Jamaica Economic Report for 2006

JAMAICA 1. RECENT ECONOMIC PERFORMANCE There was economic policy continuity during 2006. Since 2004, the Government of Jamiaca (GOJ) has been implementing an economic programme (designed within the context of its medium-term economic strategy, FY 2004/05 to 2007/08), that is aimed at stabilising the economy and accelerating the rate of economic growth through prudent debt management, fiscal consolidation, a lowering of interest rates, inflation reduction and the facilitation of investment and private sector development. While progress has been made, overall programme performance has been generally less than expected. On the fiscal side, in particular, budget deficits have been larger than targeted reflecting the adverse effects of the many shocks on growth and fiscal revenue performance, as well as on efforts to contain spending. Nonetheless, notwithstanding the failure to balance its fiscal budget, 12 fiscal policy direction and the policy commitment to price stability has maintained and enhanced a trend toward macro-stability and has engendered an environment of increased economic certainty, a main factor encouraging consumer and business confidence and favourable investor sentiment in the Jamaican economy. Jamaica continued to receive record levels of investment, while the take-up of GOJ’s international bonds (despite increasing global interest rates) has remained favourable, with strong demand and reduced yields on secondary trades. B. Sectoral Performance There was a general increase in sectoral activities in 2006. GDP growth reflected performance in both the goods and services sectors, particularly, mining, agriculture, basic services13 and tourism. The goodsproducing sector is estimated to have grown by 1.1% (up from 0.9% in 2005), while services rose by 3.2% (up from 1.4% in 2005). Agriculture Agriculture rebounded from two consecutive years of decline to post growth of 14.7%. While starting Jamaica A. Overview Jamaica’s rate of GDP growth accelerated in 2006 as the country continued to recover from recent exogenous shocks 8 which had adversely affected economic activity, and stymied progress on the country’s medium-term economic reform programme. Provisional estimates indicate real GDP growth of 2.6%, sustained largely by strong recovery in agriculture, as well as increased tourism activity and bauxite/alumina production. Although modest, the growth outturn represents a strengthening above a trend of negligible growth since 1990. Positive trends were noted in other economic variables. With increased production, relative stability in the foreign exchange market and low underlying inflation, price pressures moderated considerably to 5.8%, 9 while the unemployment rate fell to single digits. Supported by continued buoyancy in foreign direct investment inflows (mostly being channeled primarily into hotel construction and into expanding capacity in mining), as well as increased remittance flows and tourism receipts, the net international reserves position (NIR) also strengthened above target, remaining well above the 12-week imports10 benchmark. The fiscal position, however, weakened as lower revenue growth, in conjunction with higher recurrent expenses, is expected to push the overall fiscal deficit for FY 2006/0711 to about 5% of GDP, almost double the target. 8 9 Including significant weather-related shocks with four hurricanes affecting the island in 2004 and 2005. Below the 10% target and down 7.1 percentage points from 2005. 10 Imports of goods and services. 11 The FY ends in March 2007. 12 The balanced budget target was initially programmed for FY 2005/06. 13 This refers to utilities, transport, storage and communications. 62 CDB Annual Economic Review 2006 from a lower base, compared with the performance assessment for 2005, growth was influenced by favourable weather conditions, initiatives to revive and spur production, and a growing export demand for local crops. Domestic crop production expanded by 12.9% while export crop production increased by 47%. Banana production doubled, cocoa production increased by 62% and coffee production grew by 14%. The robust increases in export crops represented a relatively quick recovery to pre-hurricane output levels, although recovery in the coffee industry14 continued to be adversely hampered by the non-payment of hurricane-related crop insurance claims. Under a flood relief programme continuing from 2005, farmers benefited from the distribution of seeds, fertilisers and other planting materials. The banana industry benefited from funding under the EU Banana Support Programme aimed at enhancing efficiency and competitiveness. As part of broader initiatives to support sustainable rural development, GOJ provided modern irrigation systems to facilitate a shift away from rain-fed irrigation practices in order to, increase crop yields and output levels. This formed a part of the first phase of its longer-term sector development strategy aimed at restoring productivity, improving competitiveness and transforming the sector by 2020. Mining and Quarrying Output in the mining and quarrying sector grew by 1.8%, reflecting a 5.3% increase in total bauxite production15 to 14,865.4 kilo tonnes, the highest level since 1974. This increase was facilitated by continuing strong external demand for bauxite and its by-products, as well as the introduction of new machinery for mining