The Last Summer of the Programme: Jamaica’s Economy Accelerates as the IMF Deal Enters Its Final Months

As Jamaica’s IMF Extended Fund Facility moved into its penultimate quarterly review, the economy it had reshaped was performing at its strongest pace in nearly a decade. GDP growth for 2016 was tracking toward 1.5 per cent, tourism arrivals were reaching levels that operators had once described as structurally impossible, and the energy cost burden that had suppressed Jamaican competitiveness for a generation was at last beginning to ease. The programme was approaching its conclusion; the transformation it had catalysed was still underway.

• GDP growth for 2016 tracking toward 1.5%, the strongest annual expansion Jamaica had recorded since the pre-crisis years
• The IMF EFF completed its penultimate quarterly review, with all performance criteria met and no waivers required
• Summer tourism arrivals surpassed the prior year record, extending Jamaica’s unbroken run to a fifth consecutive annual record
• The Old Harbour Bay LNG power plant entered full commercial operation, beginning to lower industrial electricity costs
• Unemployment fell to approximately 11.5%, approaching a fifteen-year low as private sector hiring continued
• Negotiations on the post-EFF precautionary facility with the IMF were confirmed as actively underway

The summer of 2016 arrived with a confidence in Jamaica’s tourist industry that four years of record-breaking had not quite managed to make routine. Hotel managers along the north coast reported occupancy that exceeded even their revised-upward expectations, drawing on a market that was choosing Jamaica with a consistency that pointed to something beyond fashion or price advantage. The island’s positioning in the premium all-inclusive segment — anchored by the established resort clusters in St. James and St. Ann and expanded by the newer development in Trelawny — was delivering a quality of visitor that spent more, stayed longer, and returned more often than the budget traveller it had spent a decade displacing. The Jamaica Tourist Board confirmed in August that summer 2016 stop-over arrivals had again surpassed the equivalent period of 2015, extending what was now an unbroken run of annual records dating to 2012.

The tourism performance was the most visible expression of an economy that was, by the mid-point of 2016, growing at its fastest rate since before the global financial crisis. The Planning Institute of Jamaica was projecting GDP growth for the full calendar year in the range of 1.4 to 1.5 per cent — a figure that would have seemed ambitious in 2013 and now seemed merely descriptive. The construction sector was contributing materially, as both public infrastructure spending and private hotel and residential development absorbed labour and capital. The financial services sector, which had spent several years absorbing the impact of the National Debt Exchange and its successor arrangements, was showing signs of a recovery in profitability. The Business Process Outsourcing sector, operating from Kingston and its suburbs, was expanding headcount in response to increased demand from North American and British clients.

The energy sector added a dimension to the recovery story that was structural rather than cyclical. Jamaica’s dependence on imported petroleum for electricity generation had, for decades, produced electricity costs that were among the highest in the Caribbean — a persistent tax on industrial competitiveness that discouraged investment in manufacturing and processing activities. The Old Harbour Bay power plant’s conversion from fuel oil to liquefied natural gas, which had been years in negotiation and development, entered full commercial operation in the third quarter of 2016. The Jamaica Public Service Company confirmed that the conversion was beginning to reduce the cost of electricity generation for industrial customers, with further reductions expected as the gas supply chain matured. For the first time in a generation, Jamaica’s energy cost disadvantage was narrowing.

The International Monetary Fund completed Jamaica’s penultimate quarterly review under the Extended Fund Facility in August, finding all performance criteria on track. The Fund’s assessment noted the continued strong fiscal performance, the resilience of the external position, and the improvement in growth. It also noted, with appropriate caution, that the growth remained dependent on a narrow base — tourism and BPO — and that a broadening of the productive base would be necessary for Jamaica to reach the 5 per cent annual growth rates that economists judged necessary for meaningful poverty reduction. The caution was well-founded; the progress was nonetheless real.

The Bank of Jamaica confirmed in its quarterly monetary policy statement that it was in active discussions with the IMF and the Ministry of Finance about the shape of a post-EFF framework. The options on the table included a clean exit — completing the programme in May 2017 and relying on the Fiscal Responsibility Framework to provide discipline without a formal IMF relationship — and a precautionary Stand-By Arrangement or Precautionary and Liquidity Line that would provide insurance against external shocks without requiring fresh borrowing. The market expectation, reinforced by signals from both the government and the Fund, was that some form of successor arrangement was likely. Jamaica’s debt, while declining, remained high enough that losing the signal provided by an active IMF relationship would risk a widening of sovereign spreads that the fiscal programme could not easily absorb.

The Statistical Institute of Jamaica‘s labour market data for mid-2016 showed unemployment continuing its steady decline, reaching approximately 11.5 per cent — a level not seen since before the 2008 global recession. The improvement was broad-based across sectors, with tourism, BPO, construction, and financial services all contributing to net job creation. For a government governing with a majority of one, the labour market data was the most politically valuable statistic in the quarterly accounts: it told voters that the recovery had reached them, not just the banks and the hotels.

What This Means

The summer of 2016 is the season in which the long arc of Jamaica’s economic recovery becomes legible in a single glance. Record tourism, falling unemployment, declining energy costs, GDP growth at its highest since before the crisis, and an IMF programme completing its final reviews without a single waiver since 2013: these are not modest achievements. They represent the successful conclusion of one of the most sustained and disciplined fiscal adjustment programmes in the Western Hemisphere, executed across two governments of different political parties under the watchful eyes of creditors, multilateral institutions, and an electorate that had every reason to demand short-term relief from long-term discipline. That Jamaica reached the summer of 2016 with the programme intact is a testament to the institutional framework that the Partnership for Jamaica built and the political leadership that chose to preserve it through an election. The question for the next chapter is whether the same discipline can be maintained when the external accountability of an active IMF programme no longer provides the structural incentive to comply.

The Road Ahead

With the EFF’s final review due in early 2017 and the post-programme framework under active negotiation, Jamaica faces a transition that is as much psychological as institutional. The IMF programme has been the organising framework for Jamaican economic policy for four years. Completing it will remove a constraint that has occasionally chafed — the primary surplus target that compressed capital expenditure, the structural benchmarks that imposed reform timelines not always convenient for politicians — but that has also provided cover: a reason to say no to spending demands that the fiscal arithmetic could not support. The successor arrangement, whatever form it takes, will need to replicate that function. The Fiscal Responsibility Framework provides a statutory basis for discipline, but statute can be amended. The real test of Jamaica’s reform achievement will come not in the final quarter of the EFF, but in the years that follow it, when the external accountability mechanisms are weaker and the political pressures to spend accumulated fiscal space are stronger.

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