IMF PRESENTATTION TO PARLIAMENT BY MINISTER AUDLEY SHAW

PRESENTATION TO PARLIAMENT
ON THE PROGRAMME FOR A STAND-BY ARRANGEMENT
WITH THE INTERNATIONAL MONETARY FUND (IMF)
HONOURABLE AUDLEY SHAW, MP
Minister of Finance and the Public Service

December 17, 2009

Mr. Speaker, over the past several months, the Government has been in
discussions with the International Monetary Fund (IMF) on securing a
standby loan facility of over US $1.2 billion to be disbursed over a two-year
period in order to cushion the devastating effect on the economy of a sharp
decline in foreign exchange earnings.

This decline in earnings and concomitant revenue was due largely to the
effects of the global financial crisis which led to the closure of three out of
four Alumina plants in Jamaica, a 16 percent decline in remittance flows,
marginal decline in tourism receipts, as well as declines in border tax and
consumption tax collections.

The Government and the IMF staff members who were here this week have
reached agreement on key elements of a programme which will be submitted to the management and Board of the IMF for approval.
Mr. Speaker, it is important at the outset that I state categorically that
Jamaica's economic problems did not begin with the global financial
meltdown which started last year.

Pre-Global Crisis: A Crisis of our Own Making

Jamaica has long struggled with a number of economic challenges that
predated the current global financial and economic crisis. The global crisis
revealed large imbalances that were allowed to persist and remain
unaddressed for too long. We have pursued an economic model that has not produced much by way of economic growth or an improved standard of
living for the average Jamaican.

Annual real GDP growth has averaged only 1 percent since 1991.

The Jamaican Productivity Center reports that labour productivity
for the average Jamaican worker has declined by 1.3% per year
over the last 35 years, after achieving annual productivity growth
among the average Jamaican worker in the 1960s of 4.0% per year.
Indeed, by the end of the decade of the 1960s, our productivity
growth per worker was a whopping 11.24%.

Strikingly, labour productivity has been on the increase in
countries like Trinidad & Tobago, Barbados and St. Lucia over the
same period. While in the 1962 - 1972 period, Jamaica was ahead
of countries like Costa Rica, Cuba, Dominican Republic, St. Lucia
and Trinidad & Tobago, for the period 1974 - 2007, Jamaica
lagged behind them all (see Table 1).

Jamaica's per capita income is far below that of our Caribbean
partners. The IMF in its September 2009 Article IV Consultation
with Barbados, estimates that country's per capita GDP at
USD13,328 and that of Jamaica at USD5,335. This means that
Jamaica would have to grow at an average rate of 4.68% over the
next 20 years to achieve the per capita income that Barbados is
enjoying today.

Public debt increased substantially after the banking crisis in the
mid-1990s (an increase of 40% of GDP). Since 1991, the debt-to-
GDP ratio averaged 110%, going as high as 143% in FY2003/04.

Public investment has long been constrained by the need to service
the large debt stock.

Not only were we heavily in debt, but to sustain this appetite, the
market demanded exorbitant interest rates. This heavy demand for
unproductive money squeezed out the productive sector and
created paper profits and a money illusion even as inflation and
depreciation ate away at the value of our currency.

Additionally, the country has long had a relatively narrow export base (a
situation made worse with the collapse of the export apparel sector in the
1990s), a broken energy infrastructure, and a deeply rooted culture of
corruption.
The Jamaican people need much better than what we have delivered to them  since Independence. The low levels of economic growth and development contribute to many of the social ills we are witnessing in the country today.

The Current Global Crisis: A Compounding Effect

Speaking to the current global economic crisis, from all indications the
world economy has pulled back from what seemed at times to be depression like levels. Nascent recovery is evident in the U.S., China, the U.K., and many other places. Overall, the IMF estimates that the world economy will   record growth of -1.1% and 3.1% for 2009 and 2010 respectively. These projections represent a marked improvement in the economic outlook  compared to the economic disaster the world was staring at in the fourth quarter of 2008.

