Letter of intent

In recent days, Prime Minister Dr. Keith Mitchell has been telling the nation that his nine-month old government will be signing a “letter of intent” with the Washington-based International Monetary Fund (IMF) in order to get its approval for the home-grown Structural Adjustment Programme to be implemented by the New National Party (NNP) administration.

According to the Prime Minister, the letter would be signed by month-end which will be just over a week before he presents the 2014 budget to Parliament.

A leading economist on the island has said that the “Letter of Intent” would have to be signed with the IMF in order for the Prime Minister and his government to get the “blessings” of the fund to get finances on concessional terms to help fix the bad fiscal situation existing in the country.

“All for now the two sides (IMF and government) are merely talking and exchanging ideas. Unless the IMF gets a letter of intent from government, do not expect any positive movement from the folks in Washington with respect to this home grown programme period”, he remarked.

The economist is insisting that the measures to be announced by the Prime Minister in the 2014 budget will form the basis of the Letter of Intent that will be sent by government to the IMF in order to tackle the bad fiscal situation existing in Grenada.

As a public service, THE NEW TODAY has decided to highlight some of the commitments and austerity measures that the Jamaican government of Prime Minister Portia Simpson-Miller did agree to implement in its Letter of Intent that was signed with the IMF in April for its programme.

 

MACROECONOMIC PROGRAMME

 

Fiscal Sustainability

 

The government is committed to improving the overall public sector deficit from

4.3 percent of GDP in FY (Fiscal Year) 2012/13 to a surplus slightly above 1 percent of GDP by FY 2016/17, which involves improving the central government fiscal balance.

Consistent with this, the central government’s primary surplus would rise from 5.2 percent of GDP in 2012/13 to 7.5 percent in 2013/14 and in subsequent years during the programme period.

The deficit of the public bodies is projected to be balanced by FY 2013/14 and in subsequent years during the programme period. Achieving these objectives requires a combination of corrective revenue and spending measures and structural reforms.

The government is committed to pass a FY 2013/14 budget consistent with the programme outlined below and in the attached macro-framework tables and its recent tabling in parliament is a structural benchmark (April 2013).

 

Revenue and Spending Measures

 

To raise the primary surplus of the central government in FY 2012/13, the GOJ (Government of Jamaica) has implemented revenue enhancing measures for FY 2012/13 amounting to approximately 1.6 percent of GDP (annualized), complemented by a reduction in expenditure equivalent to 1.4 percent of GDP.

The main element of the revenue package of June 2012 was a 1.0 percentage point reduction in the GCT rate while widening the GCT base such that some previously exempted and zero-rated items are now taxable.

The projected intake for FY 2012/13 from this package amounts to about 1.2 percent of GDP due to the later than customary start of the budget presentation to allow for completion of the consultative process on tax reform.

In order to raise the primary surplus of the central government to 7.5 percent of GDP in FY 2013/14 and balance the budget of the public bodies, the government has committed to further measures that will be adopted in the context of the FY 2013/14 budget.

 

Central Government:

 

On the revenue side, the changes in government taxes and fees listed in Text with an estimated positive revenue impact of J$27.3 billion, was tabled in Parliament in February 2013 to allow for a full fiscal-year effect.

Among the changes is an increase in property taxes, which are payable to local government. This will help improve the central government balance though a corresponding reduction in the required transfers to local government by J$3.4 billion.

Central government capital spending will increase marginally to 3.0 percent of GDP and recurrent non-debt spending will be lowered by at least 0.4 percent of GDP reflecting the wage agreement, efficiency gains through improved tracking of medical supplies, and the introduction of health cards and better management of pharmacies, among other measures.

The central government’s primary surplus will be enhanced by the provision of financial support from the NHT (National Housing Trust). This change has been supported by legislation. The adverse impact of this on the balance of the public bodies will be offset by higher fees and spending adjustments.

 

Reform measure

 

(1). Apply a customs administration fee (CAF) on all imports except for charitable organisations and the bauxite sector. (1.2 billion Jamaica dollars).

 

(2). Amendment to the fee structure and gross profit tax of betting, gaming, and lottery sector. (1.5 billion dollars)

 

(3). Increase property tax rates to take effect for fiscal year 2013/14 and initiate measures to improve the relatively low property tax compliance rate. (3.4 billion).

 

(4). Include the special telephone call tax (TCT) as part of the GCT base. (1.3 billion)

 

(5). Include all fees and taxes paid at the port (environmental level and customs administration fee) as part of the GCT base. (1.5 billion)

 

(6). Increase the tax on dividend to 15 percent. (0.8 billion)

 

(7). Impose a surtax of 5 percent on large unregulated companies. (1.2 billion)

 

(8). Telecom providers should account for GCT on the face value of prepaid vouchers/airtime. (0.2 billion)

 

(9). Increase the Education tax rate by 0.5 percentage points for employers and 0.25 percentage points for employees. (2.8 billion)

 

(10). Increase the Stamp duty and transfer tax rates (for properties) up from the current 3 and 4 percent rates to 4 and 5 percent, respectively. (2.0 billion)

 

(11). Financial support from the National Housing Trust (NHT) for fiscal consolidation over the period April 1 2013 through March 31, 2017 (11.4 billion)

 




Total 27.3

 

 

Public Bodies:

 

On the expenditure side, the Road Maintenance Fund will reduce its spending by J$9 billion, in large part owing to the completion of the Jamaica Development Infrastructure Programme.

PetroCaribe Development Fund will curtail its grants to the Central Government by J$1 billion. In addition, Petrojam expects to see savings of J$4 billion on trade credits.

