDP by 2013/14.

85. The privatization of three Public Bodies will have a short-term adverse effect on the overall Public Bodies’ balance, but should prove beneficial in the medium term. The privatization o f the Petrojam refinery will offset the divestment o f the loss-making Sugar Company and Petrojam Ethanol Limited. Thus, unless Public Bodies cut spending in the meantime,15 their overall deficit i s expected to increase to 4.8 percent o f GDP compared to last year’s 4.2 percent o f GDP. After planned privatizations take place in the medium term, the Public Bodies deficit i s expected to decline to 1 percent o f GDP form last year’s estimated level

expend:lt&e budgets publ is ied with annual budgets.

Increase individual income tax threshold. Reduce exemption l ist for the VAT (GCT)

Amalgamate the various payro l l taxes. Harmonize personal and corporate income tax rates

15. Data on Public Bodies execution i s available with significant delay

111.1 111.1 111.1 111.1

35

o f 4.2 percent o f GDP. While the pace o f divestitures i s conservative, i t should be recognized that the current global environment may slow the process o f divestitures in the in the near term.

86. Figures 10 and 11 and Table 13 present the expected path of overall public sector balances and net public sector debt, with the impact of reform for the next three years in the three areas where quantification i s feasible-Public Bodies, wages, and taxes.16 The No- Reform scenario holds constant the policies o f 2006/07 in these areas. Other spending and policies for al l scenarios are assumed to hold constant (in real terms) from the 2007/08 levels, so that any fiscal gains go toward reducing net public sector debt and the subsequent cost o f interest on debt. The table presents that information in the graphs.

Figure 10. Overall Public Sector Balances with No-Reform and Reform Scenarios Trajectory of the estimated Public Sector Deficit

-

Figure 11. Net Public Sector Debt with No-Reform and Reform Scenarios Net Public sector debt: no reform counterfactual scenario vs 1-3 year reform effort

140 0

130 0

120 0

% I 1 O 0 t z .E 1000

900

80 0

70 0

16. The Macro projections underlying the analysis are o f Nov18th-2008

36

Table 13. Fiscal and Debt Projections with No-Reform and Reform Scenarios (as GDP YO) 20071s 200819 2009110 2010/11 2011112 2012/13

Central Government Balance -5.9 -5.8 -5.5 -4.5 -3.9 -3.6 3rd year reform

2nd year reform

1st year reform

No-reform

Public Bodies Balance Total Public Sector Balance Net Debt Central Government Balance Public Bodies Balance Total Public Sector Balance Net Debt Central Government Balance Public Bodies Balance Total Public Sector Balance Net Debt Central Government Balance Public Bodies Balance Total Public Sector Balance

-4.2 -4.8 -3.0 -1.5 -1.2 -1.2 -10.1 -10.6 -8.5 -6.0 -5.0 -4.7 123.1 119.6 114.5 110.2 105.5 100.1

-5.9 -5.8 -5.5 -4.6 -4.0 -3.1 -4.2 -4.8 -3.0 -2.9 -2.8 -2.8

-10.1 -10.6 -8.5 -7.5 -6.7 -6.4 123.1 119.6 114.5 111.0 107.3 102.8

-5.9 -5.8 -5.5 -4.6 -4.0 -3.7 -4.2 -4.8 -4.2 -4.1 -3.9 -3.9

-10.1 -10.6 -9.1 -8.7 -7.8 -7.6 123.1 119.6 118.5 116.1 113.3 109.9

-5.9 -6.4 -6.8 -6.4 -6.3 -6.1 -4.2 -4.5 -4.7 -4.8 -4.9 -4.9

-10.1 -10.9 -11.5 -11.2 -11.2 -11.0 Net Debt 123.1 119.0 119.0 118.6 118.6 118.1

Sources: Wor ld Bank, IMF, Ye l l ow Books.

87. The Reform 1-year scenario shows the impact o f implemented reforms in the past 18 months. Tax and tax administration measures, including tax arrears collection, as well as privatization in 2009 have the largest impact in subsequent years. For 2008/09, there i s a slight deterioration compared to the non-reform scenario, because o f the loss o f substantial current net revenue from Petrojam, which was privatized. l7

88. The effects o f reform for 2009 and 2010 are each added onto the effects from earlier reforms. The effects f rom 2009 reforms are al l from the privatizations that year, with lasting impacts by reducing the overall fiscal deficits in later years. The sharp debt decline under the second year reform scenario occurs due to privatizations o f prof i t making companies. Under such circumstances, the private sector i s assumed to take over the entire debt held by the company. The 2010 reform effects are mainly from further privatizations, including Air Jamaica, and there i s also a small debt-reducing effect from assuming another MOU and wages and some reduction in personnel numbers. These reform scenarios assume that the foreign exchange real interest rate drops from 7-8 percent to 4 percent as Jamaica accesses multilateral credit, which reduces the average interest rate on external debt. At the same time, the framework assumes a constant return on NFA totaling 3 percent, the LIBOR rate.

Fiscal and Debt Sustainability Projections

89. Stochastic simulations indicate a 5 percent probability that debt would increase rather than decrease, even with the policy measures described above, and with good policies and a favorable external environment, the debt could fall even faster than projected. Historically the parameters o f these frameworks have varied unpredictably, such as exchange rates and growth, but history also tel ls us about their likely range and co-variation.

17. Privatization revenues are counted as capital revenue below the line, which should go toward reducing the debt stock or act as an substituting financing source, but do not count immediately for improv ing the fiscal balance. Reducing the stock of debt does reduce the deficit by reducing interest costs.

37

Using this knowledge in a stochastic simulation framework, the calculated range o f probable outcomes indicates a 5 percent chance that debt would increase rather than decrease, even with the policy measures described above, and the debt could fa l l even faster than the projections in Figure 15. The main reason behind the high-debt possibility i s that the economy is exposed to significant external shocks, which offset the fiscal measures. Bearing these r isks in mind, the government i s committed to take further pol icy measures as necessary to offset the effects o f any negative external shock. Jamaica has withstood and adjusted to adversity before, and the authorities stand ready to do that again if needed. For the most l ikely external scenarios, the package o f pol icy measures described above would have the desired effect o f putting the island on a path o f fiscal sustainability and higher growth. I t i s worth noting that the scenarios discussed above assume a macroeconomic framework consistent with estimates o f Jamaican authorities and the IMF.

Fiduciary Aspects

Public Financial Management System

90. The 2006 Country Fiduciary Assessment ( C P M C F A A ) and the 2007 Public Expenditure and Financial Accountability (PEFA) provide an overview o f the public financial management strengths and areas for improvement in Jamaica. Overall, the fiduciary environment in Jamaica i s adequate. This fiduciary environment i s based on a strong legal foundation, outlined in the Financial Administration and Audit (FAA) Act, which set forth the basic principles for efficient management o f public resources.

91. K e y recommendations o f the 2006 C F M C P A R were: (i) strengthening the link between policy, planning and budget allocation by moving toward a Medium term Expenditures Framework and costing the Corporate Plans, (ii) improving the quality and timeliness o f financial reporting, (iii) improving cash predictability by defining a transparent mechanism for warrant releases that maintain budget consistency with Government priorities, (iv) strengthening the capacity o f the Internal Audit Directorate and increasing the financial independence o f the Auditor General’s office, (v) enhancing public procurement performance and monitoring, (vi) improving supplier registration, (vii) developing reliable and consistent statistics on procurement, and (viii) intensifying efforts to create a cadre o f qualified procurement officers.

92. The Jamaican Authorities have introduced several reforms to improve public financial management. Pillar I1 o f the Government’s Fiscal Sustainability and Debt Reduction Program aims to improve Central Government management and budget processes. Four main actions wil l be implemented under this pillar: (i) development o f an investment prioritization system for al l the public sector, (ii) development and implementation o f a performance based budgeting system to monitor and evaluate results o f spending, (iii) improvement o f accounting and financial reporting by the implementation o f an integrated Financial Information System and an accrual accounting system, (iv) and enhancement o f internal and external control systems through the development and implementation o f the internal audit quality assurance manual and timely production o f the Auditor General’s report on the financial statements. The proposed DPL wil l support this reform program and certain actions and key milestones have been identified to help track progress on the public financial management reform progress.

38

Foreign exchange system

93. The IMF joint ly with the World Bank conducted the Financial System Stability Assessment in 2006 and found that the Central Bank control environment within which foreign exchange is managed i s satisfactory. BoJ has well established procedures that ensure the integrity o f its operation and there i s a well functioning internal audit department, external auditors who regularly audit the accounts, and an Audit sub-committee o f the Board.

Disbursement, Reporting and Auditing Arrangements

94. The proposed loan wil l follow the Bank’s disbursement procedures for development pol icy support. Loan proceeds wil l be disbursed once evidence o f fulfillment with prior actions (Annex 1) has been accepted and the necessary approvals by the World Bank and Jamaica have been obtained. The proceeds o f the loan wil l be disbursed into an account designated by the Borrower that i s part o f the country foreign exchange reserves account at the BoJ. The administration o f this loan will be under the responsibility o f the Ministry o f Finance. Given that the Borrower’s current public financial management system is satisfactory and the fiduciary environment at the BoJ is adequate, no specific audit o f the deposit account wil l be required.

Loan Administration

95. The Bank would disburse the loan proceeds into an account o f the Central Bank o f Jamaica denominated in U S dollars. The Central Bank o f Jamaica wil l immediately credit the disbursed amounts to the account o f the Ministry o f Finance and the Public, thus becoming available to finance budgeted expenditures. Within a week o f this funds transfer, the Ministry wil l accordingly provide the Bank with a written confirmation.

Monitoring and Evaluation Arrangements

96. The Ministry o f Finance and the Public Service will play the primary role in coordinating monitoring and evaluation o f program implementation. The government and the Bank will take advantage o f several important data sources to assess progress o f the DPL, including:

Central and nonfinancial public sector budget monitoring from the Ministry o f Finance and the Public Service

Central Bank o f Jamaica reports and analysis Reviews and analyses o f laws and implementing regulations by the Bank and other stakeholders Data from key Government agencies such as PIOJ and the Auditor General Financial audits and fol low up o f CPAR and C F A A recommendations Bank, CDB, IDB and IMF supervision missions and reports. Jamaica i s under intensified surveillance from the Fund which produces a bi-annual staff report that assesses its economic and financial stability. The World Bank has been closely coordinating with the Fund on its monitoring o f the economic and financial situation.

Statistical Institute o f Jamaica

39

Box 8. Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership

The operation was developed within the objectives o f the Government’s Medium-Term Socio-Economic Policy Framework and 25-year National Development Plan-Vision 2030, which i s being widely consulted with stakeholders and broader civi l society and which w i l l establish clear development priorities. The priority legislative agenda i s developed in consultation with the Parliamentary leadership on an ongoing basis. The Bank support focuses on 1) promoting fiscal sustainability through controlling overall public sector balances and debt generation, 2) increasing the efficiency o f public financial management and budgeting processes, and 3) reducing distortions and enhancing the efficiency o f the tax system. These focus areas, including the rationalization o f Public Bodies have al l benefited from broad political support. The D P L i s strongly underpinned by prior analytical and fiduciary work, including the Poverty Assessment (2006), Country Economic Memorandum (2002), Public Expenditure Review Update (2005), the CFAAKPAR (2006), and PEFA (2007), as well as non- Bank AAA, including the Matalon Report on Tax Reform (2004) and the I M F K A R T A C report on Tax Incentives

Principle 2: Agree up front with the government and otherfinancial partners on a coordinated accountability framework

The Bank’s support i s summarized in a brief and focused policy matrix. I t i s expected that the Bank, the CDB, and the IDB w i l l be providing budget support to Jamaica in the form o f loans, while the EU i s providing support through grants. These institutions draw on the country’s development plan, thereby ensuring coordination among them and consistency o f support. They have also supported enhanced public financial management, progress on rationalization o f Public Bodies, strengthening o f tax administration, and improved competitiveness.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

In addition to supporting the government’s development o f i t s public financial management systems, the Bank has been working closely wi th the government and donor groups (including the main bilateral donors as well as the IDB, CDB, UNDP, IMF and European Union) on issues concerning governance as well as working to support various dialogues on social auditing wi th a range o f c iv i l society organizations. As part o f th is process, the Bank recently approved an IDF on enhancing transparency in public institutions and intends to facilitate the strengthening o f civil society in social auditing and helping the country to develop a bipartisan governance strategy.