Notwithstanding this marked improvement in the economic forecast, there
are important challenges to recognize. First, the projected growth rate of
3.1% for the world economy in 2010 is materially lower than the 5%
recorded in 2007. This means the world economy will have to grow much
faster than 3% going forward to eliminate the idle capacity the recession has created.

Second, the recovery we speak of is driven largely by huge fiscal and
monetary stimulus packages in several countries. The relatively large
stimulus packages coupled with a downturn in local tax revenues have
pushed fiscal deficits and debt burdens in many countries to critical levels.
These have led to mounting concerns by market participants about the
abilities of governments to successfully withdraw stimulus packages and
return their finances to sustainable levels.

Given this backdrop, one of the major risks that the world economy faces is
the premature withdrawal of fiscal and monetary stimuli. This point was
made very clear in the latest IMF publication (IMF World Economy Outlook
of October 2009) on the world economy.

Jamaica and the Current Crisis

Mr. Speaker, Jamaica did not create nor did it contribute to the terrible set of
circumstances that devastated the international financial markets, yet the
country was not spared its severe negative impacts.

Mr. Speaker, reports have been made to this Honourable House and to the
country on the fallout to the Jamaican economy as a result of the global
economic crisis. We've spoken of our export earnings being cut in half due
largely to the shutdown of a large portion of the bauxite/alumina sector;
we've spoken of the 16% fall in remittances. There has been a significant
drop in private capital inflows. We estimated that the fallout from Bauxite &
Alumina and Remittances approximated some US$1.3 billion,
approximately some 10% of GDP and 20% of the national budget. Some
40,000 people were reported to have lost their jobs during this period, while
several others have seen a decline in their earnings.

This decline in economic output, including mining activity, is having a
negative impact on Government revenues. For the first seven months of this
fiscal year, total revenues were $17.8 billion less than what was budgeted
(over 10% below budget). With revenues declining and interest payments
consuming well over 60 per cent of total receipts, the Government is facing
significant financing gaps. In a context where the global economy is unlikely
to recover before FY2010/11, the Jamaican economy is unlikely to record
strong growth over the next 2-3 years especially if the bauxite/alumina
companies remain closed until 2011 and flows from remittances and capital
transfers continue to be weak.

The Main Areas of Understanding between the Government of Jamaica
and IMF Staff

Mr. Speaker, Proverbs 27 and verse 12 of the Bible says:
"The prudent see danger and take refuge,
but the simple keep going, and suffer for it."

It was against the background of the grim economic reality facing the
country at this time that the Government opted, in 2009, to negotiate a
borrowing arrangement with the International Monetary Fund (IMF). We
could not just simply keep going. We had to change course.

Transforming the Jamaican economy will not be easy or painless, given the
relatively low economic base we are starting from. Further, the ongoing
global implosion will impact our ability to implement far reaching policies
to modernize, diversify and improve the Jamaican economy.
Nevertheless the Government intends to draw a line in the sand by
fundamentally reforming the economic landscape in Jamaica. We will
use the crisis as an opportunity to transform the Jamaican economy into
an internationally competitive one, one of prosperity for all Jamaicans.
This is our goal.

During the year, passive balance of payments projections pointed to a
financing gap of US$600 - US$800 million in FY 2009/10. The proposed
financing to close the gap will come from two sources,
(i) a general allocation of Special Drawing Rights (SDRs) by
the IMF and
(ii) a two-year Stand-By Arrangement (SBA). Jamaica's
allocation currently stands at SDR 273.5 million. An
increase in the general allocation of SDRs - that is, the
distribution of SDR 250 billion among all member countries
- was approved by the Board of the IMF. Jamaica's share of
this allocation, received towards the middle of this fiscal
year, boosted resources available to the Bank of Jamaica by
approximately US$320 million.