Capital expenditures by public bodies will be rationalised taking into account the capacity of each public entity to deliver projects. Furthermore, current expenditures will be capped in real terms for the public entities. Also, for several agencies, previously planned increases in expenditure will be controlled.

The National Housing Trust (NHT) will continue to deliver on its core mandate, that of providing housing solutions for its contributors.

Cost savings on its activities will result from cuts in administrative expenses, actions to increase compliance rates and reductions in current arrears.

Capital expenditure will be contained at $29.0 billion, a reduction of $5.0 billion over a previously planned amount of $34.0 billion.

Capital expenditure by the National Water Commission will be contained to $10.0 billion, a reduction of $5.0 billion over a previously planned amount of $15.0 billion.

The Port Authority of Jamaica, through a public private partnership project, will transfer part of its cost to the private counterpart, thereby containing capital expenditure to $1.9 billion representing an $8.0 billion reduction on previous plans.

Beyond these immediate measures, the government will contain expenditure growth over the programme period.

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Wages and salaries

 

The government has signed a no-increase agreement with public sector unions for FYs 2010/11 and 2011/12, and concluded discussions on a compensation agreement for FYs 2012/13 through 2014/15.

These discussions have resulted in a labour agreement that is consistent with lowering the wage bill to 9 percent of GDP by 2015/16. In particular, an agreement has been reached with major unions (representing 81 percent of government workers) as a prior action on:

 

(i) foregoing wage increases for FY 2012/13 (and limiting performance increments to no more than 2.5 percent); and

 

(ii) limiting the sum of wage increases and performance increments to an annual average of no more than 5.0 percent for the period FY 2013/14–FY 2014/15. In this context, the government is committed to annual targets for the wage bill for interim years, of 10.6 percent of GDP in 2013/14 and 9.7 percent of GDP for 2014/15.

During the programme period the government will also ensure implementation of a comprehensive reform of the public sector to enhance efficiency and support containment of the wage bill in a durable manner.

In that regard, the government commits to not undertaking any new reclassification exercises during the programme period that may result in additional wage or salary costs or impact an entire occupational grouping.

The government may however, within the context of the public sector rationalisation or other streamlining operations, undertake re-organisations as necessary, in consultation with Fund

staff, to support efficient and effective performance of core activities.

Any such re-organisation will be limited in scope and undertaken within the framework of achieving the 2015/16 legislated wage/GDP target of 9.0 percent.

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Civil Service Positions

 

The GOJ will reduce the size of the public sector over the next two years through the elimination of some posts and an attrition programme.

Following the permanent removal of 3000 posts from the Civil Service in September 2012 and the elimination of an additional 3000 posts in the wider public sector in early 2013, an additional 1000 positions that will become vacant due to natural attrition by end-2013 will not be filled.

There will be no net hiring of workers by the government in any year during the programme period. More generally, in order to ensure that the GOJ’s overall wage ceiling of 9 percent of GDP by 2015/16 is met, the filling of vacant positions will be constrained as needed.

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Social spending

 

Expenditure rationalisation with respect to social spending will be implemented with a view to effecting savings through enhanced targeting and efficiency without impairing, and possibly improving, social services.

The programme includes a floor on social spending (indicative target) that signifies the priority attached to it, and that will help safeguard this spending category.

For this purpose, the floor on social spending is defined as a minimum annual expenditure on specified social protection initiatives and programmes.

These programmes are funded by GOJ resources only and comprise: conditional cash transfers to children 0-18 years and the elderly; youth employment programme; the poor relief programme for both indoor and outdoor poor; the school feeding programme and the basic school subsidy; basic education including early childhood, primary and secondary education; provision of assistance for persons with disabilities; and targeted components of primary health care.

The floor will be quantified at a level that is the equivalent of the FY 2012/13 budget allocations, in real terms.

 

Capital expenditure

 

Capital spending will be guided by national priorities aimed at supporting the growth agenda and social protection, while ensuring fiscal prudence.

In order to ensure the maximum impact of public investment on growth and equity, the government will introduce a 5-year public sector investment programme (PSIP), beginning with FY 2013/14, to be updated on an annual basis (structural benchmark, April 2013).

 

All capital investments by central government and all State-owned Enterprises will be governed by the PSIP. These investments will be selected according to efficiency criteria and consistency with the growth and equity goals; they will be subject to transparent procurement procedures; and their financing, in each case, will be cleared by the Debt Management Branch.

Each annual programme of investments will be included in the fiscal budget approved by Parliament, which will include a report on the alignment of capital investments in the previous fiscal year with the corresponding programme for that year.

Furthermore, to help safeguard attainment of the budget target for 2013/14, the government has identified contingency measures which could include but are not limited to increases in fees and charges for government services.

Implementation of contingency measures will be enacted by the government, in consultation with Fund staff, as soon as a monthly review of budget implementation indicates that the target is at significant risk.

In the area of public bodies, improvement is to be achieved. The sector’s overall balance is projected to be in balance by end FY 2013/14 and to remain in balance for all programme years.

To enhance transparency, the annual reports (including audited statements) for public bodies will be completed within six months of the end of the FY; this is to be achieved by end-2014 for self-financing public bodies and by September 2015 for all other public bodies.

Monitoring of public bodies will be strengthened by (1) enforcing a time limit for submission of public bodies’ financial statements to the Auditor General; and (2) bolstering capacity within the Auditor General’s office for more in-depth and frequent reviews of these statements.

 

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