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The Gleaner - August 11, 2000


Gov't to pay FINSAC interest in cash

FINANCE Minister Dr. Omar Davies is planning to write-off a substantial chunk of debts owed to the Financial Sector Adjustment Company (FINSAC) and expects the near $50 billion of outstanding debt to be assumed by the government, with full interest payments made on FINSAC paper in cash beginning in April next year.

His own detailed analysis of the Government's economic performance yesterday bought to light yesterday by National Democratic Movement president Bruce Golding. Mr. Golding has obtained a copy of a July 19 memorandum to International Monetary Fund managing director Horst Kohler, which is now freely available on the IMF's web site.

Real GDP growth of about 1 percent is projected for 2000/01 "based largely on some recovery in agriculture and manufacturing", according to the web site posting.

The document details the Government's medium term economic strategy and outlines a comprehensive approach to the financial sector. It acknowledges for the first time that the Government is prepared to raise new taxes or fees on public services if revenues do not meet expectations, that FINSAC's paper is largely "non-marketable" and that if interest rates do not fall as planned economic growth is likely to be constrained.

The memorandum of economic and financial policies presents the Government's specific macroeconomic objectives and policies for 2000/01-2001/02 (the fiscal years run from April 1 to March 31).

Limited policy options

"Key among these policies is the continued substantial fiscal effort required. Jamaica is faced with limited policy options if it is to retain the confidence of creditors at home and abroad, and the most important signal will be the attainment of the fiscal targets. In support of these objectives, the Government requests that Fund staff monitor and follow up the execution of its programme during April 1, 2000-March 31, 2002."

A letter accompanying the memorandum signed by Dr. Davies and Bank of Jamaica governor Derick Latibeaudiere said: "The Government of Jamaica believes that the policies in the memorandum will "enable it to achieve its programme objectives, but we are ready to adopt any additional measure that may prove necessary to this end.

"The Government will communicate to the Fund all the information needed to monitor its progress in implementing its economic and financial policies and the measures required to achieve the programme objectives. The authorities of Jamaica will review the SMP with the Fund staff no later than end-

December 2000, end-June 2001, and end-December 2001". The accompanying memorandum was published with the consent of the Government and was sent to the IMF as part of plans to enter a IMF staff monitored programme (SMP). The programme is an informal arrangement between the Government and IMF over the economic plans for the country. Regular visits by IMF officials will help in the institutions monitoring of economic performance.

"In the financial sector, the government recognises the need for a long-term comprehensive solution to address the mounting debt burden associated with the FINSAC liabilities" says the document.

Gross obligations

FINSAC currently has gross obligations of around $110 billion. Some $35 billion is owed to the Bank of Jamaica, asset sales are expected to yield another $25 billion, while the remaining $50 billion is likely to have to be serviced by the Government.

The strategy for dealing with FINSAC's debt involves implementing six key measures, according to the Finance Minister.

(i) FINSAC's debt to the central government (the Ministry of Finance and Planning) will be written off.

(ii) FINSAC's debt to public sector entities (Bank of Jamaica, and other government entities) will be offset against those entities' liabilities to the government

(iii) The sale of Union Bank will be completed in 2000/01, and proceeds from the sale will be used towards reducing the stock of FINSAC debt held by the Union Bank

(iv) Efforts to recover value on FINSAC's non-core assets, including the sale of property and the portfolio of non-performing loans (NPLs) to a third party, will be intensified during 2000/01 and the proceeds used towards a reduction in the FINSAC debt held by the private sector

(v) The government will use all proceeds from possible World Bank, IDB, and CDB loans supporting its financial sector to reduce the stock of FINSAC debt during 2000/01 and 2001/02

(vi) All remaining FINSAC liabilities outstanding as of end-

2000/01 will be assumed explicitly by the government, and full interest payments will be made on FINSAC paper in cash beginning in 2001/02. The document adds that "preliminary calculations indicate that this strategy would require additional cash interest payment by the central government of about 3 per cent of GDP ($8b) in 2001/02, trending downwards over the medium term to about 2 per cent of GDP ($5.5b) in 2004/05. At this level of effort, and taking into account the reductions in the stock of debt through the measures outlined above to J$73.6 billion, the stock of FINSAC debt relative to GDP would decline from 37 percent at end-1999/2000 to 23 percent in 2000/01 and 17 percent by end-2004/05".