Principle 4: Choose on@ actions critical for achieving results as conditions for disbursement

The Bank’s policy matrix has only nine sets o f prior actions. They address key development policies including actions in promoting fiscal and debt sustainability to enhance growth and reduce poverty and inequality.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support

As agreed with the government, this DPL i s a single-tranche operation, timed to meet the country’s financing needs to be evaluated and monitored for results. Monitoring and evaluation o f the program w i l l take place within the government’s own processes. The policy matrix contains a range o f outcome indicators (9), which are assessed as part o f the operation implementation and are closely linked to the supported policy actions.

Consultation, Distributional and Environmental Aspects

97. The DPL has been prepared within the framework of the country’s development plan, and the CAS, which benefited from wide consultation and dissemination within the country. Specific laws, institutional reforms and actions supported by the loan were also discussed with different groups, including non-governmental organizations, the private sector

40

and the research and academic community, which have informed the design o f the DPL. The government has consulted intensively with country stakeholders, including the cabinet and members o f Parliament on fiscal reform, Public Body rationalization proposals, and tax reform issues. Through the Planning Institute o f Jamaica (PIOJ), the government has undertaken a broad consultation process on its 25 year development plan-Vision 2030-which incorporates many o f the reforms supported by this DPL. Publicly announced consultations on the development plan have taken place in various fora throughout the country as well as targeted consolations with various group^.'^ 98. The Bank has been closely working other donors to put in place grant resources for technical assistance to support the government's debt and growth agenda. DFID and UNDP have committed financing resources to support the implementation o f the reforms. C I D A support would be in kind whereas U S A I D support will be conducted in parallel. C D B has a technical assistance component in their PBL. The IDB has a long relationship with the Ministry o f Finance, the Office o f the Prime Minister and the Planning Institute o f Jamaica providing technical assistance in public financial management, budget processes, central government operations, and investment prioritization. The IMF, directly and through CARTAC, has been providing technical assistance through advisory services on tax issues and topical issues such as investment schemes and the stability o f the financial system (see Box 9 for a general description o f donors' activities in Jamaica).

~

Box 9. Donors' Activities in Jamaica

=Key areas o f support for Jamaica are in private sector development and public financial management. In the are o f private sector development, the IDB supports improvements in the incentive framework and the business environment, including reforms to build economic opportunities through reducing the transaction costs for titling and registering land, increasing access to credit for sole proprietors and small businesses, and improving incentives for informal businesses to become formal. The IDB's Portfol io over the last 5 years amounts to US$192 mil l ion.

@J: As the most important grant donor to Jamaica, the 10" EDF Country Strategy 2008-2013 has a financial envelope o f €1 10 mi l l i on in programmable resources and €12.9 m i l l i o n for unforeseen needs. The ma in thrust o f the country strategy i s t o address the two major challenges facing the country: the high level o f publ ic debt and crime. The breakdown o f the programmable resources i s as follows: 55 percent for macroeconomic support for debt relief; 30 percent for support o f governance reforms; and 15 percent to actions outside the focal sector. In addition, Jamaica wil l be receiving €82.7 m i l l i on over the period 2006-2010 under the Accompanying Measures for ACP Sugar Protocol Countries, in order to adjust t o the new trade regime for sugar.

U S A I D : Programs in Jamaica are organized around f ive strategic objectives: economic growth, aimed at increasing trade competitiveness in targeted industries; rural development, for management o f natural assets for rural development; health, t o improve the health status among youth and most vulnerable groups; education, t o improve education o f targeted Jamaican youth; and democracy, t o increase accountability, cit izen security and participation. The 2007 U S A I D Program Budget for Jamaica amounted to US$10.2 mil l ion.

m: The ma in objectives o f DFID's program in Jamaica are to support the development o f effective publ ic services and to improve safety, security and access to justice especially for the poor and marginalized. One of DFID's major projects over the last f ive years has been the Jamaica Social Pol icy Evaluation (JASPEV) project. T h i s project i s supporting the government's strategic p lan for a more effective social sector delivery system by the

18. After one year since i t s launch in October 2007, the f i rs t phase o f the Vis ion 2030, National Development Plan public consultations came to end in the parish o f St. Thomas o n Thursday, November 13, 2008. Some seven parishes-St. James, Westmoreland, Manchester, Clarendon, St. Catherine (Portmore, Spanish Town), Portland and St. Ann-have been targeted to date, as a means o f creating awareness and galvanizing public support and feedback across Jamaica.

41

year 2015. During the next p lan period, DFID will incorporate gender, as we l l as H I V / A I D S and disaster risk reduction into a l l i ts program interventions.

UNDP: The multi-year Country Program has specific thematic and results focuses, namely: disaster response, social dialogue processes, national reports, gender training and research, environment, and strengthening o f publ ic institutions. In the program cycle 2002-2006, UNDP delivered development results wor th nearly US$10.3 m i l l i on through the programs under the Jamaica Mult i-Country Office. Under the new Country Program, UNDP has a target o f US$4.5 m i l l i on in 2008 and US$6 m i l l i on in 2009 as financial resources to deliver their expected development results.

CIDA: CIDA’s development assistance program focuses o n three ma in areas: improving governance, strengthening the private sector, and improving environmental management. C IDA ’s Industrial Cooperation Program finances initiatives by Canadian businesses seeking to develop partnerships with Jamaican companies. Moreover CIDA i s work ing to strengthen key central agencies responsible for the environment and supports H I V / A I D S prevention and treatment programs

CDB: Citizens, especially f rom rural areas, have been beneficiaries o f the CDB’s Caribbean Technology Consultancy Service (CTCS), a program that supports the development o f small businesses throughout the region.

99. The actions supported by this DPL are expected to have a positive overall distributional impact, although some identifiable groups may experience an adverse impact in the short-run. To the extent that the measures supported by the DPL play a role in the government’s ability to lower inflation, reduce the income tax burden for lower income groups, improve prioritization o f public expenditures, and enhance the efficiency and fairness o f the tax system, their overall impact on poor people’s income and access to services i s expected to be positive. This is confirmed by the Poverty Assessment and the Public Expenditure Review, which indicate that the high debt has adversely impacted the poor by reducing fiscal space for priori ty social spending and investment programs, while macroeconomic volatility and inflation have had a disproportionately negative impact on the poor. Likewise, the distributive impact o f reducing the number o f favored tax exemptions and raising the income threshold for income taxes i s expected to be pro-poor, as i s improving expenditure efficiency and strategic allocation o f public spending.

100. The poverty and social impacts due to Public Body rationalizations, particularly due to employment dislocation, require careful evaluation. While the aggregate impact o f the fiscal savings and debt reduction associated with the rationalization o f Public Bodies wil l be to create a more efficient and transparent allocation o f public spending and investment, some groups may be adversely impacted in the short-term. Poverty and social impact analysis allows the government to respond adequately, particularly for those industries with a large number o f low-skilled workers. The Development Bank o f Jamaica, through its Privatization Unit, which supports Government appointed enterprise teams, has the overall mandate to divest specifically assigned public assetdentities. As a part o f that process, the Development Bank o f Jamaica evaluates impacts o f the prospective investors’ development plans, which must include an evaluation o f employment and social impacts.

101. Poverty and social impact analysis has been completed for the Sugar Industry, due to i t s size and employee characteristics, and further analysis i s planned to assess the distributional impact in other sectors. The divestiture o f the Sugar Industry is, by far, the most important in terms o f its potential impact on the poor and the environment. The industry employs over 30,000 people, mostly unskilled, and has a significant amount o f land under cultivation. The divestiture i s designed to improve productivity in this sector and bring new

42

technologies so that farmers can increase yields. Even if divestiture were not to take place, there would likely be a significant impact on the industry in the coming years as the EU trade preferences for Jamaican sugar are set to expire this year. Economic and social impact analyses were completed in 2006, with the assistance o f the EU, for the Sugar Transformation Strategy, inclusive o f the sugar privatization. The studies’ recommendations, including the need for a better government communication strategy and assistance for displaced workers, has helped to guide the divestiture process. The Jamaican government has expanded i t s communication strategy through consultations on its development plan and i s taking actions to minimize the impact on the poor (including, providing severance payments to farmers that exit the industry as well as support and training for alternative employment). Other divestitures wil l be evaluated based on the likely social and poverty impact. Divestitures o f Petrojam and Petrojam Ethanol, do not involve a large number o f employees or unskilled workers, and are not expected to have a significant distributional impact. In addition, these companies are currently profitable, so divestiture is not l ikely to have a significant impact on operations or employment.

102. In other areas of the reform program, government strategy would require further analytical work to determine the extent and/or need for complementary actions. The government i s cognizant o f these issues and i s ensuring that poverty and social impacts are adequately addressed in the context o f the reform program and the economic downturn. On December 14,2008, the government announced that i t had set up a special program through the HEART TrustLNational Training Agency to retrain laid-off workers in order to assist them to gain alternative employment. The Bank i s also supporting the advances in the PATH program, which provides conditional cash transfers for the poor. The program is well targeted and also helps the poor during periods o f natural disasters with additional payments, which occurred after Humcane Ivan. A further increase in benefit level is expected to take effect in December 2008 that provides for additional incentives for boys and students in secondary school to encourage them to complete high school. All this wil l represent a substantial increase in PATH budget from 2007 levels (reaching 14 percent o f the population).’’ Whi le an economic crisis could result in budget constraints that limit the P A T H CCT program, it i s expected that the actions supported by the DPL wil l help to reduce the likelihood o f a crisis as wel l as protect priori ty social spending through supporting the government’s Medium-Term Expenditure Framework. Planned analytic work by the Bank, to be initiated in the f i rs t ha l f o f 2009, will address potential rural, urban and gender distributional impacts o f the government reform program, as wel l as address the political economy r isks and incentives related to the reforms to help guide future policy dialogue and operations.

103. The specific policies supported by this DPL operation are not expected to entail likely significant impacts on the environment, forests or other natural resources. However, Jamaica has the arrangements to assess and manage such effects. In April 2001, the National

P A T H o r Program for the Advancement through Health and Education i s a conditional cash transfer (CCT) program geared to provide cost effective social assistance to the extremely poor in exchange o f them complying with conditions that promote the development o f their human capital. The largest proportion o f beneficiaries i s drawn f rom the poorest quintile (poorest 20 percent), which i s better targeting when compared to many similar programs in the L A C region. The number o f PATH beneficiaries has increased since April 2008 by 22 percent reaching 300,000 at end September 2008. The benefit level has increased by 23 percent ( f rom $JM 530 to $JM650 o r U S D 9 per person per month). An additional increase in benefit level i s expected to take effect in December 2008 to implement a Cabinet Decision that provides for additional incentives for boys and students in secondary school to encourage them to complete high school.