With the conclusion of the Standby Agreement (SBA), given the
Government's desire to maintain an adequate level of gross reserves of at
least 12 weeks of goods and services imports, the IMF is expected to commit
the equivalent of 300 per cent of quota (US$ 1200 million) over two years.
This pool of convertible resources and the endorsement of the IMF would
also smooth the flow for additional funding from other multilateral sources,
including the IDB and the World Bank and the CDB, as well as grant
funding from the European Commission. Funding from these agencies will
support the programme being undertaken to address the economic issues.

Unprecedented Multilateral Support

Mr. Speaker, let me take this moment to underscore the extraordinary and
unprecedented level of support for the people of Jamaica by our international development partners, particularly since this administration took over the Government in September 2007. Our engagement of the multilaterals   represent borrowing that is smarter and cheaper and is accompanied by measures to strengthen and right-size the economy. These include improved  governance, increased transparency and accountability and macroeconomic  stability.

For the period December 2007 to December 2009 loans approved by the
IDB totaled US$551M, for the World Bank US$206M and for the CDB
US$216M, and grant monies from the European Union totaled 200M Euros.

Mr. Speaker, I'll read two brief testimonials to give an indication of such
support:
The Inter-American Development Bank (IDB):
"The support from the IDB since 2008 has been extraordinary. In 2008
and 2009 an annual amount of over US$4oo million was approved and
an even higher amount is programmed for 2010. This level of support is
unprecedented in the history of the relationship between the Bank and
Jamaica and is driven by the solid credibility of the economic programme
and the reforms aimed at correcting Jamaica's longstanding development
challenges." - Mr. Gerard Johnson, IDB Representative in Jamaica.
U.S. Department of Treasury:
Dr. Nancy Lee, Deputy Assistant Secretary for Western Hemisphere in
the U.S. Department of Treasury, and U.S. Director of the IMF, whom
I met with in Istanbul, Turkey in October of this year, had this to say
in a meeting Tuesday last with Ambassador Anthony Johnson in
Washington:
"The United States is very supportive of a very substantial financing
package for Jamaica from the IMF and other multilateral institutions to
back this deal, but only in the context of an agreement that will solve the
problem in the long run."

We are also appreciative of the support of the Canadian Government which
represents us on the Board of the IMF, the U.K. Government and the
European Union, as well as the Government of China.

Mr. Speaker, I wish to, on behalf of the Government and people of Jamaica,
express sincere gratitude for the strong support of all our development
partners over the years to Jamaica.

The main elements of the macroeconomic programme to be supported by an
IMF Stand-By Arrangement are:
i. Strong fiscal consolidation over the next four years,
characterised by a gradual rise in the primary balance to between
7.0 per cent and 9.0 per cent of GDP and a concomitant decline in
Central Government deficit to below 4.0 per cent of GDP.

ii. Comprehensive tax reform that will broaden the tax base and lead
to a more equitable tax structure. In implementing the programme
of tax reform we are going to review and streamline the complex
structure of tax incentives and tax concessions, some of which date
back to a long distant era whose circumstances no longer exist.

iii. Major institutional reforms that can underpin the achievement of
fiscal and debt sustainability over the medium term. These reforms
include legislating guidelines for fiscal responsibility, streamlining
the public service and enhancing tax administration. The key issue
is the containment of the fiscal deficit.
Credibility requires that government intentions be backed by
concrete action. Legislation to provide for a Fiscal Responsibility

Framework to set parameters for fiscal performance and enhance
transparency and accountability will be promulgated. A Ministry
Paper setting out the proposal to enact appropriate legislation was
tabled today.