activities. Crude bauxite production increased by 12.3%. Production gains from the refining of the higher value-added product16 alumina was, however, less robust (increasing only marginally by 0.3%), due to an unstable industrial climate; and was the primary reason for the slackening in the sector’s overall growth from 2.8% in 2005. Tourism The less active hurricane season in 2006, a rapid expansion in hotel room stock, aggressive marketing, increased airlift out of the US,17 contributed to increased vibrancy in the tourism industry. Following 14 5% of coffee trees were lost from hurricane damage. on four consecutive years of growth, performance was particularly robust in 2006 with real value-added increasing by 12.5%. Total arrivals rose by 15.3% to just over 3 mn visitors, the highest level on record. Of this amount, stay-over arrivals accounted for 1,678,905 (up by 13.5% compared with 4.5% in 2005) with the USA continuing to be the main contributor. Cruiseship arrivals accounted for 1,336,453 (up by 17.7%). Cruiseship passengers were boosted by ship calls from the world’s largest cruiseship. Visitor expenditure rose by 23% to $1,900 mn. Jamaica’s tourism industry has benefited in recent years from high capital investment (domestic and foreign) concentrated in hotel expansion. Following on the addition of 2,000 rooms in 2005, another 5,600 rooms were expected to become available in 2006. Added to this, more than 500 rooms have been registered under the industry’s bed and breakfast home-stay programme which is targeting additional visitors associated with the CWC 2007 sporting event. The drive to increase the room inventory by a minimum of 12,000 by 2010 forms a part of an industry 10-year master plan which aims to create the environment for higher and more sustainable growth in tourism. In charting this path, the plan recommends a number of initiatives including, inter alia, those to diversify the tourism product, to increase and improve attractions, and to strengthen linkages with other sectors. A Tourism Enhancement Fund was established in 2005 through the collection of revenues from visitors, 18 to fund the implementation of this sector development plan. This is being complemented with supporting infrastructural development with large public investments currently continuing in upgrading and expanding the road network, as well as the island’s ports and airports. Similarly, Government has responded to the environmental and planning issues expected to arise with the significant ongoing investments, with an action plan19 to guide associated spatial and development planning needs, to identify skills and training needs, and the development of supporting basic infrastructure including housing and utilities. Manufacturing Following a 1% decline in 2005, manufacturing value-added is estimated to have contracted (by 1.4%) in 2006, reflecting the impact of competition, production difficulties and reduced demand for some commodities. The Food, Beverage and Tobacco sub-sector registered an overall decline of 5.7% as a result of the closure (and relocation to Trinidad) of the sole tobacco company in December CDB Annual Economic Review 2006 15 The Bauxite/Alumina industry accounts for 97.2% of the mining sector’s output. 16 Reports from the Planning Institute of Jamaica notes that alumina’s weighting in the Mining and sector’s GDP account for 73% as against 27% for crude bauxite. 17 Two additional airlines commenced service to Jamaica in 2006. 18 $10.00 per incoming airline passenger and $2.00 per cruise passenger . 19 Tourism Framework Programme of Action. Quarrying Jamaica 63 2005. Increases were noted for some industries, notably petroleum product refining, animal feed, poultry meat production, rum, and sugar production. Construction and Installation The impact of cement supply constraints during the first half of the year (following on from October 2005), due to quality control problems at the sole manufacturing plant, and subsequent difficulties in sourcing imports,20 was sufficiently strong to cause a decline in the sector’s GDP by 2.6%. The shortage was in the context of relatively high demand in 2006 to facilitate the construction of several, large non-residential building projects, notably, hotel construction and infrastructure for hosting the 2007 cricket events. Along with these activities, extensive work continued on road network development, the building and repair of public schools,21 and housing and community development projects. Other Sectors In line with the pick-up in demand, electricity and water production increased by 3.5%. Similarly, output in transportation, storage and communication increased by 4.8%, reflecting increased cargo movement at the sea ports and increased tourism activity. In telecommunications, the number of mobile users continued to increase, indicating an increasing level of penetration as well as an increasinge incidence of multiple phone ownership. Output levels in financial services increased, reflecting an expansion in commercial banking lending, higher levels of mortgage lending by building societies, and growth in the insurance industry. C. Prices, Wages and Unemployment Jamaica’s annual point-to-point inflation rate fell to 5.8% at the end of December 2006, in comparison to 12.9% in 2005. Since trending up from single digits in 2003, and peaking at 19% in September 2005,22 the 12-month rate exhibited a sharp