Jamaica introduces a wide range of measures to strengthen economy and promote growth

• Author: Stephen Tokarick
• Position: IMF Western Hemisphere Department
• Pages: 209-212

Page 209

Beginning with a financial crisis in 1995/96, the Jamaican economy faced daunting challenges in the mid-1990s. The crisis resulted from the liberalization of the financial sector undertaken without a sufficiently robust prudential and supervisory framework in place-even across subsectors-against a background of a period of high inflation, high real interest rates, and macroeconomic stability. The ensuing bailout of the financial sector, through government guarantees of deposits-like insurance policies and pension funds-at failed institutions, has been very costly, estimated at more than 40 percent of GDP by end-2000/01. Contagion effects, however, were limited by a fairly large share of bank deposits held in foreignowned institutions unaffected by the crisis.

In the wake of the crisis, the government adopted a tight monetary and exchange rate policy stance to contain inflation, which declined from about 31 percent at end-1995/96 to about 6 percent by end- 1998/99. However, the tight monetary policy, coupled with a widening of fiscal deficits associated with servicing the costs of the financial sector bailout, led to high real interest rates, an erosion in external competitiveness, and unfavorable debt dynamics in subsequent years. The stock of debt, mostly domestic, escalated sharply as interest was capitalized on much of the debt issued to finance the bailout. As a result of these events, the formal economy contracted in real terms by nearly 4 percent in 1996-99. The government's social safety net programs, emigration, and remittances from abroad, as well as the sizable informal sector, have all helped to maintain living standards, including of the poorest. Although unemployment has declined somewhat, it remains high at around 151/2 percent.

Economic program

To strengthen the financial sector, as well as provide the foundation for sustained growth and a reduction in the overall debt burden, the Jamaican authorities embarked on an economic program covering the period from April 2000 through March 2002, which the IMF staff is monitoring. The staff-monitored program (SMP) (see box below) envisages a significant reduction in the public sector deficit, a strengthening of the financial sector, and structural reforms thatPage 210 would enhance efficiency and external competitiveness.

The authorities see the SMPs as a vehicle for maintaining close contact with the IMF, as well as a...