Steps are also being taken to establish a Central Treasury
Management System (CTMS) so that the government stops
borrowing its own money through expensive intermediaries at huge
cost to the taxpayers.

iv. The consolidation of public enterprises i.e. a structured approach
to minimizing the impact of these enterprises on the accumulation
of debt. This will include divestment, mergers and improvements
to their governance that will minimize financial losses. Regarding
divestment, Government assets that are not critical to the discharge
of its core functions will be divested.

v. A containment of recurrent expenditure on utilities, purchase of
goods and services and travel. However, expenditure on social
safety net programmes will increase to ensure protection of the
most vulnerable groups.

vi. A debt management strategy that seeks over time to continue to
reduce interest cost to government and increases access to capital
for private sector interest.

vii. An overall stable macroeconomic environment, underpinned by
fiscal consolidation that is expected to translate into lower and
more predictable interest rates over the short to medium term.

The Debt Burden

Mr. Speaker, I would like to pause here to go into more detail on Jamaica's
debt obligations and the Government's challenge to service this debt.
The total cost of debt servicing (interest and amortization) in this fiscal year
is 103% of our total revenue and grants.

So burdensome is this debt that except for 3 of the last 10 years our interest  costs and principal repayments have exceeded our total revenues. For this  year, as per the Supplementary Estimates tabled in September, our interest costs (of $175.2 billion) and principal repayments (of $150.2 billion) total  $ 325.4 billion, while our total revenue is estimated at $316 billion. Mr.
Speaker, this picture helps graphically to bring the full extent of our fiscal
crisis into sharp focus.

We can see from this information that since 1990/1991 there has been a
steady growth of borrowing as the method of financing the budget. The
result has been no to low growth with only the debt itself growing
exponentially over the years.

The Government's revenue cannot support our level of indebtedness, so the
country has to keep borrowing to repay what has been borrowed and to do
what little we can to provide desperately needed services to the people.
Government's insatiable appetite for borrowing from the banking system
means that resources that could be going toward financing investment,
creating jobs and stimulating growth are captured by government to service
debt.

Due to the global financial meltdown, and the lack of access to capital
markets, this debt issue has been brought even more sharply into focus. It is unsustainable. It is time for corrective action.

Accordingly, Mr. Speaker, the Government is developing a comprehensive
debt management strategy to deal with this issue.
This is a defining moment in our life as a nation - a wake up call - to the
reality that we cannot, in perpetuity, live beyond our means, where the cost
of servicing our national debt continually exceeds the earning capacity of the
country. It is a prescription for persistent poverty and social and
economic chaos. We cannot continue to live in a fool's paradise and believe
that we can borrow our way into prosperity. We will have to begin to work
our way, to earn our way and pay our way.

Vision of a New Jamaica

Mr. Speaker, what will all of the economic measures and adjustments mean
to the average Jamaican after 24 months going forward? What will we have
to show for this period of ‘belt-tightening' and sacrifice? What good will
result from this period where our "nose haffe run"?
For the burden we are called upon to bear today, there is a light at the end of  the tunnel. These measures outlined here, galvanized by our partnership with  the IMF and the other multilateral agencies, provide the backdrop against which to build a new Jamaica; a Jamaica built on the principles of
production and productivity, integrity and honesty, hard work and discipline;
a Jamaica where there is low cost money for investment and lower costs of
production; a Jamaica where we are earning our way rather than borrowing
our way.

Mr. Speaker, we have come face-to-face with the futility of our borrowing
ways. We have been courting poverty, rather than coping with the challenge
and discipline of creating wealth, and now we must exercise the courage and   commitment to change direction and proceed along a pathway to progress.