decline thereafter, underpinned by stability in the exchange rate and only moderate increases in agricultural prices, ending the year well below the 10% target. The annual average inflation measured 9.2% for 2006, compared with 15.3% in 2005. The largest contributor to inflation was higher prices for food and drink, reflecting some supply constraints (relative to increasing demand), and the continuing pass-through of higher energy costs. Tightness in the supply of some foods resulted from increased cropexport activity and an increasing domestic demand for meats. After a two-year period of relatively slow wages growth reflecting real wage restraint by public sector workers, wage increases picked up in 2006. Under a successor two-year Memorandum of Understanding (MOU)23 between the Government and public sector workers signed in May 2006, new terms provided for some compensatory wage adjustments. The new agreement placed a 20% cap on wage increases, with the higher rate of 15% payable in the first year. Somewhat higher pay deals were agreed during the year for certain professional categories, including doctors, teachers, nurses and the members of the police force. Consistent with increased investment and growth, employment trends have generally improved since 2001,24 reflected in increasing employment across most industry groups (but especially within construction, distribution, and tourism), and, relatedly, a general declining trend in unemployment. At July, the employed labour force increased by 4.3% to 1.14 mn persons relative to July 2005. The unemployment rate (comprising those persons within the labour force looking for work and those not actively seeking work) fell to single digits, at 8.9%, comparing favourably with 11.2% in July 2005. The job-seeking rate, comprising the percentage of the labour force actively seeking work but out of a job, stood at 5%. By gender, male unemployment of 5.6%, remained well below female unemployment of 13.2%. Jamaica’s labour participation rate25 stood at 64.5%. D. Fiscal Policy and Public Debt Deficit reduction remained the primary goal of the Government’s fiscal strategy. With higher planned expenditures to meet the CWC 2007 obligations as well as the payment of higher wages, the fiscal adjustment programme was set to rely more heavily on revenue enhancement efforts. As a result of a worsening of performance, the overall fiscal deficit, after staying within the target during the first half of the fiscal year (J$16.9 bn versus J$21 bn), was expected to end the fiscal year above target of 2.5% of GDP, and above the 2005 outturn of 3.3% of GDP. Up to the end of the third quarter, the Central Government Jamaica 20 Due to strong regional demand. 21 In line with its universal access objectives, 17 new secondary schools are being built in the western parishes. 22 Pushed up by higher food prices (consequent on adverse weather), higher imported inflation (consequent on the rise in international fuel prices) as well as increases in domestic tariffs. 23 Under the terms of the first MOU, which expired in March 2006, public sector wages were frozen in lieu of inflation falling to single digits. Inflation, however, trended up. 24 Excluding temporary dislocations linked to weather related shocks, short-term labour disputes and to the cement shortage. 25 The proportion of the working age (over 14 years) population that comprises the labour force. 64 CDB Annual Economic Review 2006 accounts generated a higher than programmed deficit of J$38.4 bn, relative to a target of J$30.7 bn, and an outturn of J$29.5 bn in 2005. A revenue shortfall, alongside increased expenditures, contributed to the deterioration in the outturn. During the first nine months of the fiscal year, total revenue growth outpaced that in 2005, rising by 16% to J$148.3 bn, but fell short of budget by J$5.9 bn. All the major tax categories increased. Taxes on incomes amounted to J$51.3 bn (up 18.3%), while taxes on production and consumption increased by 16.5% to J$41.7 bn. Trade related taxes rose to J$39.3 bn (up 14.6%). Revenue collection is being enhanced by tax policy reform aimed at improving the tax system, simplifying tax administration and improving compliance.26 In FY 2005/06, programme implementation, within the context of the broader fiscal objective of reducing the fiscal deficit, encompassed a mix of tax relief to taxpayers and revenue gains to Government, and was estimated to yield net revenue of J$9, 455 mn. During FY 2006/07, with no new tax measures, strengthened administrative measures were expected to buoy collections. The measures, however, have not had the anticipated success, as revenue yields have fallen below budget in both periods, reflecting a combination of factors including the delayed and non-implementation of some revenue measures, as well as a lower than projected growth outturn. The authorities delayed providing additional income tax relief as planned in FY 2006/07 due to administrative difficulties with rolling in certain allowances into the income tax net. A committee comprising government officials and representatives from various stakeholder groups, mainly employers and labour unions, was set up to examine the impact of increasing the tax threshold and eliminating certain allowances. The income tax threshold was last raised in January 2006. Central to Government’s expenditure containment strategy in FY 2006/07, was the implementation 26 The package of reforms, recommended in 2004 out of a comprehensive review of the tax system, include the phased increase of the personal income tax threshold, the harmonisation of corporate and personal income tax rates at 25%, the elimination of several allowances and exemptions, the increase in the standard consumption tax, as well as the replacement of a number of indirect taxes with value-added taxes, to be implemented on a phased basis over a four-year period. On the administrative side, measures include an arrears collection plan and legislative changes to improve administration and compliance. 