19

43

Environment and Planning Agency (NEPA) was formed as a means for conducting environmental impact assessments under acceptable international standards. In 2003, A Strategic Environmental Assessment (SEA) was drafted for Jamaica as a means to better facilitate the integration o f environmental sustainability into the development objectives o f the country. The implementation o f the SEA pol icy in 2006 was the f i rst o f i t s kind in CARICOM. In addition, the Development Bank o f Jamaica requires that al l proposed projects conform to the environmental laws o f Jamaica and must comply with the regulations stipulated by the National Environment and Planning Agency. Depending on the size and importance o f the public entity/asset, a formal Environmental Impact Analysis may be required. An environmental report has been completed for the divestiture o f the Sugar Company by the Sugar Industry Authority and the Ministry o f Agriculture wil l commence a Strategic Environmental Assessment in January 2009. As measures supported by the DPL program are expected to be successful with the potential for attracting new investment in the future (including in infrastructure), there wil l be a need to strengthen Jamaica’s national institutional capacity to identify and address environmental pol icy and regulatory issues. With this in mind, Jamaican Government has embarked on a number o f initiatives geared toward the proper management, conservation and protection o f the natural resources for sustainable development.

Risks

104. The Jamaican program, to be supported by the proposed DPL, faces three types of significant risks: economic, political, and natural disasters:

105. Economic: The current global financial crisis and resulting economic downturn i s expected to reduce demand for Jamaica’s key exports o f services and goods-tourism, bauxite/alumina, and light manufacture-and slow remittances from the U S and Europe. I t i s also increasing the government’s cost o f servicing its variable rate debt and raising the cost o f ro l l ing over existing debt. These developments wil l l ikely reduce economic growth, increase unemployment, strain government finances, and pressure the currency. The strain o n government finances might jeopardize crucial social spending related to PATH the government flagship social assistance program. PATH’S budget, which has been substantially increased from 2007 (almost doubled), could be threatened by the crisis and resulting budget constraints. A significant deterioration in growth may stall or reverse reform actions. The growth forecast has been revised downwards from 1.1 percent in 2008/09 in April 2008, to 0.8 percent since the onset o f recent global volatility in September 2008, and i s now -0.5 percent as o f December 2008. There is further downside risk, including a financial crisis, if the country is unable to roll-over i t s debt. Mitigation: While the current economic risks are substantial, mitigating factors include declining o i l and food prices, which should reduce external financing requirements. Declining inflation should he@ limit the negative impact of slower growth on the poor. I n addition, the operation supports actions to improve fiscal balances and address the debt generating process, and, thus, reduces financing vulnerabilities. The financial resources provided by this loan, and other IFI f inancing that supports the Government’s reform program, is expected to mitigate a sizable portion of the roll-over risk in 2009. Nonetheless, these funds may not be sufficient to cover a l l financing needs should a full-blown financial crisis surface. The government recognizes that it may need to secure other sources of financing and undertake additional actions iffinancial and economic conditions decline further. There is ongoing macro-monitoring and country dialogue lf critical risks emerge.

44

106. Political: The current government came into power in the fal l o f 2007, but i t has had only a one-seat majority in Parliament, making the government’s program vulnerable to special interests. The risk i s that some MPs could object to, and block, specific pol icy reforms supported by the DPL. In particular, reforms to rationalize the Public Bodies, and improve the tax code may face resistance, as various interest groups seek to maintain the status quo. While the growth slowdown and pressing financial needs may exacerbate political concerns, i t i s just as l ikely may also spur consensus on the need for near-term actions. Mitigation: The political risk is reduced by the Government’s consultative approach to reform implementation and the dialogue among country stakeholders on the fiscal and economic costs of inaction. Disputes over leadership in the opposition party may in the short term mitigate parliamentary resistance to the reform program, although it would also make it more difficult for the current ruling party to negotiate bi-partisan support for the agenda.

107. Natural Disasters: Jamaica i s highly vulnerable to multiple natural disaster risks- particularly floods and hurricanes. The cumulative damage from the last three major storms- Ivan (2004), Dean (2007), and Gustav (2008)-was over US$1 billion. Natural disasters have the potential to derail economic growth and poverty reduction. They also pose a heavy fiscal burden, increasing indebtedness and redirecting public resources away from long-run development plans. Mitigation: The damage to the major private sector enterprises would be partly covered by their own insurance. The Jamaican Government participates in The Caribbean Catastrophe Risk Insurance Facility (CCRIF), which helps to offsetfinancing costs in the case of a signijkant disaster. The Bank is also assisting Jamaica through investments in natural disaster risk mitigation with the Hurricane Dean Emergency Recovery Loan and technical assistance for its safety net program as a way to mitigate the adverse consequences of natural disasters on poverty.

45

46

0 vr

cd c

ANNEX 2. Natural Disasters and the Caribbean Catastrophe Risk Insurance Facility

Caribbean countries are highly exposed to adverse natural events (including hurricanes, earthquakes, volcanic eruptions, and tidal waves), which can result in disasters affecting their entire economic, human, and physical environment and, as a consequence, their fiscal situation. The natural disaster hotspot study financed by the World Bank ranks Jamaica number three in the world among countries at high economic risk from multiple hazards, with 79.6 percent o f total area at risk, 87.7 percent o f population residing in areas at risk, and an estimated 87.8 percent o f the country’s GDP produced in areas at risk.

In the last thirty years, Jamaica has suffered extensive damage due to the hurricanes Allen (1980), Mi tch (1998), Ivan (2004), and Dean (2007), and tropical storm Gustav (August 2008). The cumulative damage o f the last three events has been estimated above US$ 1 billion. The two largest earthquakes on record took place in 1692 and 1907. Earthquake activity i s being monitored by a series o f seismographs and accelerographs which are operated by the Earthquake Unit o f the University o f the West Indies at Mona.

Probabilistic risk analysis figures suggest that Jamaica’s potential impact o f a 1 in a 100 year event could result in losses o f close to US$ 3.7 bi l l ion for hurricanes, and US$ 5.7 bi l l ion for earthquakes.

Jamaica’s Potential Losses Risk Profile: Hurr icane 50 Year 100 Year Physical Damage (US$ million) 1,716 3,666 Government Defici t (US$ million) 526 1,129 Risk Profile: Earthquake 50 Year 100 Year Physical Damage (US$ million) 3,277 5,700 Government Defici t (US$ million) 657 1,143

Source: EQECAT Country Risk Profile -Jamaica (October 2006)

L ike many small states, Jamaica on its own has l imited capacity to maintain the necessary reserves to face major catastrophic events, l ike the ones mentioned above, each o f which set the economy back substantially in growth and poverty reduction.

As part o f its risk financing strategy, Jamaica participates in the Caribbean Catastrophe Risk Insurance Facility (CCRIF). CCRIF was established in 2007 as a jo int reserve mechanism for CARICOM member and associate member governments. The Facility provides partial coverage for catastrophic loss events caused by hurricanes with a recurrence o f less than 15 years and earthquakes with a recurrence o f less than 20 years. Jamaica currently holds policies for coverage close to the aggregate limit o f U S $ l 00 mi l l ion equally distributed between hurricane and earthquake perils. The government is considering raising this limit or finding other ways- l ike deferred drawdown options-to increase the shelter for the budget and government-budget.

A Draft National Hazard Mitigation Policy has been developed and is expected to be completed in the near future. The Disaster Preparedness Act (1 993) has been in force since 1993. A building code has existed since the 1950s but it i s yet to become a law. Hazard mapping for floods, landslides and earthquakes has been done and flood risk mapping i s taking place.

There are various initiatives on disaster risk information management systems and national public awareness programs. Disaster management i s a part o f various curricula and

55

training programs are available at the undergraduate and postgraduate level in the country. Several c iv i l society initiatives have taken shape during recent years, showing an increase not only in public awareness but also in public participation in disaster reduction. In the aftermath o f Hurricane Dean, the GoJ requested and obtained a US$10 million-Hurricane Dean Emergency Recovery Loan from the World Bank to address the reconstruction needs o f the poorer segments o f the population.

56

ANNEX 3. Jamaica's Latest Short term Indicators

Jamaica 17-NW-CB

Laresf D x t a ! 1SO days Rnnnc Chnnze Over Earlier Period$ Arailable I L o w High 1 day Y days 30 day5 90 d a y 180 d a p

Sovereian Spreads (bp) JP Morgan EM61 Global JP kbrgan Et461 Plus Eurospread EM81 Global Emerging Markets €ME EMBi Global Regional

14-Nov-08 750 350 752 I5 113 144 328 378

17-Nov-08 68 I 322 785 4 -66 65 220 315 14-Nov-08 712 259 89 1 0 w 108 385 436 14-Nov-08 740 269 914 0 39 8s) 393 448

Credit Default Swaa Cornorate Spreads

JP Morgan CEMBI Brood JP Morgan CEhW Broad Emerging Markets

Interest Rates (%I &&v Interest Rate t%i

Inter Bank Rate M.1 Stock Market Index Reserves (US$ mnl Exchange Rat. (NSS) r a p ~ c ( I ~pprer (+I]

14-Nov-08 1,734 14-Nov-08 515

31-Dec-07 13 3

17-Nov-08 91,405 30-Nov-07 1,805 17-Nov-08 76 9

571 1841 6 25 42 1 1011 1.OM 314 1 045 3 25 164 522 59;

0 6 0 6 0 6 1 0 1 ;

85223 112793 0 0% -1 6% 3596 -149% -178% -117 -259 -444

71 I 77 0 0 1% -0 3% -3 2% -6 7% -8 0%

*Level Change for Spreads, Interest Rate. and Reserves ' Perrentage Change for Sfock Mar+ret lndax and Exchacge Rates

Source: LCSPE Database.

57

Table A3. Central Government Operations as o f September 2008 Central Governmen; Operations 21xT8ro9

(in millions of Jamaica dollars)

