The International Monetary Fund has provided a cautiously optimistic outlook for the Jamaican economy in the near to medium term.

But the Fund has suggested to the Government that it spend less than is programmed in its $360 billion budget to provide itself with a cushion in the event that there is a shortfall in its projected tax intake or has to respond to a natural disaster.

The IMF this week published a staff review of the island under its so-called intensified surveillance project and concluded that the "short-term macroeconomic outlook is broadly favourable," apparently giving credence to the Government's expectation of a three per cent growth for the current fiscal year, against two per cent in 2005/2006.

Investment projects

"Growth is picking up due to ongoing large-scale hotel and infrastructure investment projects as well as buoyant tourism," the IMF said. Moreover, inflation which spiralled over the past three years is again falling under control and is expected to fall back to single digit.

But despite the improvements, the IMF analysts pointed to failures in achieving a raft of performance targets and warned that the country's position remained vulnerable.

For instance, while that public debt, now at around 133 per cent of gross domestic product, is significantly down from close to 150 per cent of GDP three years ago, it is still between eight and 10 percentage points higher than where the finance minister, Omar Davies, had in 2004 projected it would be at this point.

"The higher debt outcome reflects both lower than expected GDP and higher fiscal deficits," the Fund said. This was partly because of the impact of Hurricane Ivan in 2004 and subsequent storms as well as shortfalls in revenue collections.

Budget-busting

After its budget-busting spending for the October 2002 general election, which led to a deficit of 7.4 per cent for the 2003/2004 fiscal year, Davies promised to balance the budget by 2005/2006. Instead, he returned a deficit of 3.6 per cent and now expects a balanced budget in 2009/2010.

The deficit target was missed, in large part, because of a shortfall in tax revenues on 2005/2006 to the tune of 2.5 per cent of GDP, mostly in general consumption tax.

Again, the Government expects a similar growth in tax revenues in order to meet planned expenditures that are expected to increase by half to percentage point to 33 per cent of GDP. At this level the Government's revenues and grants would reach 30.3 per cent of GDP, up from 29 per cent in the previous fiscal year.

But despite a strengthened tax administration and initiatives to collect back taxes, the IMF is not overly optimistic that the revenue targets will be met. At the same time, introducing new taxes would be difficult given the administration view that it would have difficulty cobbling a social and political consensus on the matter as well as its belief that collecting more from "the tax compliant segment of the economy had reached its limit".

The IMF had an alternative strategy: spend less.

"The mission advised the authorities to under-execute, to the extent possible,this year's expenditure programme until after it has become clear that revenues have improved substantially, and to prepare contingencies in the event revenues fall short or natural disasters struck," the report said.

It added: "Beyond this year, meeting the authorities' fiscal plans for FY2007/2008 implied not replacing one-off capital expenditures in this years' budget with new spending, containing spending on other recurrent programmes in line with inflation (implying a relative shrinking of government expenditures in relation to GDP, and sustaining much of the revenue gains from the improved tax administration expected this year."

One upshot of harsher fiscal discipline, improved tax collection would be a positive impact on the deficit, projected a 2.7 per cent of GDP for this fiscal year, but still one percentage point higher than what Davies had been targeted between the IMF and the government in their 2005 consultations.

It would also be positive for the debt profile by reducing interest payments on the government debts and possibility influence a further downward trend in domestic rates.

Said the IMF report: "The recent decline in the debt stocks, prudent debt management practices over the past several years and a fall in domestic rates in the 2003 peak are expected to reduce the FY2006/07 bill by 1.8 percentage points of GDP compared to the FY2005/06 outturn. However, the targeted primary surplus of 10.1 per cent of GDP, while still exceptionally high by International standards, would represent a weakening from FY2005/06 by 0.9 percentage points of GDP."

However, that government insisted that it was difficult to delay budgeted expenditures but reiterated that there were one-time spending this fiscal year that would not be carried forward in the medium term.

But even as it warmed that Jamaica's economic situation remains fragile the IMF analysts praised the country's recent performance manage in the face of difficulties.

"The authorities have deftly charted the economy through a difficult path," the report said. "Over the past two years, Jamaica has had to withstand a series of natural disasters, as well as very large hikes in petroleum prices.'

business@gleanerjm.com