27 Compared with single digit inflation targeted. 28 As a result, the proceeds did not impact liquidity management, and had no cost to public finances. 29 Includes Government guaranteed and Bank of Jamaica Debt. 30 Under this scheme, financial institutions were required in 2003 to hold cash deposits equivalent to 5% of their liabilities with the central bank. This was imposed as a measure to stabilise financial markets in 2003. This was subsequently reduced to 1% in 2005. of a successor agreement to the MOU between Government and trade unions to constrain the growth in the public sector wage bill. While Government’s budget accommodated higher wage adjustments to reflect the higher ex-post inflation outturn,27 pressure from the unions resulted in agreements providing for higher wages than were budgeted for. As a result, total expenditure of $186.7 bn outpaced the budgeted level and exceeded expenditure of $157.3 bn for the corresponding period in 2005, with recurrent expenditure coming in 16% above the 2005 level. On the other hand, capital expenditure rose by 53.4% to $17.8 bn, but remained below budgeted levels and accounted for 9.6% of total spending. Given the higher deficit, the level of financing also increased. Government financed its deficit and amortised it debt through the net issue of bonds. On the domestic bond market, with improved investor confidence in the economy, Government was able to lower the proportion of foreign denominated debt as investors switched into Jamaica dollar denominated instruments, at lower rates, reducing the vulnerability of the public debt stock to exchange rate depreciations. In line with policy, foreign debt payments were pre-funded from the proceeds of a $250 mn, 30-year Eurobond issued in February 2006, at a reduced rate of 8.5%. These funds were held as a US dollar28 deposit and did not comprise a part of the central bank’s international reserves. At December 2006, total public debt outstanding29 amounted to $925.8 bn, 9.3% above the $847.3 bn level at March 2006. The external debt accounted for 42% of the total amount outstanding. E. Financial Sector The monetary policy stance gradually eased throughout 2006, reflecting the rapid decline in the inflation rate, output recovery, and strong exchange market conditions. Rates on the Central Bank’s open market instruments, which were at levels established since May 2005, were lowered in May, September and again in December, facilitating marginally lower banking system interest rates. Falling from 12.6% and 13% on 30-day and 180-day reverse repurchase instruments, respectively, the range of policy interest rates moved to 11.65% and 12%, respectively, at the end of the year. The easing in the policy stance was also reflected in the removal of a compulsory special reserve requirement30 of 1% of prescribed liabilities for banks, increasing their capacity to extend credit. In line with this easing, banking system credit to the private sector recorded buoyant growth of 16% for the 10 months to October, reflecting loans to the construction and distribution CDB Annual Economic Review 2006 Jamaica 65 sectors, and for personal use. Credit growth and the build-up in the net international reserves contributed to monetary expansion during the year. Given the price stability objective, this expansion was countered through liquidity absorption (through open market operations) by the monetary authorities. The build-up in Government deposits at the Central Bank during the year supported the liquidity management process. Against this backdrop, M2 expanded by 16.4% during the ten months to October, compared with 5.8% in 2005. Following some volatility during the last quarter of 2005, the foreign exchange market was relatively stable during 2006, with the external value of the currency being supported by strong receipts from tourism and remittances, among other foreign exchange inflows. Compared with exchange rate depreciation of 2.6% during the last quarter of 2005, which saw the selling price of the US dollar ending the year at J$64.58 and the central bank intervening through net market sales of $272.1 mn, the weighted average selling rate of the Jamaica dollar depreciated by 1.4%, 0.8%, and 0.03% in the first three quarters of 2006, respectively. During these quarters, central bank market purchases exceeded market sales. The seasonal increase in demand to finance consumer imports during the last quarter induced some intermittent pressures on the exchange rate. Market intervention by the central bank, however, contained the depreciation to 0.9%. F. External Sector In the external accounts, the current account deficit narrowed to $620.3 mn for the eight months to August 2006, compared with $685.6 mn during the corresponding period of 2005. With the exception of the merchandise