ffevenwe & Grams Tax Revenue NonTax Revenue

Capital Rwenue Grams

fXpeIldttW@

Bauxke Levy

bcurrsnt Expenditure Prcgrammes wages 8 salaries Interest

Domesf#: External

Captlal Expendfiure Capital Prcgramrnes IMF it1 Account

Fiscal Balance (Surplos + Defiu't 4

Luan Receipts Domeshc External

AmoRization Domestic Exterw

Overall Balance (Sw/us + f aefrcit -1

Rimafy &-dance (surpius / LWicii -1

2i.610.8 19,019.3 1,530.4

378.2 117.2 5fi5 8

25.078.6 23.116.9 5,748.3 7.868.7 9.500.0 8.254.5 1,245 4

1,961.7 19617

0.0

-3,467.8

8,158.3 7,771 .O

387.4

5 . M .O 4,968 8 1,022.2

-1,m.1

6,032.2

19,266.6 17,023.4 1,577.8

435.9 43 9

179.6

z%QsrjS 23,425.0

7,875.6 10.277.6 5,818.6 4.459 0

2.540.5 2.540.5

0.0

4,698.9

6,518.6 5,850.4

668.2

8,010.3 5,131.3 2,879.1

-8,190.7

3,578.6

5.27i.a

26,091.5 24.144 8

1,097.5 617 5 56 5

181 3

24$71.3 22.938 8 3,504.4 8,757.8

10,676.5 a 828.6 1,847 9

1,932 5 1,932 5

0 0

1,226.2

32.513.1 8,022 3

24,490 8

5,434.1 3 373 0 2.1 I 1 1

28,255.3

11.9028

23.070.3 19.898 6 1,624.4

4660 176 7 9046

30.198.3 27,880 0 7.288.6 8.128.4

12,m.o 6,921.3 5,541.7

2,319.3 2,319 3

0 0

-7,129.0

11,441.7 9,112.9 2,3283

8.074.7 6,696 9 1,377.8

-3,7620

5,334.0

140810 16,966 7 1.548 5

403 9 93 5 72 4

22,5&1 20,827 2 5,737 0 8,1996

5,601 8 6.890 6

1.288 8

t ,758 9 1.7589

0 0

-3,501.1

13.1745 12,849 9

324 6

86785 7,886 3

792 2

9949

3,38%5

22.508.3 20,361 1

1,232 6 416.1

32 1 556.4

28,504.8 23,585 7 6,1628 8.055 4 9.369 5 7.111 1 2 258 4

4,817 1 4,817.1

0 0

-5,806.5

15.846.9 15.1342

712 7

15.329.2 12,667.1 2,662 0

-5,288.8

3.5680

131,728.5 117,419.9

6.611.2 2,717 5

519 9 2.460 1

157.105.6 141.175.7 33.713 0 48.885 4 59.177.2 42,535.9 16,641.3

15,330.0 15,330.0

0.0

-25,377.1

87,653.2 58,740 7 28.912.5

51,567.1 40323 3 10,844.4

10,708.3

33,800.1

136.846.0 121.742.8

7,475.6 4,110.6 1 .m ,4 2.417 5

165.633.0 145.471.2 37,362.3 50,021 8

43.704.0 16,383.2

20,161.8 20.161.8

0.0

-28,787.1

58.087.2

88,463.2 62,745.0 25,na.z

50,456.8 40,740 4 9,716.4

9,219.4

29,300.2

-5.117.4 -4,322.9 1.1355

-1,393.1 -579.5

42.5

-8.527.4 -3,695.5 -3,649.2 -1,136.3 1.090.0

831.9 258.1

-4,831 8 -4,831.8

0.0

3,410.0

-810.1 -4.004.3 3,1843

1,110.9 -17.1

1,128.0

1,489.0

4,aa.Q

58

ANNEX 4: THE GROWTH PUZZLE I N JAMAICA

Jamaica continues to puzzle pol icy makers with its sustained l o w economic growth despite high investment rates and reasonably well-educated English speaking labor force. Real GDP grew, on average, only by around 1.3 percent in the last decade while investment averaged above 30 percent during the same period. The country has a strong growth potential with i t s solid endowment in natural beauty and mining resources. Moreover, given i ts closeness to the world’s largest market, the US, Jamaica could benefit from regional integration and regional trade flows. Many o f Jamaica’s social and governance indicators are strong. School enrollment for 6- to 14- year-olds is near universal. However, growth in Jamaica has underperformed other Caribbean countries and was substantially below growth rates experienced by other emerging economies. In addition, economic growth has been very volatile, reflecting the vulnerability o f the country to natural disasters, adverse external shocks, and shifts in investors’ sentiment. Understanding this puzzle o f high investment and l o w growth i s key to addressing the constraints to lifting economic growth, improving debt sustainability, and alleviating poverty.

Jamaica’s poor growth performance has a number o f possible explanations, though further research might be required for a complete solution o f the puzzle. For a better understanding o f the picture, two different types o f factors playing role in the growth process need to be separated: (a) the statistical measurement problems leading to underestimation o f the actual output and (b) the factors leading to l ow economic growth rates.

On the measurement side, a significant part o f the l ow growth performance in the last decade can be attributable to problems arising from increasing informality in the Jamaican economy. Off icial growth rates might be underestimated because o f the existence o f a large informal economy, which has increased rapidly since early 1990s. A study by Inter American Development Bank shows that the share o f the informal economy in total output grew continuously from 12.9 percent o f GDP in 1991 to about 40 percent in 2000.20 Estimations correcting for the increasing informality indicate a much larger GDP growth rates during the 1991-2000 period: GDP growth may be estimated as high as 3.0 percent, or in other words 2.7 percent higher than off icial ly recorded numbers.21.

Productive capital stock might have also been overestimated. A non-negligible part o f the investment could be toward crime protection which i s a sunk cost to the economy. Jamaica has one o f the highest crime rates in the world and the 2003 Country Economic Memorandum (CEM) for Jamaica estimates the annual cost o f crime in at around 5 percent o f GDP, including costs o f investment in fighting crime and production losses due to crime.22 Another factor leading to overestimation o f productive capital stock could be the natural disasters. Jamaica i s exposed to frequent natural disasters and a part o f investment could be just the replacement o f the capital eroded by the hurricanes. Regarding the factors leading to lower economic growth in Jamaica, f i rs t o f a l l the negligible GDP growth in the 1990s i s usually attributed to external factors and weak regulation. The adverse external climate and the financial crisis that arose from bank privatization

20. 2 1. Rodolphe Blavy, I M F Working Papers No: 06135 and also see IMF Country Report for Jamaica, No 06/157, May 2006. 22. See World Bank Country Economic Memorandum (CEM) for Jamaica: The Road to Sustained Growth, 2003

See “The Informal Sector in Jamaica”, December 2006, Inter-American Development Bank. See “Public Debt and Productivity: The Diff icult Quest for Growth in Jamaica” by

59

to poorly capitalized investors as wel l as the financial liberalization unaccompanied by appropriate regulatory strengthening led to volatile and often negative growth rates.

Second, the loss o f competitiveness has had adverse impacts on the growth rates. The last decade was characterized by an appreciating real exchange rate, rising real wages, increasing costs associated with rising crime, and an increasing burden o f government consumption, al l o f which reduced international competitiveness to the point where the output o f agriculture and manufacturing declined, and tourism lost some o f its share o f the Caribbean market.

Third, l ow total factor productivity that might be caused by debt overhang has been a major driving factor behind poor economic performance. Estimations show that Jamaica experienced a decline in productivity o f 0.5 percent a year on average from 1960 to 2000. During the same period, Latin American countries experienced a productivity increase o f 0.2 percent and the average productivity increase in the world was 0.9 percent.23 Blavy (2006) explicitly tests for the link between this negative productivity growth and the public debt, using panel estimations for a sample o f countries. The results indicate that high public debt has been associated with macroeconomic uncertainty and an output structure that rel ied excessively on a few maturing sectors for which the scope for high productivity gains i s low. At the same time, public investment has been crowded out by debt service, which might have hrther adversely affected productivity due to its complementary role. Access to finance for the private sector has been limited, in particular for small domestic producers, given the narrow scope o f the financial sector, and the crowding out o f credit to the private sector by the public sector. While investment may remain high, its quality, however, may be affected, with investment being concentrated in few, already well-developed sectors.

Lastly, the quality o f education may not be supportive o f productivity gains although schooling ratios are high and education is widespread. According to the 2003 CEM, about 30-40 percent o f students are functionally illiterate at the end o f primary education, and about 30 to 40 percent o f Grade 6 leavers read below grade level. The national pass rate o f less than 60 percent in Grade 11 CXC (Caribbean Examination Council) English examinations and 30 percent in mathematics is below that o f comparator countries in the Caribbean region.

23. See “The Empirics o f Growth: A n Update” by Bosworth and Collins, 2003.

60

ANNEX 5: Revenues and Grants Projections

This table shows revenues projections taking into account the impact o f the crisis on revenues for FY 2008/09 as shown in Table 6. The modest changes are highlighted in the table and only impact fiscal years 2009/10 and 2010/11 under the f i rst and second years o f the Government Program.

Government Program 1"year (DPL) 1 09/10 1 10/11 I 11/12 I 12/13 I 13/14 I

Revenue & Grants 29.5 30.7 31.0 31.0 31.0 T a x Revenue 26.0 27.1 27.4 27.4 27.4

Income and profits 11.0 11.2 11.4 11.4 11.4 Environmental Lev), 0.3 0.3 0.3 0.3 0.3 Production and consumption 7.5 8.0 8.0 8.0 8.0 International Trade 7.2 7.6 7.7 7.7 7.7

Non-Tax Revenue 2.5 2.5 2.5 2.5 2.5 Bauxite Levy 0.5 0.6 0.6 0.6 0.6 Capital Revenue 0.3 0.3 0.3 0.3 0.3 Grants 0.5 0.5 0.5 0.5 0.5

Government Program Y" year 09/10 10/11 I 11/12 12/13 I 13/14

Revenue & Grants 29.5 30.6 31.0 31.0 31.0 T a x Revenue 25.9 27.1 27.4 27.4 27.4

Income and profits 11.0 11.2 11.4 11.4 11.4 Environmental Levy 0.2 0.3 0.3 0.3 0.3 Production and consumption 7.5 8.0 8.0 8.0 8.0 International Trade 7.2 7.6 7.7 7.7 7.7

Non-Tax Revenue 2.5 2.5 2.5 2.5 2.5 Bauxite Levy 0.5 0.5 0.6 0.6 0.6 Capital Revenue 0.3 0.3 0.3 0.3 0.3 Grants 0.5 0.5 0.5 0.5 0.5

Revenue & Grants T a x Revenue

Income and profits Environmental Levy Production and consumption International Trade

Non-Tax Revenue Bauxite Levy Capital Revenue Grants

29.5 25.9 11.0 0.2 7.5 7.2 2.5 0.5

0 0.5

30.6 27.1 11.2 0.3 8.0 7.6 2.5 0.5

0 0.5

31.0 27.4 11.4 0.3 8.0 7.7 2.5 0.6

0 0.5

31.0 31.0 27.4 27.4 11.4 11.4 0.3 0.3 8.0 8.0 7.7 7.7 2.5 2.5 0.6 0.6

0 0 0.5 0.5

61

62

ANNEX 6: Analyzing The Interest Savings From IF1 Financing Euro 200 Million Due In Early 2009

The objective o f the exercise i s to gauge the fiscal savings that may occur if Jamaica utilizes multilateral financing, as opposed to commercial markets, to roll-over principal debt payments over the current and next two fiscal years (FYs). The scenarios shown assume commitments o f IADB o f US$ 120 million, CDB o f US$ 33 million, and EU grants o f EUR 30 mi l l ion per FY for the next three years. IBRD financing o f U S $ 100 mi l l ion i s assumed only for FY2008/09. The baseline i s assuming no multilateral funding (Le., principal roll-over from commercial markets).

For current and subsequent nine fiscal years, interest savings amounts to between US$20 to US$42 mi l l ion per year (see Chart: Interest Savings Profile).24 In terms o f principal payments, the differences between the baseline and the scenario are mostly driven by the assumption made on principal payments: In the baseline, a reopening o f 2039 international bond i s assumed and multilateral loans are considered to have a final maturity o f 25 years with 10 years o f grace period and level repayment^.^^ Savings as a share o f total debt servicing (i.e. principal plus interest) against the baseline scenario show another picture. For the time horizon o f this exercise--from FY2008/2009 to 2038/2039-savings are, on average, $52 mi l l ion per year.

70

60

50

$ 40 2.

30 .- - -

20

10

interest Savings Profile

24. For the scenario with multi lateral funding, interest savings for the next two FYs (2009/2010 and 2010/2011) are we l l above the rest o f FYs. This fact i s accounted for the relatively (and not representative) low amount o f principal payments for those FYs: as the funds obtained f rom multilaterals are greater than amortization payments. The residual is assumed to be used to reduce interest payments. By these means, a second source o f interest savings appears: not only because o f the difference o f interest cost of multilaterals vs. market, but also due to these residual funds. 25. Notwithstanding this, a principal saving i s achieved considering Jamaican bonds are priced at discount while multilateral loans are given at par (i.e. in order to collect certain amount o f money, the face value needed to be issued to market i s greater than that o f multilaterals).

63

Principal Savings Profile l-____--_lll- ---.-I

320 T- ~

350 r--- ___-

300

250

;zoo

a100

2 E150

50

64

ANNEX 7: Debt Dynamics (2008-2014)

The debt trajectory i s expected to fall in FY2008/09, triggered by the primary surplus and seignorage. While in FY 2005/06 and 2006/07 the debt accumulation outside the Central Government declined to expected levels, the spike in last year's net public sector debt was driven by a surge in non-guaranteed Public Bodies borrowing. During the past years, recapitalization transfers to BoJ were significant, totaling at times as much as 3 percent o f GDP. Other debt creating flows account for estimated redundancy costs caused by the privatization o f the Sugar Company and restructuring costs for the Jamaican Urban Transport Company (0.6 percent o f GDP in total). See Table 8 on debt dynamics.

