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Shrinking primary balance runs counter to key IMF policy recommendations
By Camilo Thame Business Co-ordinator thamec@jamaicaobserver.com
Wednesday, July 08, 2009
The Government had to undertake significant fiscal manoeuvring in the month of May as it didn't earn enough to pay its workers while meeting its other non-debt obligations.
Even before making interest payments, government revenue was still $2.47 billion short of the $20.78 billion it spent on non-debt expenditure, which included public sector wages, Government programmes and capital expenditure.
Moreover, Minister without Portfolio in the finance ministry Don Wehby now faces the daunting task of convincing the International Monetary Fund (IMF) to enter into an arrangement with Jamaica without austerity measures being imposed, despite the fact that the Government's primary balance is moving in the opposite direction to where the multilateral lending agency believes it needs to be in order to bring the nation's public debt to sustainable levels.
In June 2008, the IMF in its Article IV Consultation report stated as a key policy recommendation that Jamaica should "reduce the public debt/GDP ratio to about 100 per cent of GDP over five years or by 2013 by raising the primary surplus gradually by four to 4.5 percentage points of GDP over the same period".
As a percentage of GDP, however, Jamaica's primary surplus has gradually declined from 11.9 per cent in the 2004/2005 fiscal year to 8.2 per cent in 2007/2008. Furthermore, the central government reported a primary surplus of 4.5 per cent last fiscal year.
Now that the government has reported a primary deficit, it is not clear when it might reach its debt target, nor is it clear what the IMF will demand of the Jamaican Government in return for its support.
The debt-to-GDP ratio target has, on the face of it, been revised within closer reach after the government revised the System of National Accounts and the GDP rebased through the Statistical Institute of Jamaica (Statin) during last fiscal year.
As a percentage of GDP, the total public debt at the end of March 2008 was revised to 108.2 per cent from 126.1 per cent, while at the end of March 2009 the ratio had increased marginally to 108.9 per cent.
Shrinking primary surpluses over the last few years have also been pressured by loose fiscal discipline, another component of the IMF's policy recommendation that should have been moving in the opposite direction.
For the last five years, the Government has achieved fiscal deficits of four to six per cent, actually running a deficit of 6.8 per cent last year.
The target for the current fiscal year, which began April 1, is 5.5 per cent, or $65.3 billion, but the fiscal deficit for the first two months was actually $2.1 billion or 0.2 percentage points of GDP higher than projected.
The widened deficit largely reflects lower inflows into government coffers, which have been tracking four percentage points below the same period the previous year.
The day after finance minister Audley Shaw presented his tax package in parliament in April, finance ministry officials voiced confidence that tax revenue would grow at close to 12 per cent over last year, even before measures were put in place to rake in another $20 billion into government coffers over the fiscal year that runs to March 31, 2010.
The fiscal numbers in May, however, represented the second consecutive month that tax revenue and overall inflows fell behind the corresponding period in 2008. In fact, tax revenue for April and May were 4.9 per cent and 3.8 per cent below the comparative months last year, respectively. Tax revenue in May, meanwhile, was barely higher - $600 million, or 3.6 per cent - than the amount collected in May two years prior.
Additionally, revenue was so low in May, that despite slashing planned non-debt expenditure for the first two months of the fiscal year by $2.3 billion, the central government found itself in a quandary - it was unable to meet its primary expenditure for the month.
On April 27, the finance ministry brought into effect a slate of tax measures which included: the increasing of general consumption tax on telephone instruments from 16.5 per cent to 20 per cent, which was expected to yield over $700 million in revenue; the reform of general consumption tax (GCT) reducing the number of items listed as exempt to bring in $7.5-billion; and the imposition of an $8.75 per litre special consumption tax (SCT) on petrol, which along with a customs user fee on imported finished petroleum products, was to yield $13.3 billion.
The government did replace certain items on the GCT exempt list, including books and certain food items, but an increase in the SCT on cigarettes was supposed to offset the loss on tax expected to be earned from books.
There was perhaps no way to account for the $370 million fall in corporate taxes collected in May compared to the same month in 2008, while local stamp duty collections dropped $279 million over May 2008.
Local GCT collections in May were $601 million lower than the previous year, while GCT on imports fell by $425 million, meaning for the first month the reform yielded a $1-billion loss over the previous year rather than moving towards the upward revised GCT goal.
Customs duty collections also fell by $344 million in May compared to the corresponding month last year.
On the expenditure side, the central government did manage to spend the same on programmes in April and May compared to last year, or just over $11-billion for the two months, while it cut capital expenditure by $800 million over last year, which means it shaved $2.3-billion off its recurrent expenditure.
Even after declaring that it would have to freeze wage increases for public sector workers, the government still spent $5.8 billion, or 37 per cent more, on wages and salaries during the review period compared to the corresponding two months in 2008.
The government expects to spend $14 billion more on wages in 2009/2010.
On Monday, Jamaica's negotiating team, headed by Wehby, left the island to meet with IMF officials to explore "the possibility of access to the IMF Standby Facility," according to a press release issued by the finance ministry,
"The global financial crisis and continued concerns about the country's balance of payments as well as pressure on the Net International Reserves are the main reasons for exploring a medium-term economic programme with the Fund," said the statement.
The finance ministry has already developed a medium-term economic programme to be submitted to the IMF in order for Jamaica to access a facility.