trade deficit, which widened, all other sub-accounts improved. On the capital and financial accounts, net private and official inflows were sufficient to finance the current account deficit and leave a surplus of $128.4 mn. Significantly higher net inflows were recorded on the services and transfer accounts of $588.4 mn (up $133.3 mn), and $1,129.1 mn (up by $90.2 mn), respectively. The trade deficit, however, widened by $243.1 mn to $1,951.3 mn, even as export growth of 29.6% outpaced imports growth of 20%, reflecting the relative large size of the country’s import bill. Visible goods export earnings accounted for less than one-half of goods imports. This notwithstanding, there were notable improvements in earnings from traditional exports. Higher earnings from alumina (up 11.7%) reflected a 16% rise in the price per ton (to $257.2) as export volume declined by 3.7%. Bauxite earnings (up 17.4%) largely reflected higher volumes. Sugar export earnings (up 16.8%) also reflected higher volumes, as export prices fell in line with the implementation of the new EU sugar regime in July. For goods imports, increases in the fuel bill of 33.5% (33% of total imports) and in the import of machinery and transportation equipment of 28.7% (19.4% of total imports) were the main drivers. The food import bill (10.7% of total imports) increased modestly by 5.3%. 2. MAJOR POLICY ISSUES A. Poverty The latest available poverty statistics31 indicate that the incidence of poverty in Jamaica stood at 14.8% in 2005, a reduction of 2.1 percentage points compared with 2004. This decline continued a downward trend over the past decade from 27.5% in 1995, with slight increases observed in only three years (1999, 2000 and 2002) of the ten-year period. The Gini coefficient, used to measure the level of income inequality showed a slight improvement moving down to 0.3810 in 2005 from 0.3826 in 2004. The survey findings showed little change in the poverty profile. Poverty is more serious in rural areas than in urban areas. Moving from 37% in 1995, the rural poverty rate stood at 21.1% in 2005, well above the All Jamaica rate. The rate of decline in rural poverty has, however, been steeper than in the Kingston Metropolitan Area (KMA) and Other Towns. Poverty in the KMA (which has tended to exhibit more volatility) declined from 15% in 1995 to 9.6% in 2005. In the Other Towns region, poverty moved down sharply from 22.8% in 1995 to 7.2% in 2005, reflecting the expansion of commercial activities in other urban areas of the country. Notably, since 2002, the areas comprising Other Towns, have experienced the fastest decline in poverty from 18.7% in 2002, to 7.2% in 2005 possibly as a result of the positive benefits linked to increased access brought about by Government’s infrastructure projects which have been designed to improve the linkages between the urban and rural areas and to facilitate expansion in economic activity. Households headed by females remained concentrated in the poorer consumption quintiles, and were larger than those headed by males. Jamaica 31 Jamaica Survey of Living Conditions 2005. 66 CDB Annual Economic Review 2006 Of the households surveyed, 53.8% reported receiving remittances, a 7.6 percentage point increase over 2004. The declining extent of poverty against the contrasting backdrop of a decade of anemic growth, fiscal restraint, modest declines in unemployment, and the negative impact of oil price increases and natural disasters, indicates some measure of success in the authorities’ social development and welfare programmes and policies aimed at poverty reduction. This reflects a renewed emphasis to embrace development-oriented social strategies (including social safety net reform)32 to improve the quality of life of vulnerable groups, to strengthen the machinery facilitating administrative decentralisation and community participation, to increase the allocation for recurrent expenditure for specific services, and to improve social and economic infrastructure particularly in rural and inner-city communities (as, for example, programmes through the Jamaica Social Investment Fund). B. Human Resource Development Despite high enrolment rates, Jamaica has seen educational outcomes worsen over time. Jamaica’s education system caters to 800,000 students in public and private institutions. Over 22,000 teachers are employed in 1,000 public institutions, with only 20% being trained university graduates.33 Performance at all levels has fallen below target, as measured by student scores in national and regional assessments. In respect of early childhood education, while access is high with gross enrollment at 97.7%, the delivery of education has been uneven, with many basic schools delivering educational programmes below the required standard. This has been borne out by diagnostic testing at the lower primary grades which reveal a high level of under-preparedness. At the secondary level, issues include uneven delivery, inadequate access, poor quality outcomes, low compensation for teachers (and their resulting outward migration from the profession), and increasing violence and criminal activity in schools. At the tertiary level, as at the lower levels in the school system, concerns relate to the quality of delivery and the relevance of training relative to labour market demands. A significant proportion of the labour force is inadequately trained. Against this backdrop, it