Table A4. Debt Dynamics (2008-2014)

Baseline Debt Dynamics 2008/09 2009/10 2010111 201 1/12 2012/13 2013/14

Public sector debt decomposition (YO of GDP) 119.6 1185 116.0 113.1 1095 105.1

Change in public sector debt -3 5 -1.1 -2.6 -2 9 -3.6 -45 A) Primaiy Deficit -4.3 -4.7 -5.3 -5.8 -5.8 -5.8 B) Seignorage -1.2 -0.6 -0.5 -0.4 -0.4 -0.5

C) Automatic debt dynamics 1.4 4.2 3.2 3.4 2.7 1.8

Contribution f?om real domestic interest rate 0.7 2.9 3.2 3.7 3.6 3 .O

Contribution f?om real foreign interest rate 0 .o 12 1 2 1 2 1.2 1.2

Contribution f?om real GDP growth 0.6 0 .o -12 -1.7 -2.2 -2.7

Contribution f?om real exchange rate depreciation 0 .o 0.1 0 .o 0 2 0.1 0.3

0) Other ident8ed debt-creating flows 0.6 0.0 0.0 0.0 0.0 0.0

E) Other debt accumulation 0.0 0.0 0.0 0.0 0.0 0.0

65

66

ANNEX 8: Debt Sustainability Analysis

Government

1. Consolidation o f the Public Sector

Group 2 and Group 3, including Air Jamaica

and Clarendon Alumina Production

Bodies (1 2) Public Bodies

The calculation o f net public sector debt is presented in two steps. The f i rst step involves consolidating the central government and public bodies, which summarizes the primary balance and overall deficit o f the public sector, including the recapitalization o f the BoJ. This consolidation excludes the local government given its small size. The second step involves the aggregation o f gross debt figures and netting out o f liquid assets, predominantly deposits, to obtain the net public sector debt.

a) Motivation: Consolidating the Central Government (CG) accounts with the Public Bodies (PB) indicates the potential size o f the fiscal challenges for the Government o f Jamaica (GoJ) going forward. The consolidation i s a necessary first step toward the government’s goal to reducing gross public debt to loopercent o f GDP by FY 2010/11 from the current level o f roughly 130 percent o f GDP. The process o f fiscal adjustment can benefit from consolidated government accounts as enhanced transparency helps improve the assessment o f fiscal risks and contingent liabilities. The consolidation identifies the determinants o f debt accumulation other than the central government primary balances, growth, exchange rates, and interest rates. The presented outcome o f the consolidation exercise provides preliminary estimates o f the fiscal stance considering the l imited data availability and resource constraints. Ultimately, the GoJ has to take ownership o f producing consolidated data after consultations with ROSC and GFS TA missions.

b) Chart 1 : The consolidation exercise

Consolidated Public Sector

balance

67

c) Box 1 : Reclassification methodology aml ied to data in Jamaica Public Bodies

65

:onsol idation methodology: step-by-step

E& 70 71.5

Selected PBs

1 Current revenues 2 - Currentspending from summary financial statement

3 + Depreciation

4 Current balance

5 - Capital spending (incl. mortgage loans)

6 + Capital revenues from individual income statements

(NHT: contributions - refunds + mortgage repayments)

7 Overall balance 8 + interest payments from individual income statement!

9 Primary balance

Transfers to government (induding corporate taxes), Transfers from government, payables/receivables

reclassified below the line or netted out

Other PBs and Regulatory Entities

10 Current revenues

11 - Current spending

12 - interest payments

13 Current balance

14 - CaDital sDendina

15 Overall balance

16 + interest payments

17 Primary balance

Jamaica Air and Clarendon Alumina (expressed in US$)

ER assumptions:

05/06 I 06/07 I 07/08 I 08/09

18 Current revenues

19 - Currentspending

20 - interest payments

21 Cu rent balance

22 - Capital spending

23 Overall balance

24 + interest Davments

from summary table on Other PBs and Regulatory En tities

from summary table on Air Jamaica and Clarendon Alumina

25 Primary balance

68

d) Table 1 : Outcomes following consolidation methodology Actual Actual Actual Estimated Projected

2004/05 2005/06 2006/07 2007/08 2008/09 Overal I balances

Public Bodies 1.8 -0.9 -2.8 -4.2 -4.5

o/w capital spending 3.9 3.3 4.1 6.2 5.9

Central Government (incl. BoJ losses) -9.1 -5.7 -7.5 -7.2 -5.4

o/w capital spending 2.0 2.4 3.3 4.9 4.2

Consolidated Central Government -7.2 -6.7 -1 0.2 -1 1.4 -9.9

Actual Actual Actual Estimated Projected 2004/05 2005/06 2006/07 2007/08 2008109

Primary balances

Public Bodies 2.9 0.2 -1.2 -2.5 -2.5

Central Government (incl. BoJ losses) 11 .O 9.1 8.1 6.8 8.2

Consolidated Central Government 13.9 9.3 6.9 4.4 5.7

Current balance 4.0 2.2 2.5 1.6 1.9

o/w interest payments 0.5 0.4 0.4 0.7 0.9

Capital spending (incl. mortgage loans) 2.4 2.4 3.2 4.0 4.3

Capital revenues (NHT) 1.3 1.5 1.2 2.1 2.1

Overall balance 2.9 1.4 0.5 -0.3 -0.3

Primary balance 3.3 1.8 0.9 0.4 0.5

~ ~~ ~

Other Public Bodies and Regulatory Actual Actual Actual Estimated Projected Entities 2004/05 2005/06 2006/07 2007/08 2008/09 Current balance 0.4 -0.3 -0.4 -0.4 -0.8

o/w interest payments 0.4 0.4 0.5 0.3 0.4 CaDital sDendino 0.8 0.0 0.3 1.4 1 .o Overall balance -0.4 -0.3 -0.7 -1.8 -1.8 Primary balance 0.0 0.0 -0.2 -1.5 -1.4

Actual Actual Actual Estimated Projected 2004105 200906 2006/07 2007/08 2008/09

Air Jamaica and Clarendon Alumina

Current balance

CaDital sDendina o/w interest payments

0.1 -1.1 -2.0 -1.3 -1.8 0.2 0.4 0.7 0.7 0.8 0.7 0.9 0.6 0.8 0.5

~

Overall balance -0.6 -2.0 -2.6 -2.1 -2.4 Primary balance -0.4 -1.6 -1.9 -1.4 -1.6

69

e) Table 2: M e r g e d account o f the consol idat ion exercise

ConsoMatton meihodology appffed to CG and PBs I m bil J$ u? 'Ib GDP

04/05 05106 06107 O7108e 08109~ 04/05 05/08 08107 07108e 08109p

19 1 18

15

16

12 interest payments 2 4 2 3 3 4 2 5 3 5

2 0 -2 0 -2 9 -3 5 -7 7 13 Current balance

14 Capnal spending 4 2 0 2 1 8 11 1 9 7

Overall balance -2 3 -2 2 -4 7 -14 6 -17 4 -0 4 -03 -07 -1 8 -1 8

interest payments 2 4 2 3 3 4 2 5 3 5 0 4 0 4 0 5 0 3 0 4

0 0 3 9 0 4 0 I 0 0 0 0 0 0 1 1

Overall bala nce, Consolidated

deferred financinq) CG (Incl. BoJ losses and

#n bil JS in % GDP 04/05 05/06 06,07 07108e 08109p 04/05 05106 06107 07108e 0 8 1 0 9 ~

-39 7 -42 9 -72 4 -91 3 -92 4 -7.2 -6.7 -10.2 -11.4 -9.6

0 8 3 8 0 4 4 9 4 8 0 5 3 2

memo' BoJ losses and deierrfd financing (In % GDP) 2.4 1.2 1 7 1 3 0 3 GDP. nominal 550 643 707 801 964 source Jamaica Public Bodies. 2008: IMF 2008Artcle IV, MF website

50.0 40.6 77.8 64.3 9.1 6.3 11.0 8.0 Public sector financing requirement

I

5 4 -269 I 1 9 -04 0 8 -34 I IDifference I 104 - 2 3

Source: MF and BoJ

The above-the-line def ic i t and below-the- l ine f inanc ing do n o t necessarily coincide due to pre- f inancing and other activities. In FY 07/08, the difference appears to b e larger than in other years possibly due to pre l iminary estimates on both sides o f the account.

70

2. CALCULATION OF NET PUBLIC SECTOR DEBT

2blNet aotal domestic debt I 197 81 3'0&71 ' 3744 'L7fNet total foreign debt } I20 71 108.31 162.9 281TotaI PS Net Debt I 318.51 41501 537.3

Aggregation o f gross debt figures and netting out o f deposits

439.21 488.2 538.8 566 .3 586.4 189.61 208.4 225.1 249.0 399.5 628.71 696.7 763.8 815.3 985.8

a) N e t public sector debt includes the following components (source: MF website and PB dept) i) ii) iii) iv) v) vi)

central government gross public debt central government guaranteed external and domestic debt central government deposits, excluding deposits held at BoJ BoJ NFA and NDA, excluding holdings o f public debt Non-guaranteed debt o f public bodies Deposits and other liquid assets o f public bodies'

Table 4 and Table 5 provide the same consolidation from two different perspectives.

Table 4: Net public sector debt, expressed as components o f net total domestic and foreign debt

I TOTAL PS GROSS DEBT 390.5 511.1 628.8 728.4 793.3 888.9 966.9 1149.0]

memo: GDP nominal 336 380 41 8 496 550 E43 707 801

71

Table 5: Net public sector debt, expressed as components o f net central government debt, net public bodies’ debt, and net BoJ debt

11 12 13

BoJNFA -51 9 -90 3 -7411 -91 6 -111 6 -1485 -177 1 -1427 BoJ NDA (excl government deposits) -71 5 -100 5 -12451 -151 7 -1894 -2026 -211 7 -183 0 Net BoJ debt 19.5 10.2 50.41 60.0 77.7 54.2 34.6 40.3

b) Table 6: Public bodies’ gross debt (in J$ mil) Summary of public bodies’ loans 2000101 2001102 2002103 2003104 2004105 2005106 2006107 2007108 Guaranteed 16,051 21,457 26,376 34,164 40,984 70,662 78,276 96,607 foreign 14,704 14,108 17,427 24,160 26,889 47.498 65.487 74.885 domestic 1,347 7,348 8.949 10,004 14,095 23,165 12,789 21,722

Non-guaranteed - private sector 8,500 6,667 18,582 24,545 19,548 18,390 30,934 126,593 foreign 7,102 1,682 1,876 4,891 9,631 8,896 16,880 103,602 domestic 1,398 4,985 16,707 19,654 9,918 9,494 14,054 22,992

Non-guaranteed - public sector 10,455 13,144 9,438 11,204 10,709 10,067 14,512 25,637 foreign 0 0 0 0 0 0 0 0 domestic 10,455 13,144 9,438 11,204 10,709 10,067 14,512 25,637

total 35,006 41,267 54,396 69,913 71,242 99,119 123,722 248,837

Source. MF

Net PB debt and its Components

20 0

15 0

i o 0

5 0

0 0

-5 0

10 0

-15 0

- . _ - - _̂._. _-. .- - __- I PB TOTAL GUARANTEED DEBT

I 15 8 PB IMPLICIT DEBT

72

PB debt adds over 30 percent of GDP to gross public debt ...

zowi01 zw,102 2002103 2W3M 2w4105 ZW6107 2WllOB

3. DEBT DYNAMICS:

The approach used using the F S A toolkit does the following:

. Eclectic, forward looking approach - Dynamic Simulation - . Steady State consistency approach for final period

Simplified Financial Structure to incorporate seignorage - Cagan demand function for base money assumed

Approach to Uncertainty: - User Defined Stress Tests - Stochastic Simulations using full distribution o f driving variables