Through our engagement with the IMF and our other development partners,
we will see a Jamaica characterized by improved governance to ensure
entities do not run up the debt; we will see increased fiscal responsibility
supported by law; we will see a reindustrialization of Jamaica, and an
emphasis on export production; we will see the emergence of a culture of
production and productivity, with increased training and certification of our
workforce; we will see lower energy costs, and increased levels of

international competitiveness; we will see greater levels of tax compliance;
we will see scaled down public sector entities, and a leaner, more efficient
public sector, ensuring higher standards and greater service delivery; we will    see lower interest costs and consequently more resources to provide for the  health, education, and security sectors; we will see Welfare to Work
programmes as part of our social safety net; we will see lower Commercial
Bank lending rates and more initiative and enterprise at the workplace.
Mr. Speaker, while we had little or no choice but to go to the IMF, an IMF
programme cannot, in and of itself, develop Jamaica. Equally, we have no
choice but to embark together on a deliberate path of embracing and
developing our future. The Prime Minister has indicated the commitment of
this Government to lead the charge towards this new Jamaica and I want to
echo and underscore that commitment here today.

In our press towards fulfilling this vision, in our efforts toward realizing this
new Jamaica, we will implement measures to grow the economy, implement
a programme of tax reform, as well as implement measures to enhance
revenue. Let me speak to each of these:

Measures to Grow the Economy

Our strategies for growth and development and increasing employment
cannot lie only in better fiscal management, or in restructuring the public
sector to be more efficient and cost-effective. These strategies must also
depend on attracting and stimulating investments.

The investment market, while not now robust, is not dead. Creative investors   ae anticipating the recovery from the recession and are positioning   themselves to be the first out of the box to ride the upswing.
By way of promoting investment and growth:

• We will continue our thrust to provide easier access by micro, small
and medium enterprises (MSMEs) to financing. We are doing
everything possible to promote the establishment and expansion of
MSMEs because they are the fastest means of creating new jobs. Loan
financing provided through the DBJ is substantially disbursed and
efforts are being made to source additional funding. Developments
have taken place in this regard with more announcements to follow.

• Our agricultural sector has performed very well and has recorded such
significant growth over the last few quarters that its output has now
exceeded the pre-Hurricane Ivan level. We will continue to focus on
agro-processing through backward integration with our farmers and
forward integration with our hotels and retailer distribution sector.

• The UDC is returning to its core function of leading the way in urban
development projects through a combination of joint ventures, sale of
land to facilitate private investments and own account projects.

• Plans for the industrial park at Caymanas Park are moving apace.

• The NHT, the Ministry of Water and Housing and the Housing
Agency of Jamaica will be undertaking over the next 12 months over
10,000 housing solutions (housing units and serviced lots) at a cost of
some $24 billion.

• A government guarantee for a loan of $19 billion from Scotia Bank to
finance extensive water supply projects covering several parishes has
just been approved.

• Overseas Cruise Ships are poised to invest in the redevelopment of the
Ocho Rios Pier, consolidating both the existing pier and the Reynolds
Pier to facilitate the new generation of large cruise ships.

• The development of the Falmouth Cruise Ship Pier is well underway
and every effort is being made to meet the deadline for the arrival of
the Genesis class ships.

• The Casino Gaming Act is scheduled to be debated by the House
within the next few weeks and construction of the expanded Harmony
Cove project is on schedule to commence next year.

• Tourism, despite all its challenges, continues to perform better than
most could have expected and better that most other Caribbean
destinations are experiencing.

• Funds are being generated through the additional petroleum tax, a
portion of which is dedicated to the Road Maintenance Fund; and
using money at 3.0% interest rate, we will embark on a major
programme of road rehabilitation islandwide.

• The downtown Kingston redevelopment programme (including the
establishment of an International Financial Centre), through a mix of
private and public funding will be intensified.

To secure our future on the global market, we have to achieve global
competitiveness. The Jamaican Brand is strong. Our musicians and our
athletes have established a powerful presence internationally. We must now offer products of value at competitive prices. In order to do that, we must   create an investment-friendly environment, and this includes lower cost   energy, including the introduction of Liquid Natural Gas (LNG) as an
alternative fuel by mid 2012.