is reported that with the recent expansion in economic activity, the labour market has tightened substantially in construction, mining and the hospitality sectors. These outcomes have been linked to a number of deficiencies, including inadequately trained teachers, inadequate and irrelevant curricula, out-dated teaching methods, inadequate number of teachers, deteriorating facilities,and declining budgetary allocations,particularly those of a capital nature. The authorities have moved ahead with plans to improve educational outcomes by addressing quality and access in the educational system through several on-going programmes. At the primary level,education programmes are targeting improvement in literacy and numeracy. At the basic level, the Early Childhood Act was passed in 2005 to provide for the regulation, assessment and rating of these institutions. At the secondary level, new secondary schools are being built and places are being purchased in private high schools in order to meet the goal of universal education to secondary level. Improved service delivery in vocational and technical skills training is aimed at increasing the number of certificated graduates. In 2004, a 14-member task force was commissioned to develop an action plan for the creation of an education system which would generate the human capital and produce the skills necessary to allow the Jamaican citizen to compete in the global economy. From this, recommendations have included system decentralization, the establishment of regional educational authorities, and a substantial increase in the allocation of resources to education. C. Crime The high level of violent crime, reportedly linked to drug-trafficking, organised crimes, the trade in firearms, extortion, and domestic violence, remains a serious problem in Jamaica. Although available crime statistics suggest a trend decline in the total number of reported crimes, falling from just over 2,000 per 100,000 population in 1997, to 1, 232 per 100 000 in 2005, the murder rate has moved in the opposite direction, increasing since 1999 from 33 per 100,000 to 63 per 100 000 in 2005. In 2006, the murder rate fell back to 46 per 100,000. More persons accused of major crimes fall into the 16-25 years age-group than in any other age-range, and about 98% of accused persons are males. Only about half of the reported homicides are cleared. 34 Throughout the years the authorities have adopted a multifaceted approach to addressing the crime problem. Besides strengthening institutional and human capacity, CDB Annual Economic Review 2006 32 As part of reform to improve the relevance, effectiveness and efficiency of the country’s welfare programmes, initiatives were introduced to improve programme transparency, targeting and to link the receipt of benefits with health and educational lifestyle changes (school attendance, immunisation and clinic visits). 33 Task Force on Educational Reform Final Report, 2005 34 This refers to cases in which a suspect is charged, or has died, and evidence ties the suspect to the offence. Jamaica 67 crime management strategies have been intensified through increased community policing, research and development, and training in investigation techniques. At December 2005, the strength of the Jamaica Constabulary Force stood at 93.8% of the establishment, with the ratio of policemen to citizens ratio standing at 1:334. Considerable work has also gone, over the years, into sociological assessment of the factors contributing to criminal activity. Much of the design of social and economic development programmes, ranging from micro-level community development and basic needs programmes, through welfare support, health and sanitation, agricultural and farm development, education and training, to macro-level programmes to improve the institutional environment in order to attract investment to facilitate growth in employment and incomes have been aimed at removing the attractiveness of crime and providing socially cohesive alternative ways of earning decent livelihoods. Initiatives have also focused on improving the justice system. Some of the major pieces of legislation introduced or enhanced include: the Criminal Justice (Plea Negotiations and Agreements) Act, the Fingerprints Act, the Domestic Violence Act and the Trafficking in Persons Act. The Proceeds of Crime Act, 2006, which gives the state the authority to confiscate assets and profits acquired through drug trafficking and money laundering, was passed in early 2007. Access to justice has been enhanced with improvements to the expanded Legal Aid System, providing for legal aid in both civil and criminal matters, and from the time of arrest up to the stage of appeal. Efforts to address crime and violence and to improve the justice system are also being facilitated by collaboration with local and international partners and key civil society groups through programmes such as the Peace Management Initiative, Safe Schools Programme, mediation and conflict resolution offered by the Disputes Resolution Foundation, and other activities implemented by other non-governmental organisations. Targeted social intervention programmes in violence-prone communities are also being utilised. As part of the crime-reduction plan, focus is currently being given to improving murder investigations, and to the management of criminal intelligence, with particular attention to enhancing the use of forensic science in all its dimensions. 