A br ief summary o f the analytical background:

Discounted value o f non-interest expenditure g, plus init ial debt bo smaller or equal to discounted value o f income (taxes t, plus seignorage s,):

Flow budget constraint:

73

P S I + SI bl b f - , = +- l + r l + r

Substitute in f low budget constraint repeatedly, start at t=O:

PSI + S I ~ b, bo =- l + r ( l + r ) ]

- PSI +SI , PS2 + s2 I b2

l + r (1+r )2 ( 1 + r ) 2 --

‘ psi +S i 4 =LimC- + Lim- r+m ] ( l + r ) i ‘--*a ( l + r ) ‘

Therefore solvency requires:

bl Lim- = 0 t+m ( l+r) I

Debt should ultimately grow at less than the rate o f interest

Consistency and l imits o n debt issue: - Rogoff and Reinhart (2003): debt dynamics and l imits on debt tolerance - Once l imits on debt issue bind, trade o f f between deficits and money issue emerges - Consistency between fiscal and monetary, exchange rate pol icy becomes important

Consistency between inflation targets, fiscal, and monetary pol icy - Sargent-Wallace (1 98 1): Unpleasant monetary arithmetics - h a n d - v a n Wijnbergen (1 989): Deficits, financial structure and inflation in Turkey

Money issue a source o f public sector revenue (Phelps (1973), Walsh (2003)) - Inflation tax equals extra nominal balances people accept just to keep real stock

constant; l ike a tax, i s income that cannot be spent on consumption - In addition extra money issued because real balances grow as economy grows - Combination equals seignorage

Seignorage important element o f fiscal consistency analysis - model uses Cagan money demand function

where M i s base money at end o f period t- 1 , P i s the average price level in year t, Y i s real GDP in year t, q i s the semi-elasticity o f money demand with respect to inflation and A i s constant term. Link becomes clear once C B incorporated in public sector

74

Government without Central Bank:

pdi + iB +i'B'E = B+ B'E + kG = B +(if - MA')E + kG + MA'E

Subtract (simplified) Profit/Loss account CB:

Yields basic equation consistency approach:

PQ. + iB + i*(B' - W A ' ) = B + (l? -@A*)E + kG + NFA*E -

PQ. + iB + i' (B' - NFA') = B + (li' - @A* )E + &f

OR

Convert in real terms: introduce real variables: b=B/P, e=EP*/P, b*=B*/P*, etc. Thus, use:

To obtain: d M pd + rb + (Y* + e )̂(b* - nfu')e = b +- {(b' - nfu')e} +- dt P

= b + - {(b' - nfa' )e> + r i ~ + An dt

. d

Steady State analysis: - constant ratios to output, - output grows at rate n

Possible rate o f debt issue

Define required rate o f deficit reduction (italics indicate shares o f GDP):

Backward Looking debt sustainability assessment: Historical Decomposition

75

- ~ . b’e b’e b = ( p d - s) + ( r - n)b+ r - - -

Y Y and

(2 - n ) b* - b’e b*=-+ Y

Table 7: Historical and future debt decomposition for the baseline scenario in Jamaica

20.0

15.0

10.0

5 0

0.0

6 0

10.0

15.0

I I

I 2007 2009 2011 2013 0 Rmry M i c n - Segnorage S$iwB Contrhuton fromreA domstr: mterest rate D Contrbutonfromreal G W g r w m I Other debt xcurmbton --Chanoe u1 wblc SBcto, debt

Contibuton fromreal foretgn nterest rate - OLher dentdmd debt-creatmg fbws 0 Contrhuton from real exchange rate deprecstan

For references see: Burnside, Craig (2005) “Theoretical Prerequisites for Fiscal Sustainability Analysis”, Ch. 2 in Craig Burnside, Fiscal Sustainability in Theory and Practice, World Bank; van Wijnbergen, Sweder, Roberto Rocha, and %tu Anand (1989) “Inflation, External Debt, and Financial sector Reform: A Quantitative Approach to consistent Fiscal Policy”, World Bank papers, WPS 0261 Budina, Nina and Sweder van Wijnbergen (2007) “Quantitative Approaches to Fiscal Sustainability Analysis: A N e w World Bank Template Applied to Turkey”, World Bank Working Paper No 4169 Frank, Nathaniel and Eduardo Ley (2008) “Refinements to the Probabilistic Approach”, World Bank Policy Research Working Paper No 4709 Bandiera, Luca, Nina Budina, Miche l Klijn, and Sweder van Wijnbergen (2007) “The ‘How To’ o f Fiscal Sustainability: A Technical Manual for Using the Fiscal Sustainability Tool” World Bank Policy Research Working Paper N o 41 70 Ley, Eduardo. (2006) “Fiscal (and External) Sustainability,” (Unpublished, The World Bank), available at http://l29.3.20.4l/eps/pe/papers/03 10/03 10007.pdf Celasun, Oya , Xavier Debrun, and Jonathan D. Ostry (2007) “Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A FanChart Approach,” IMF Staff Papers, 53(3): 401-425.

The debt dynamics take account o f the following:

User Defined Stress Tests to deal with specific risks, extreme events

76

- Alternative scenarios - Bound tests

The purpose o f the various alternative scenarios and bound tests i s to facilitate discussion o f key vulnerabilities o f the economy and to ensure more realistic fiscal sustainability assessments.

In the case o f Jamaica, the following stress tests have been undertaken:

Magnitude of shock Length of shock I n unit of SD

Interest rate Real growth

Primary b a k e

Combtned

Percentage change

Percentage of GDP F- E-

Real depreaabon

Contingent liabilities

In years Save copy

12 12 12 12 F- ri-- r-- I.

R F R R

F

P

F I7

Cancel Generate Bound Tests 1

150.0

140.0

130.0

110.0

100.0

90 0

Stress Tests and the Baseline Scenario

_ _ _ _ _ _ - _ _ . _ _ _ _ _ _ _ . _ _ _ _ _ _

- One time 30 percent real depreciation in 2008109

Key variables are at their 7-year historical averages

_ _ _ _ _ _ - _ _ . _ _ _ _ _ _ _ . _ _ _ _ _ _

- One time 30 percent real depreciation in 2008109

Key variables are at their 7-year historical averages

1-Baseline I

200314 200415 200516 2006i7 200718 200819 2009110 2010111 2011112 2012/13 2013/14

77

The above chart depicts some stress tests in addition to the ones already mentioned in the main body o f the text.

i) The B 2 stress test applies a 2 STD shock to the 7-year historical average in the f i rst two projection years. Interestingly, only in FY 2010/11 does this scenario reveal deterioration compared to the baseline scenario. The reason i s the low growth outlook in Jamaica: the 2 STD deviation shock to the historic average implies a 0 percent growth rate in the two years, whereas the baseline scenario assumes a negative growth rate in the f i rs t year and zero-growth in the second projection year.

ii) The combo shocks looks at 1 STD shocks to: a. Average real interest rate on public domestic debt (nominal rate minus change in CPI, in percent); b. Average real interest rate on foreign exchange debt (nominal rate minus change in CPI, in percent); c. Average real interest rate on NFA (nominal rate minus change in CPI, in percent); d. Real GDP growth (in percent); e. the primary surplus (in percent o f GDP). After the shock, net public sector debt accelerates to close to 135 percent o f GDP and over the five year horizon declining only by roughly 10 percent o f GDP, indicating high persistence in the debt dynamics.

4. A DESCRIPTION OF THE STOCHASTIC SIMULATION TOGETHER WITH AN INTERPRETATION.

To account for the high volatility o f key variables, such as real interest rates, real growth rates and changes in the real exchange rate, and to assess the impact o f uncertainty o n fiscal sustainability, we use stochastic simulations. This approach to incorporating uncertainty into sustainability analysis allows for interactions among the underlying debt dynamics factors (e.g. GDP growth rate, interest rate, inflation rate, exchange rate, etc.) by estimating a vector autoregressive model (VAR) on historical data.

The estimated VAR model can then be used to generate a “fan chart” o f debt-to-GDP ratios using Monte Carlo simulations. Such a probabilistic approach to fiscal sustainability depicts the magnitude o f r isks - upside and downside - surrounding public debt projections as a result o f external and/or pol icy shocks. In addition, this approach can be used to show the distribution o f the measure o f required deficit reduction. In general this approach i s implemented by first estimating a VAR model for the foreign real interest rate rf, the domestic real interest rate rd, the real GDP growth rate g, and depreciation of the real exchange rate e, that is, Vt = ( rt , rt , gt, et) f d

Real exchange rate [------- PSD

i r“ RDR

Years Start year 1 1.876507039(

Iterations

r Fiscal reaction function

Opttons 1 I 78

Based on the estimated variance-covariance matrix, the tool uses a programming algorithm that computes the resulting debt dynamics by feeding each vector o f stochastic realizations in the debt updating equation. The FS tool then simulates this dynamic debt process as many times as desirable (5000 times by default). Finally, the tool plots the probability density o f the outcomes o f debt ratio from the stochastic simulations, generating a “fan chart” for debt-to-GDP ratio as in Celasun, Debrun, and Ostry (2005). The “fan-chart” for net public sector debt-to-GDP ratio, using as an input the variance-covariance matrix o f the estimated VAR process is shown below.

Public sectm debt

1 1 5 0 7 I

ao 3 2007 2008 2009 2010 2011 2012 2013

This chart indicates that given historical movements in underlying economic variables that impact debt to GDP, there i s at least a 30 percent probability that net public sector debt wil l be at or below 110 percent o f GDP by 2013 (which i s the predicted baseline level). As the diagram indicates, for the higher the possible future debt levels, the higher i s probability o f observing that particular that particular debt to GDP level or less. For example, there i s a 95 percent chance that public debt wil l be equal to or below 130 percent o f GDP by 2013. Because o f the unique historical volatility in underlying economic variables for Jamaica, the probability o f observing a debt to GDP level above the predicted baseline in 2013 (1 10 percent) is higher than the probability o f observing a debt to GDP level below that level. This conclusion is similar to results obtained by the Fund, namely that there i s about a 50-percent probability o f debt falling below 100 percent o f GDP by 2012/13 (IMF Country Report No. 08/199).

The stochastic simulation approach can also be employed to demonstrate the probability distribution o f the required deficit reduction. This i s a measure that calculates the additional fiscal effort needed to stabilize public debt to GDP ratio in any given year throughout the projection period, as a result o f random shocks to key debt determinants.

79

1 Required Debt Reduction I 1 i 10 T-------

95-97 5

0 85-95

n 75-85 m 25-75

' 3 0 15-25

5-15 2 5-5

0

The diagram indicates that there i s a greater likelihood o f additional fiscal efforts (above a baseline o f 5 percent o f GDP primary surplus), compared to lower fiscal efforts to achieve the baseline prediction o f 110 percent debt to GDP ratio. Should a worse case scenario occur in the underlying economic variables, a doubling o f the primary surplus may be necessary to achieve the expected baseline debt-to-GDP outcome.

80

ANNEX 9. LETTER OF DEVELOPMENT POLICY

w w BJeSEOUM' r ) r ~ T H ~ rouML#o R E ~ C E BE KUMR wwmm warn MIHISTRY OF FINANCE AND THE PUBLIC SERVICE

30 NATIONAL HEROES CIRCLE R.0, BOX 642

KIHGSTON JAMAICA

Dscmbet 15,2008

w@laeHa aN&m-11 WI&&SM$#iiW.MLgJ*jlr t l i a b m m u

POLICY LETTER

Fiscal and Debt Sustainability Developmeat Policy Loin

MT. Robert E3. &ellick President World Bank Washington DC

Dear Mr. ;EoelIick

The Government o f Jamaica appreciates md welcomes the kcbnicd and

financial supprt af the World Bank and the avenum which it opens for the

succtl?ssful and gradual achievement o f the goals, outcomes and reform

measures articulated in Vision' 2030 JainBica National Development Plan and

the Medium Term Socio-Economic Policy Framework 2009-20 12.

