Building on the Baseline: Jamaica’s 2014-15 Budget Bets on Infrastructure as Growth Takes Hold

Jamaica entered the first quarter of 2014 with something it had not possessed in five years: a functioning IMF programme, a positive GDP reading, and a realistic prospect of completing the fiscal year with targets met. Finance Minister Peter Phillips presented the 2014-15 budget against this fragile but genuine improvement — a document that, for the first time in years, could speak of investing as well as cutting.

• Budget 2014-15 presented with continued primary surplus of 7.5% of GDP target
• World Bank and IDB infrastructure financing begins disbursing into road projects
• IMF EFF reviews maintain unbroken compliance record into second year
• Unemployment edges down as construction and tourism absorb more workers
• Exchange rate under pressure as dollar depreciates against major currencies
• Fiscal Responsibility Framework Act passes parliament in landmark structural benchmark

The budget Peter Phillips laid before parliament in the opening months of 2014 was, by the standards of the previous five years, almost optimistic. Not because the fiscal constraints had eased — they had not: the primary surplus target of seven and a half per cent of GDP remained the inviolable anchor of the entire programme — but because the restored multilateral financing that the EFF had unlocked was beginning to show up in the capital spending columns. World Bank and Inter-American Development Bank loan disbursements, frozen since 2011, were now flowing into road rehabilitation programmes, water supply upgrades, and the infrastructure investment that Jamaica’s parishes had been waiting for.

The Fiscal Responsibility Framework Act — one of the structural benchmarks that the EFF required Jamaica to legislate — passed parliament during the quarter. It was a document of considerable ambition: it committed Jamaica to a fiscal rule that required the government to maintain a debt-to-GDP ratio on a declining path, specified the primary surplus levels needed to achieve that decline, and established the reporting obligations that would make the government’s compliance visible to parliament and the public. The passage of the FRF was a structural milestone in its own right — an attempt to embed the discipline of the EFF into Jamaican law so that it would survive the programme’s eventual conclusion.

The exchange rate told a more complicated story. The Jamaican dollar had been depreciating against the US dollar since the start of the EFF — a managed depreciation that the Bank of Jamaica allowed in the context of the monetary framework the programme required. The depreciation was, in one sense, a correction: the dollar had been kept artificially strong during the years of the SBA, and the adjustment was returning the currency toward a rate consistent with Jamaica’s competitiveness. But it was adding to the real import bill of households and businesses, pushing up prices for fuel, food, and manufactured goods, and creating the inflationary pressure that the Bank was simultaneously trying to suppress.

Unemployment, which had remained elevated throughout the crisis period, was beginning a gradual descent. Construction activity — stimulated by both public infrastructure projects and private tourism investment — was absorbing workers. Tourism itself, now firmly established as the economy’s leading sector, was creating jobs in hotels, restaurants, transportation, and the supporting services that clustered around the resort corridors. The unemployment rate, which had reached above fifteen per cent in the worst years, was moving toward the low teens — still too high, but moving in the right direction.

What This Means

The passage of the Fiscal Responsibility Framework Act was, in institutional terms, among the most significant things to happen in Jamaica’s economic history. It meant that the discipline the IMF had imposed externally was being written into domestic law — that even after the programme ended, the legal obligation to maintain a declining debt path would remain. Whether future governments would respect that obligation was a question for another day. The act itself represented an unprecedented commitment to fiscal rules by a Jamaican parliament.

The Road Ahead

With the FRF enacted and the EFF well into its second year, Jamaica’s attention was turning to the question of what came after. The programme was designed to run until 2017, and the government’s intention was to complete it. But the structural changes needed to sustain the adjustment beyond the programme — the tax reform, the wage framework, the business environment improvements — would take years more to fully embed. The path was clear; the walk was long.

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