3. PUBLIC SECTOR INVESTMENT PROGRAMME The Government’s fiscal strategy aims to facilitate investment to support the country’s poverty reduction and growth development objectives. However, in the context of budget restraint, the execution of the public sector investment programme has often borne the brunt of the fiscal adjustment, marked by a significant decline in Central Government capital outlays, and a restriction of new development-oriented borrowing for project investments. As a percent of GDP, Central Government investment spending has generally averaged between 1% and 2% of GDP. Given the impact of the Government’s tight budgetary constraints, increased focus has been placed in recent years on efficient resource management to better improve budgetary alignment, on the identification of priority areas to direct limited resources, as well as the closer alignment of official development assistance with the Government’s development strategy and policy. Public-private partnerships in the provision of infrastructure have also been utilised. The authorities are currently in the process of drafting a new national development plan, which is expected to chart a course for transforming the nation into a developed one by 2030. In 2006, budgeted capital expenditure increased to J$28.9 bn (4% of GDP), well above past trend. Investment priorities include the critical areas of tourism, agriculture, water and sanitation, physical infrastructure, health care, and education. Renewed focus has been placed on improving educational outcomes through an education transformation project. Major infrastructural developments included road works on Phase II of Segment 1 of Highway 2000 and the North Coast Highway Project; construction of the Greenfield Stadium in Trelawny on the north coast, and the upgrade of Sabina Park in Kingston in preparation for Cricket World Cup 2007; and construction of a major bus terminal, the Half Way Tree Transportation Centre in Kingston. In health care, focus is being given to the HIV/AIDS prevention and control programme. Capital investment levels were boosted by additional resources from the PetroCaribe Fund, a development fund set up out of the oil-financing arrangement signed with Venezuela in 2005. This was further complemented by the activities of public entities which have increasingly taken on a larger role in executing Government’s infrastructure development programmes. During FY 2006/07, the Ministry of Finance reported that these public bodies, which include the Jamaica 68 CDB Annual Economic Review 2006 Airports Authority of Jamaica and the Ports Authority, would spend over J$26 bn on infrastructure projects. In addition, the Government continues to employ other mechanisms including its deferred financing and letters of undertakings to buoy investments. 4. MEDIUM-TERM ECONOMIC PROSPECTS The prospect for further strengthening of the Jamaica economy is favourable as GDP growth will likely accelerate, driven by new investment in tourism,mining, and transportation. Foreign direct investment should also be boosted by planned investment of $500 mn by a Venezuelan oil entity, which recently bought a 49% share in the local oil refinery, to upgrade refinery capacity. Local tourism officials expect the US passport initiative introduced in 2007 to have some negative impact on arrivals, given the high percentage of US visitors to Jamaica. The impact is, however, not likely to derail strong industry growth given the reported35 high level of US citizens (90%) which prior to programme implementation traveled on a passport. Although some large projects would have been completed in 2006, the demand for additional employment should remain and should translate into lower unemployment once the capacity exists within the local skills base. Fiscal revenues should remain buoyant, and provide support for a reversal of the fiscal slippage observed in FY 2006/07. The moderation in the growth of the public sector wage bill expected in FY 2007/08, (with the average increase in the wage rate falling to 5%) should also add to this outcome. Given the lower inflation path projected, interest rates should continue to trend downwards, with this having a favourable impact on the public finances. The prospect of further declines in nominal interest rates is good, given that real rates in the domestic economy are still comparatively high. Against this backdrop, a ceiling of 2% of GDP for the overall fiscal deficit should be achievable, and the public debt ratios should continue to trend down. Fiscal management must, however, continue to focus on implementing priority measures to address fundamental issues of debt management and efficiency in public expenditure. The main downside risk to an improved fiscal outturn will be an inability to resist pressure for increased spending, particularly with general elections constitutionally due in 2007. The, the main challenge, in that context, will be to keep expenditure growth in line with revenue performance. In addition, further monetary tightening in the US, a further narrowing in interest rate differentials and a tightening in emerging bond markets could, pose difficulties for the authorities, given the need to maintain access to the capital markets. 35 Economic Update and Outlook, Vol. 11 #2; The Planning Institute of Jamaica. Jamaica CDB Annual Economic Review 2006 69