T h e Government of Jamaica .Is fully committed to the sustainable development

of the country and therefore continues to undertake major stmctwd ?refarms

which will significantly improve the quality of l i fe of the Jm&can people.

T h i s requires strong and sustained economic growth which will facilitate jab

areation and poverty reduction, greater security and safety and effective

governance as well as education and training to boost production md

81

productivity. Several cbllenges including the ~ ~ b i l ~ ~ a ~ ~ ~ ~ debt situation and

the current global economic crisis wil l have to be oiverwme to achieve these

objectives and create the appropriate &arnework and capacity for global

competitiveness. However, the COJ intends to take full advantage ofthe spirit

o f commitment and pwtaersktip that was engendmxl mong key siakeholdm during the preparation of the lorzg-tem development plan In order to addmss these and other challenges and th

In order to accomplish this, the ~~v~~~~~~ has c o h a 4 itself to reduciryl

the cost o f debt sewicing through tight fiscal management; controlling the

deficit, and generating strong primary surpluses. The current global financial

crisis has: the potential to place an dditional constmint OD the ~ W ~ Q K I ~ in

t e r m o f higher debt servicing costs and slowing growth as the global economy

cools and tourism and remittance inflow are reduced. T h i s situatim is made mare dimcult by the €act that Jamaica is unable to a~cess the international

capital m d e t for additional financing;, I t i s therefom hperative that moumes

continue to flow &om: the multilateral institutions to Jamaica an a positive net

basis.

As we enter into a period o f uncertainty, it i s imperative that we proceed with

OUF reform agenda. Achieving the targets o f this agenda wi l l enable us to exit

our current trajectory which i s unsustainable mci realign the economy with

stratsgies that am more sustainable and ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ e ~ * The priorities o f the

government for the macro-economy in the context o f the

'Framework 2009 - 20 12 are:

...

* ) V i . .

82

The contahnent o f public expenditures, particularly pubh

thiG national debt. Ultimately, the goal i s to consolidate the budget, rationalize the functions o f Public Bodies, divest lu5s-m&iw Pubtic

Bodies and contain the gr :I . ' 1 ..,

h of the public sector wage bill.

Memares have been taken to improve the efficiency o f the financial

management and budget processes witbin central. government and these will intensify through the end o f this f iscal year and continue into FY

2089 - 2010. Specifically, a prioritization tool i s being developed to

facilitate decision-making on. public investments; public spending will

be subject to improved monitoring and evaluation; mechanisms to

control spending and improve accounting and Fmmcial reporting are

being implemented, To boost revenue collection and to e n b c e the

equity o f the tax system, both the administrative and the policy sides are

being improved. In icula$,- more uniform tax rates will be

implemented.

Background

. -.t .

In the context of the current global crisis, the Govern nt i s even M re

committed to proceeding with the reform agenda. Even 'under normal

circarnstances, extricating the Jamaican economy from the current status quo of low growth, high debt and economic vulnmiibility would be considered

challenging, Several factors have contributed to the G U I T ~ ~ ~ situation and these

are surrrrnarized below,

83

canomic Performlranca - Despite gross investment Ievsls o f 30

parcent of GDP over the past 5 years, growth has been impaired by 8 number

of factars including: SL large infamal XG~CH-, amiual natural disasters that

destroy installed ~~~~~~~~ lack of competitiveness, and investments made

to prevent crime which have little impact on a gate productivity,

National Debt steadily increased fiam 84 percent of EDP En 1997 to a peak of

136 percent o f GDP 2003 following t . the financial crisis o f the mid- 1990s as

the Governrnent took over t he bad debt partf~lio o f t h ~ fa i l4 institutions. At

d ~ s e to 14 percent o f GDP, &fie primary surptkl~ peaked in FY 2003J04 and

20043’05. Since 2003, public debt to GDP has: slowly decreased to below 120

percent, mostly due to high primary surpluses and decreasing interest rates.

Currently domestic debt represents 56 percent o f total public debti and external

debt i s 44 percent.

Approximately 80 percent of foreign cwency denominated debt is in US dollars and variable-rate instruments accounted for more than 40 percent o f the

total public debt stock as at September 2008 which indicates a high exposure of the Jamaican debt dynamics to fl o m in the J$JUS$ c x c h g e rate and

: d ! t > changes in interest rates. Increasing reliance on variable-rate insb;.umtmts has

extended the maturity o f domestic public debt but has increased the exposure .of public debt to interest rate movements, An analysis of the sensitivity of the

debt path to shocks indicates that the debt trajectory i s extremely sensitive: to

interest mte and exchange rate variations.

, . .

84

Business Environment and Trade: - with the exception o f the costs associated

with paying taxes and the costs of closing a business, Jamaica earnpara favorably with the rest o f LAC €or most investment climate indicators and

ranked 63' out of 181 countries fox the period April 2007 - June 2008,

The Jamaican dollar had mmained relatively stable until September 2OOX when

capital outflows resulting fi-om changes in investor sentent and the need to

meet margin calls &om external creditors, put the Jamaican dollar under

pressure, In response the central bank has Jntmened to stabilize the exchange

rate which has resulted in a temporary decline in the net international reserves

WW*

Jamaica has ftd relative SUCC~SS in reducing poverty over the last decade and a

half, whiles the level o f inequality has remained basically unchanged. Between

1989 and 2004, poverty fe11 from 30.4 to 16.9 percent o f the population. Since

2804, poverty declined from 163 percent o f the ppulaation to 14.3 percent o f

the population h 2006 but the recent surge in inflation has had a greater impact

on the poor.

Economic activity i s expected to decline by - 0.5 to 0-U percent of GDP

(revised down &om growth o f 0 3 percent) in FY 2008/09 due to a combination

offactors that originate in the external envirsmnent such as a t i

85

international financia1 conditions, declining U S growth as well as the impact of

the weather related wmts 011 the local ecl~niorny despite declining fuel prices.

Altliough the economy rernains yulner&le, growth i s expected to recover in the rnedium-tetrrn to 2.0 tu 2 S percent in 201U13 assuming that the crisis does not

deepen and Saxmica can maintain private sector investment and exports..

Inflationary pressures are expected to decline over the medium term due to

reduced aggregate demand from the private sector and fdliing fuel and commodity prices.

(a) The Current Account B f i c i t i s expected to fall to 12.2 percent of

GDP in 2008/09 and decrease fizrther to about 6 percent o f GDF

up to 2012113 as the cost a f he1 imports declmes and domestic

demand ~ ~ ~ ~ ~ ~ t ~ ~ " ~ ~ ~ ~ ~ ~ bverafl imports relative to exports.

(b) Cansolidat4 fi"lscal deficits we likely to decrease in the medium

kTKi fI"0Ill 10.1 P@WfXlt O f aDP bl 2007108 tQ 7,6 p@EeIlt hl 2012113. The General Consumption Tax (GCT) and income and profit taxes wil l be negatively impacted by the slow down in the

economy. However these wuld be offset by positive yields &om the proposed tax reforms over the medim tenn. Going forwad

expenditure associa*d with Wages: md Salaries and Recumnt

and Capital Progmmmes are expected to moderate.

86

(d) Net debt to GDP i s expected to dfxrease in the medium term due

to the impact of the r e f o m implemented under the gouwmnmt’s refarm progmmnze supported by this DPL. The cost o f capital is

prohibitively high for heavily indebted sovereigs such as

Jamaica, while depreciation pressures stemming from capital outflows could increase the cost of servicing the foreign exchange

denominated component of debt.

. t , 1

(e) Current sovereign and corporate spreads reflect a higher country

risk resulting Erorn a worsening international environment.

Heightened risk aversion has aZready resulted in an outlook

downgrade by Fitch and Mcmdy’s has placed Jamaica’s sovereign

ratings on review for possible downgrade.

111. Structural Refarms

The government’s r@fom program is set d-thin the hmework o f the long-term

gods and outcomes o f Visiorn.2030’ Jm&a and the current Mediumterm

Socio-economic Policy Framework (MW). The rnain outcomes to be pursued

over the medium term are stable macro-economy, greater security and safety,

efkctive governance and world-class education and mining.

t * I

The guverment’s program for rnzliiztahing macroeconomk stability i s

anchored in three priorities: fiscal and debt sustainability, an efficient and

equitable tax syst@m, financial system stability and price stability. The

govement riecogniztxj t b t much of the intended reduction of the debt tcr CDP

mtis will have to Come through growth in output and &hat the private sector I : I

87

must be the engine o f h i s growth far these gains to be austaitinable. T h i s

depends on improving business procesws, strengthening the processes that pmte~t intellectual property, investment in strong economic infrastructure,

irnprovrsd labar pradwtivity and labar market conditions and the development

of micro, small. and mdiurn-sized enterprises,

a, Fiscal srad Debt sustainability

To realize its commitment to reaching a balmc.ed central government budge%

the GQJ remains committed to maintaining il satisfactory D-MGI-QWOIW~~C

icy framework, This will be augmmteb by meastlres to control ovemll

public sector bdanes and debt, including implementation o f 3 Fiscal Transparency and Responsibility Framework and consolidation of the accounts

o f public bodies and central government. In the medium-tern, the Govmment

intends to reduce the ccrpzsoli&&d public sector fiscal deficit to roughly 5 percent of GDP in 20111’12 and increase the consolidated pr-imasy surplus to

7 percent (flrom 4.5 percent d6DP in ~ ~ Q 7 ~ ~ ~ ) .

Complementing these measures, the govement i s implementing measures to

ratioaaafize public bodies to ensum efficiency in spending md investmenrs in

wdcr to COIIWQ~ the accumulation o f public sectm debt and to allocate scarce

public msources more efficiently to development priorities, In particular, the

rationalization plan involves tsle divestitwe o f t b e public bodies and

engagement of privatization advisors far another three entities in 2008,

88

Over the next t h e years, the vemment plms to bring 12 public bodies with

commercial fimdians to xhe point o f sale. In some amas, regulatory capacity

will necd to be improved to facilitate appropriate monitoring of ?he divested

entities. The Government of Jamaica is committed to undertake these

divestitures consistent with saund environment practices. Within this context, the Development Bank o f Jamaica @BJ), the umbrella entity responsible for

divestment o f GOi assets, will work in tandem with the National Enviroment

and Planning Agency (MEPA) to ensure adherence to this commitment.

Improving efficiency and effectiwness of public service compensation and incentives i s one of the most important amas of sus-tainable fiscal reform, "The government has completed ~ ~ - ~ ~ u G ~ ~ ~ ~ ~ ststor survey tw a first step toward a

study "to evaluate ti medium term Stratkgy for public sector work force skills, needs and compensation. This s;rtrategy should contribute profoundly to

manage wages, sustain and improve quality of public wcwkforce, increase

workfcme efficiency and expand the M m o m d m of Understanding (MOW in the public sector procws to a wider segment ofthe workforce,

*:i . , .. t , I

b. Increased efficiency of finalatis1 management an6 budget psoamsltls

In order to hprove the ability o f the government to spend i t s resources more

effiiciently and reduce the risk o f budget ~ v e m n s i t is important to brkg accounting, remrdjng and r g '. siahdrisds in line with international

standards. Several o f the issues raised in the Public Expenditure and Financial

Accountability assessment in 2007 are scheduled fur implementation including:

( i> measures to improve capital investment prioritization mechanisms, (ii) the

89

introd rnction o f multi-year budgeting aligned with corporate and operatianal

plans and ( i i i ) the ~~~~~~~~~ o f interm! and external control systems

through the implernentahn ofthe Auditor General’s plan for institutional and

capacity building and sstablishment of an Audit Dkecturzlte md an expanded

scope of the Internal Au . _ :& :- . I

The Government o f JaJrraica plans to deespen the r e f o m o f the tax regime h line with reciornrnendations from previous reviews, Already, them has been increased uniformity o f indirect tax rates, i n c h

mro-rating into exemptions in 2005 and the govement intends to implement

measures to have a mure simplified md fairer fax system. Of note the GU5 has already simplified the Special Consumption Tax (SCT) on t o b m and the

General Consumption Tax (GCT) on motor vehicles. .