Measures to Alleviate Impact on the Poor

Mr. Speaker, we understand and accept that the revenue measures that will
be announced will have an impact on the poor. Our challenge is to find an
efficient tax system that captures tax dodgers and alleviates the pressure on  the poor and marginalized. To mitigate or alleviate the impact of enhanced   revenue measures on the poor, we will adopt the following measures:

1. Benefits under the PATH programme will be expanded and enhanced.

2. The School Feeding Programme will be expanded and enhanced.

3. We intend to launch a Welfare to Work programme in the new fiscal
year.

4. As a reminder, as of January 1, 2010, the general income tax threshold
will be further increased to $441,168 up from $320,736. Mr. Speaker,
this increased threshold of $441,168 will be double the level since
April 2009 of $220,000 as was promised to the Jamaican people.

5. The income tax threshold for pensioners aged 55 to 65 years will
increase to $521,168, up from $400,736 and for pensioners over 65
years the threshold will increase to $601,168, up from $480,736.

6. A Ministry Paper was today tabled in the House setting out increased
benefits for government pensioners. The increases have been applied
as follows:

i. $24,900.00 per annum ($2,075.00 a month) for
pensioners receiving under $30,000.00 a month.

ii. $22,500.00 per annum ($1,875.00 a month) for
pensioners receiving $30,000.00 to $49,999.00 a month

iii. $16,200.00 per annum ($1,350.00 a month) for
pensioners receiving $50,000.00 and over a month.

iv. $24,000.00 per annum ($2,000.00 a month) for widows
and widowers

v. $16,200.00 per annum ($1,350.00 a month) for
dependents.

7. Tighter fiscal management and a greater commitment to long term
fiscal discipline will reduce the level of interest rates in the economy.
The administration will be working hard with financial institutions to
ensure that the benefits from lower interest rates are passed on to the
average person in the street when he/she applies for a mortgage or any
other type of interest rate-sensitive products, as well as make
investment funds available for small businesses.

Revenue Measures

Mr. Speaker, I will now turn to the implementation of measures to enhance
revenues.
[Revenue Measures will be announced]

Achieving a sustainable medium term fiscal path requires implementation of
a number of measures to be implemented January 1, 2010. These are
intended to enhance government revenue and curtail the fiscal deficit.

Conclusion

In concluding Mr. Speaker, the Government is determined to correct the
economic ills of the past and create an environment of lower interest rates,
lower energy rates, reduced corruption and increased efficiency, and grow
the economy through increased investment, production and exports. The
inflows associated with IMF and other multilateral agencies will support the
adjustments associated with this programme. This valued partnership will
help to underwrite financial stability and provide the platform for a
sustainable development path into the future.

Mr. Speaker, with or without the IMF, we would continue to pursue this
programme of economic repositioning, for it is critical to our nation's
economic survival and prosperity. The measures I've outlined in this
programme may not be amicable, but they are appropriate; they may not be
popular, but they are pertinent; as a result of our undertaking them we may
not be in the "in-crowd", but these measures are in keeping with the
socioeconomic reality of our country.

As we ask the Eternal Father to continue to bless our land, we also ask that
He continue to infuse us with vision, lest we perish. As we navigate these
economic straits and endure the buffeting of the waves of turmoil and
hardship, let us keep in front of us the vision of a new Jamaica: a new

Jamaica, where not everyone has to be rich, but no one has to be poor; a new    Jamaica for ourselves and our children, characterized by continued
prosperity and possibility; a new Jamaica, the place of choice to live, work,
raise families and do business.

Let us lay aside complacency, and embrace courage and commitment. Let us
leave behind ‘bad mind' and bitterness and commit ourselves to be better
and to build. Let us be rid of resentment and reluctance, and reposition
ourselves for real rewards.

This is the appropriate season for us to each look away from ourselves and
to the interests of the other; where each one helps one and becomes a
restorer of paths to dwell in for a secure and prosperous Jamaica.
May God richly bless us all; may God bless Jamaica land we love.

Audley Shaw, MP
Minister of Finance and the Public Service
December 17, 2009