"This programme includes the revised medium-term targets and draws heavily on the proposed reforms to the financial and tax systems that are already underway," added the release.
http://www.jamaicaobserver.com/magaz...Y_PROBLEM_.asp
By Camilo Thame Business Co-ordinator thamec@jamaicaobserver.com
Wednesday, July 08, 2009
The Government had to undertake significant fiscal manoeuvring in the month of May as it didn't earn enough to pay its workers while meeting its other non-debt obligations.
Even before making interest payments, government revenue was still $2.47 billion short of the $20.78 billion it spent on non-debt expenditure, which included public sector wages, Government programmes and capital expenditure.
Moreover, Minister without Portfolio in the finance ministry Don Wehby now faces the daunting task of convincing the International Monetary Fund (IMF) to enter into an arrangement with Jamaica without austerity measures being imposed, despite the fact that the Government's primary balance is moving in the opposite direction to where the multilateral lending agency believes it needs to be in order to bring the nation's public debt to sustainable levels.
In June 2008, the IMF in its Article IV Consultation report stated as a key policy recommendation that Jamaica should "reduce the public debt/GDP ratio to about 100 per cent of GDP over five years or by 2013 by raising the primary surplus gradually by four to 4.5 percentage points of GDP over the same period".
As a percentage of GDP, however, Jamaica's primary surplus has gradually declined from 11.9 per cent in the 2004/2005 fiscal year to 8.2 per cent in 2007/2008. Furthermore, the central government reported a primary surplus of 4.5 per cent last fiscal year.
Now that the government has reported a primary deficit, it is not clear when it might reach its debt target, nor is it clear what the IMF will demand of the Jamaican Government in return for its support.
The debt-to-GDP ratio target has, on the face of it, been revised within closer reach after the government revised the System of National Accounts and the GDP rebased through the Statistical Institute of Jamaica (Statin) during last fiscal year.
As a percentage of GDP, the total public debt at the end of March 2008 was revised to 108.2 per cent from 126.1 per cent, while at the end of March 2009 the ratio had increased marginally to 108.9 per cent.
Shrinking primary surpluses over the last few years have also been pressured by loose fiscal discipline, another component of the IMF's policy recommendation that should have been moving in the opposite direction.
For the last five years, the Government has achieved fiscal deficits of four to six per cent, actually running a deficit of 6.8 per cent last year.
The target for the current fiscal year, which began April 1, is 5.5 per cent, or $65.3 billion, but the fiscal deficit for the first two months was actually $2.1 billion or 0.2 percentage points of GDP higher than projected.
The widened deficit largely reflects lower inflows into government coffers, which have been tracking four percentage points below the same period the previous year.
The day after finance minister Audley Shaw presented his tax package in parliament in April, finance ministry officials voiced confidence that tax revenue would grow at close to 12 per cent over last year, even before measures were put in place to rake in another $20 billion into government coffers over the fiscal year that runs to March 31, 2010.
The fiscal numbers in May, however, represented the second consecutive month that tax revenue and overall inflows fell behind the corresponding period in 2008. In fact, tax revenue for April and May were 4.9 per cent and 3.8 per cent below the comparative months last year, respectively. Tax revenue in May, meanwhile, was barely higher - $600 million, or 3.6 per cent - than the amount collected in May two years prior.
Additionally, revenue was so low in May, that despite slashing planned non-debt expenditure for the first two months of the fiscal year by $2.3 billion, the central government found itself in a quandary - it was unable to meet its primary expenditure for the month.
On April 27, the finance ministry brought into effect a slate of tax measures which included: the increasing of general consumption tax on telephone instruments from 16.5 per cent to 20 per cent, which was expected to yield over $700 million in revenue; the reform of general consumption tax (GCT) reducing the number of items listed as exempt to bring in $7.5-billion; and the imposition of an $8.75 per litre special consumption tax (SCT) on petrol, which along with a customs user fee on imported finished petroleum products, was to yield $13.3 billion.
The government did replace certain items on the GCT exempt list, including books and certain food items, but an increase in the SCT on cigarettes was supposed to offset the loss on tax expected to be earned from books.
There was perhaps no way to account for the $370 million fall in corporate taxes collected in May compared to the same month in 2008, while local stamp duty collections dropped $279 million over May 2008.
Local GCT collections in May were $601 million lower than the previous year, while GCT on imports fell by $425 million, meaning for the first month the reform yielded a $1-billion loss over the previous year rather than moving towards the upward revised GCT goal.
Customs duty collections also fell by $344 million in May compared to the corresponding month last year.
On the expenditure side, the central government did manage to spend the same on programmes in April and May compared to last year, or just over $11-billion for the two months, while it cut capital expenditure by $800 million over last year, which means it shaved $2.3-billion off its recurrent expenditure.
Even after declaring that it would have to freeze wage increases for public sector workers, the government still spent $5.8 billion, or 37 per cent more, on wages and salaries during the review period compared to the corresponding two months in 2008.
The government expects to spend $14 billion more on wages in 2009/2010.
On Monday, Jamaica's negotiating team, headed by Wehby, left the island to meet with IMF officials to explore "the possibility of access to the IMF Standby Facility," according to a press release issued by the finance ministry,
"The global financial crisis and continued concerns about the country's balance of payments as well as pressure on the Net International Reserves are the main reasons for exploring a medium-term economic programme with the Fund," said the statement.
The finance ministry has already developed a medium-term economic programme to be submitted to the IMF in order for Jamaica to access a facility.
"This programme includes the revised medium-term targets and draws heavily on the proposed reforms to the financial and tax systems that are already underway," added the release.
http://www.jamaicaobserver.com/magaz...Y_PROBLEM_.asp
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