I , a . 4

? ) I

With the expir&m o f the tax m e s t y , the focus i s now on increasing

compliance and enhancing revenue through various administrative and policy

re-lbnns such st5 ~or~soSichting payroll .taxes, kproving collection and ensuring

that special hncentives are phased out o f the tax code,

IV, I ~ ~ l ~ r n ~ ~ t ~ ~ ~ this bra reform agenda in the context of the current financial

and economic crisis has, 8.5 required, the full support o f the Cavement o f

Jamaica. We continue to benefit from the availability o f technical and financial

resources in order to fclcilitatk the ~~~~~~~~~~~~~ uf these policy and

Government Suppart for the Pro

90

administrative changes in the mas outlined. 'The EQJ will amtribute

leadership and resources to drive and support the implementation o f t h ~

program with the coordinating role king playad by the Office o f the Prime

Minister rhr0ug.h the Planning Institute of Jamaica supported by the Ministry of

Finance and the Public Service.

Audley Shaw, M.P. Minister of Fi~~mm and the Public Service

91

92

Jamaica a t a glance 12/6/08

Key Development Indicators

(2007)

Population. mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population)

GNI (Atlas method. US5 billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international 5)

GDP growth (%) GDP per capita growth (YO)

(most recent estimate, 200&2007)

Poverty headcount ratio at $1.25 a day (PPP, %) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and dder) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Jamaica

2.7 11

0.4 53

9.4 3,520 5.990

0.7 0.3

71 26

3

95 95

93 83

Latin America 8 Carib.

563 20,421

1.2 78

3,118 5,540 9,320

5.7 4.5

8 18 73 22 5

91 89

120 116

91 78

~

upper middle

income

823 41,497

0.6 75

5,750 6,987

11,888

5.8 5.1

70 22

94 92

112 109

95 83

Net Aid Flows

(US$ millions) Net ODA and official aid Top 3 donors (in 2006):

European Commission United Kingdom United States

Aid (% of GNI) Aid per capita (US5)

Long-Term Economic Trends

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US5 millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

125

4 8

16

5 1 59

27 3 18 3

1 8

2 1 2,679

63 8 20 2 15 9

51 1 51 0 10 8

1990 2000

271 10

7 33 7 5

104 -26

8.5 0.1 113 4

22.0 8.2 25.1 11.5

7.2 42.7

2 4 2 6 4,592 8,027

(% of GDPJ 8 0 8 7

37 1 31 3 17 2 13 7 54 9 62 0

64 9 89 1 13 0 15 7 25 9 28 5

48 1 42 6 51 9 53 9 18 5 21 4

2007 a

37

33 14 9

0.4 14

9.3 17.2

68.0

2.7 11,430.4

5.9

12.7 61.3

88.3 17.7 33.2

45.8 63.0 26.2

32.8

I Age distribution, 2007 I Male Female

Dercent I l5 lo O

Under-5 mortality rate (per 1,000) I 50

40

30

20

I O

0 I990 1995 2033 2 K 6

0 Jamaica BLatrn America a the Caribbean

Growth of GDP and GDP per capita (%) I

I4 1

---CCGDP - GDP per capita

1980-90 1990-2000 2000-07 (average annual growth %)

1.1 0.8 0.5 2.3 1 .8 1.7

2.0 -0.3 -1.4 2.4 -1 .o 1.7 2.7 -2.2 -0.2 2.2 2.3 1.7

Note: Figures in italics are for years other than those specified. 2007 data are preliminary. ., indicates data are not available. a. Aid data are for 2006.

Development Economics, Development Data Group (DECDG)

93

Jamaica

Balance of P a y m e n t s a n d Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (ci9 Net trade in goods and services

Current account balance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Cent ra l G o v e r n m e n t F inance

(% of GDP) Current revenue (including grants)

Current expenditure

Overall surplusideficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

E x t e r n a l D e b t a n d Resource F l o w s

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000

1,563 3,004 -838

-367 4 7

888

1,049

30 1 25 9 31 0

-1 0

25 33

2007

2,331 5,784

-2,994

-1,830 16 7

2,057

1,906

30 9 27 4 30 9

-5 9

25 33

Composition of total external debt, 2006

IO4 E D 0 387

I US$ millions

P r i v a t e Sec tor D e v e l o p m e n t

Time required to start a business (days) Cost to start a business ( O h of GNI per capita) Time required to register property (days)

Ranked as a major constraint to business (% of managers surveyed who agreed)

Access tolcost of financing Tax rates

Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

2000

- - -

2000

44.6 9.2

-I

2008

8 7.9 54

2007

72.2 60.0

107.9 8.7

IGovernance indicators, 2000 and 2007

Voice and accountability

Political stability

Regulatory quality

Rule of iaw

Control of corruption

0 25 M 75

Country's percentile rank (0-100) hrgher vduer impiy bene, rafmgs 02000

Source Kaufmann-Kraav-Mastruul. World Bank

7

1W

Techno logy a n d I n f r a s t r u c t u r e 2000 2007

Paved roads (% of total) Fixed line and mobile phone

High technologyexports subscribers (per 100 people)

(% of manufactured exports)

70.1 73.9

33 106

0.1 0.1

E n v i r o n m e n t

Agricultural land (%of land area) 47 47 Forest area (% of land area) 31.5 31.3 Nationally protected areas (% of land area) .. 16.2

Freshwater resources per capita (cu. meters) .. 3,541 Freshwater withdrawal (% of internal resources) 4.4

C02 emissions per capita (mt) 4.0 4.0

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.7 4.1

Energy use per capita (kg of oil equivalent) 1,514 1,445

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

IFC (fiscal year) Total disbursed and outstanding portfolio

Disbursements for IFC own account Portfolio sales, prepayments and

repayments for IFC own account

of which IFC own account

MlGA Gross exposure

415 98 60 22

- - -

58 20 0

5

93 New guarantees 0

360 19 48 22

- - -

202 118 27

5

168 37

Note Figures in italics are for years other than those specified. 2007 data are preliminary. 1218108 ,. indicates data are not available. - indicates observation is not applicable.

Development Economics, Development Data Group (DECDG)

94

Millennium Development Goals

loo-

75.

50 - 25 -

Jamaica

8==esm

With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2007 Poverty headcount ratio at $1.25 a day (PPP. % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) 5.8 6.4 5.9 5.3 Prevalence of malnutrition (YO of children under 5) 4.0 3.8 3.1

27.5 18.7

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 96 90 90 Primary completion rate (% of relevant age group) 91 89 a7 82 Secondary school enrollment (gross, %) 65 86 87 Youth literacy rate (YO of people ages 15-24)

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (YO) 102 101 101 Women employed in the nonagricultural sector (% of nonagricultural employment) 50 49 47 47 Proportion of seats held by women in national parliament (YO) 5 12 13 13

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 33 33 32 31 Infant mortality rate (per 1,000 live births) 28 27 26 26 Measles immunization (proportion of one-year olds immunized, %) 74 90 aa 67

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births)

Contraceptive prevalence (% of women ages 15-49) 55 66 69

170 Births attended by skilled health staff (% of total) 79 95 97 97

Goal 6: halt and begin to reverse the spread of HlVlAlDS and other major diseases Prevalence of HIV (% of population ages 15-49) 1.4 1.6 Incidence of tuberculosis (per 100,000 people) a a a 7 Tuberculosis cases detected under DOTS (%) 94 106 73

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 92 93 93 93 Access to improved sanitation facilities (% of population) a3 a2 a3 83 Forest area (Oh of total land area) Nationally protected areas (% of total land area) C02 emissions (metric tons per capita) GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent)

31.9 31.5 31.3 16.2

3.3 3.9 4.0 4.0 4.0 4.3 3.7 4.1

Goal 8: develop a global partnership for development TeleDhone mainlines (Der 100 DeoDle) 4.4 11.7 19.1 12.8 Mobile phone subscribers (per'lO0 people) Internet users (per 100 people) Personal computers (per 100 people)

+Primary net enrollment ratio

+Ratio of girls to boys in primary &

Measles immunization (%of I-year olds)

0 Jamaica 0 Latin America 8 the Caribbean

0.0 i .a 14.2 93.5 0.0 0.1 3.1 56.0

0.5 4.6 6.7

ICT indicators (per 100 people)

0 Fixed + mbi le subscribers

Note Figures in italics are for years other than those specified

Development Economics, Development Data Group (DECDG)

indicates data are not available I 28/08

95

BB ll uu eeMM oo uu nn tt aa ii nn ss

PP ee dd rr oo PP ll aa ii nn ss

DDrr yy HHaarrbboouurr MMttss..

Blue Mt. PeakBlue Mt. Peak(2256 m)(2256 m)

Dolphin HeadDolphin Head(545 m)(545 m)

H A N O V E RH A N O V E R

MANCHESTERMANCHESTER

P O RP O R T L A N DT L A N D

KINGSTONKINGSTON

CLARENDONCLARENDON

T R E L AT R E L AW N YW N Y

W E S T M O R E L A N DW E S T M O R E L A N D

S A I N TS A I N TA N NA N N

S A I N TS A I N TT H O M A ST H O M A S

SAINTSAINTANDREWANDREWS A I N TS A I N T

C AC AT H E R I N ET H E R I N E

SAINTSAINT

ELIZABETHELIZABETH

S A I N TS A I N T

J A M E SJ A M E S S A I N TS A I N TM A RM A R YY

MontpelierMontpelier

Old HarbourOld Harbour

FrankfieldFrankfield

Ocho RiosOcho Rios

MoneagueMoneague

ChapeltonChapelton

LinsteadLinstead

Bog WBog Walkalk

OracabessaOracabessa

ChristianaChristiana

May PenMay Pen

MandevilleMandeville

PorPort Morantt Morant

Black RiverBlack River

Montego BayMontego Bay

Spanish TSpanish TownownHalfway THalfway Treeree

KINGSTONKINGSTON

H A N O V E R

MANCHESTER

P O R T L A N D

KINGSTON

CLARENDON

T R E L AW N Y

W E S T M O R E L A N D

S A I N TA N N

S A I N TT H O M A S

SAINTANDREWS A I N T

C AT H E R I N E

SAINT

ELIZABETH

S A I N T

J A M E S S A I N TM A R YNegril

Montpelier

Runaway Bay

Old Harbour

LionelTown

Annotto Bay

Frankfield

Ocho Rios

Moneague

Chapelton

Linstead

Bog Walk

Oracabessa

Christiana

Lucea

May Pen

Falmouth

Mandeville

Port Maria

Port Morant

Black River

Montego Bay

Spanish Town

Port Antonio

St. Anns Bay

Halfway Tree

SavannaLa Mar

KINGSTON

Great

Bla

ck

Minho

Car ibbean Sea

Caribbean Sea

Bluef ie ldBay

MontegoBay

Por t land Bight

B l u eM o u n t a i n s

P e d r o P l a i n s

Dr y Harbour Mts.

Blue Mt. Peak(2256 m)

Dolphin Head(545 m)

19°N

18°N

19°N

18°N

78°W

78°W

77°W

77°W

JAMAICA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 5 10 15 20

0 5 10 15 20 Miles

25 Kilometers

IBRD 33423

SEPTEMBER 2004

JAMAICASELECTED CITIES AND TOWNS

PARISH CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PARISH BOUNDARIES

INTERNATIONAL BOUNDARIES