With regard to the National Commercial Bank (NCB), "the government realises that there is an urgent need to prepare the bank for privatisation in 2001/02. Efforts will be made to reorganise the bank's shareholding structure to provide FINSAC with a direct stake in NCB's equity, which would better reflect FINSAC's de facto economic ownership of the bank. In addition, a new management team for NCB will be put in place in 2000/01".

"Significant efforts at fiscal consolidation were undertaken during 1998/99 and 1999/2000. The public sector primary surplus was raised by 6 percentage points of GDP to 7 per cent in 1998/99, mainly through strengthened tax administration and efficiency gains in the operation of the public enterprises.

"However, the growing interest bill on the large public sector debt (including that on FINSAC liabilities) more than offset this gain, and the overall public sector deficit widened from 11 percent of GDP in 1997/98 to 12 percent of GDP in 1998/99."

Efforts in 1999/2000, relying mainly on expenditure cuts and some revenue measures, including the introduction of a withholding tax on interest helped raise the public sector primary surplus by about 5 percentage points to 12 per cent of GDP. However, the overall public sector deficit dropped by only 3 percentage points of GDP because of further increases in the interest bill. Consequently, the stock of public debt rose from about 124 percent of GDP at end-1997/98 to about 144 percent (including FINSAC debt) of GDP at end of March 2000.

The focus of structural reforms during the past two years was on the financial sector and trade.

In the next two years the most critical macroeconomic problems facing Jamaica are adverse debt dynamics associated with the high interest rates and a heavy public debt burden.

"However, several important shock absorbers have helped cushion the economy's vulnerability. These include the relatively large proportion of bank deposits held in foreign-owned institutions (46 percent); the willingness of financial institutions to roll over a significant portion of government domestic debt and the option to capitalise most interest on FINSAC liabilities; large and stable inflows from tourism and private remittances; the high level of official international reserves relative to base money and short-term public external debt; and the large informal sector".

The document goes on: "The government is strengthening its adjustment strategy to accelerate the reversal in the adverse debt dynamics and put the economy on a less vulnerable path. The government's macroeconomic objectives over the medium term (2000 - 2004) are to reduce inflation to about 5 per cent a year; achieve an average growth in output of about 2 percent a year that will lay the foundation for faster growth; and maintain a sustainable external position in terms of gross official international reserves coverage of imports and external short-term liabilities."

"Since the tax rate is already high, new measures will concentrate on expenditure reduction and on tax administration improvement. Therefore, expenditures are being streamlined, using for guidance two recent internal reports", according to the memorandum.

"On the revenue side, improvements in tax administration would concentrate on the rationalisation of various legislation to streamline incentives and the strengthening of tax collection from all key taxes. However, new tax measures - particularly in an effort to include more of the sizeable informal sector - will not be ruled out since they could contribute toward a broadening of the tax base, a more equitable tax system, and more favourable debt dynamics."

The Government says it is building the foundation for satisfactory growth, given the government's baseline medium-term macroeconomic framework and policies that have seen inflation fall to single digits, international reserves build up and a relatively stable exchange rate.

Real GDP growth of about 1 percent is projected for 2000/01 based largely on some recovery in agriculture and manufacturing. Growth is expected to continue over the medium term, averaging 3 per cent a year, driven by continued expansion in tourism and other services, and complete recovery in the financial and agricultural sectors.

Total public debt (including the stock of FINSAC liabilities) will decline from 144 percent of GDP at end-1999/2000 to 125 percent at end-2001/02 and to only 101 percent by 2004/05.


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