Jamaica Enhances Fiscal Sustainability

CHALLENGE

The large share of public resources devoted to debt service and the wage bill has imposed severe constraints on Jamaica’s growth. The public debt- to-GDP ratio averaged 135 percent of GDP in the 2000s and bound 13 percent of GDP to debt servic- ing. In that period, wages and salaries comprised, on average, 31 percent of total expenditures, or 10 percent of GDP.

In this context, the Programmatic Debt and Fiscal Sustainability Development Policy Loans supported the reform effort towards enhancing fiscal and debt sustainability, increasing the efficiency of public financial management and budgeting processes, and improving the effective- ness and efficiency of the tax system.

SOLUTION

The Bank supported the Government’s efforts to enhance fiscal and debt sustainability, increase the efficiency of public financial management, and improve the efficiency of the tax system. The Debt and Fiscal Sustainability Development Policy Loan series supported the Government’s reform program in seven policy areas:

• Fiscal Responsibility Framework.
• Debt Management.
• Rationalization of Public Bodies.
• Public Service Compensation and Incentives.
• Fiscal Discipline and Strategic Allocation of Resources.
• Public Financial Management.
• Tax Efficiency and Administration.

 Key reforms included:

•  Promoting fiscal and debt sustainability by consolidating overall public sector balances, rationalizing public bodies, and containing the wage bill.
• Improving transparency and efficiency of public financial management and budget processes by preparing timely financial state- ments, and further advances in auditing and operational capacity to improve the efficiency of budget allocation.
• Reducing distortions and enhancing the efficiency of the tax system by taking measures to broaden the tax base, reduce the number of special tax regimes and exemptions, simplify tax payment processes, and increase tax compliance.

RESULTS

Both operations supported improvements in several key indicators:

• Debt interest payments declined to 11 percent of GDP in 2010-2011 better than the 14.5 percent target, partly due to the 2010 Jamaica Debt Exchange, which restructured most of the domestic debt by increasing the tenor of the debt and reducing debt servicing payments in the near term.
• The fiscal balance of public entities was -0.5 percent of GDP in 2010-2011, better than the target of -1.8 percent. Employment surveys were completed for the entire public sector, laying the groundwork for the restructuring undertaken by the Public Sector Transforma- tion Unit.
• Budgets for fiscal years 2011-2012 and 2012-2013 were supported by Medium-Term Debt Management Strategies, which included borrowing plans.
• A Central Treasury Management System was created to reduce waste by centralizing all Government payments via a single treasury account.
• The Government implemented a methodology for prioritizing capital investments, which was used in the six largest ministries during the fiscal year 2010-2011 budget process and has been applied to rank public investments in the fiscal year 2012-2013 budget process.
• The Tax Administration Jamaica was created to reform tax administration. Measures were put in place to increase tax collections, such as a single payment system for all taxes. Tax collection increased 17 percent in the first quarter of fiscal year 2012-2013 over the same period in 2011-2012.
• Perhaps the most important achievement was the establishment of the Fiscal Responsibility Framework, which provides quantitative targets for the debt-to-GDP ratio, the wage bill, and the budget balance to be achieved by 2016. Regulations governing the Fiscal Responsibility Framework were put in place in April 2012.

WORLD BANK GROUP CONTRIBUTION

The Bank’s support consisted of two single tranche loans and technical assistance. The first single tranche loan of US$200 million was approved on February 23, 2010. The second single tranche loan of US$100 million was approved on September 8, 2011. Both operations disbursed upon loan effectiveness. The programmatic structure of the Debt and Fiscal Sustainability DPLs provided Jamaica and the Bank the necessary flexibility in a fairly uncertain environment. The Bank’s technical assistance supported institutional capacity building and advancing public sector reform.

PARTNERS

The loans were part of a multilateral package of support from international financial institutions and donors, including the International Monetary Fund (IMF), the Caribbean Development Bank (CDB), the European Union (EU), and the Inter- American Development Bank (IDB). The package was designed to provide market liquidity and reduce risks to participants in the debt exchange, while supporting the Government’s medium-term reform program. There was a good level of donor coordination. Fiscal and debt sustainability was given priority in all donors’ programs.

On February 4, 2010, the IMF approved a 27-month Stand-By Arrangement in the amount of US$1.25 billion to manage short-term difficulties and support the longer-term reform agenda. While this program went off track a year later, the Fund remained in close dialogue with the authorities and is currently working with them to put a new program in place.

MOVING FORWARD

During a Bank mission to Jamaica in August 2012, the Government requested further technical assistance. The proposed team to deliver technical assistance would include a resident advisor to work with the Expenditure Division in the Ministry of Finance on budget processing, a consultant to work with the Public Enterprise Division on post-privati- zation monitoring and other issues, and a specialist who could work with the Ministry of Finance on consolidating and taking forward various initiatives on public sector reform.

BENEFICIARIES

The operations benefited the Government and the Jamaican people because they improved tax administration and enhanced economic growth and competitiveness.