World Bank Document

FLEpCOy DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized Not For Public Use Report No. P-1490-JM REPORT AND RECOMMENDATION Public Disclosure Authorized OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO Public Disclosure Authorized JAMAICA FOR AN AIRPORT DEVELOPMENT PROJECT August 21, 1974 Public Disclosure Authorized This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsbility for the accuracy or completeness of the report. Currency Unit Jamaica Dollar US$1.00 J$.909 J$1.00 US$1.10 Fiscal Year - April 1 to March 31 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO JAMAICA FOR AN AIRPORT DEVELOPMENT PROJET 1. I submit the following report and recommendatian on a proposed loan to Jamaica for the equivalent of US$12.5 million to help finance an airport development project. The loan would have a term of 25 years, including four years of grace, with interest at 8% per annum. US$11.3 million of the proceeds of the loan would be relent on the same terms to the Airports Authority of JaMaica (AAJ). A Project Agreement would be signed between the Bank and the AAJ. PART I - THE ECONOMY 2. Economic Report (No. 257a-JM) entitled "Current Economic Position and Prospects of Jamaica" was distributed to the Executive Directors on March 12, 1974. Country data sheets am attached as Annex I to this report. 3. During the decade 1962-72 the economy expanded rapidly with the annual rate of growth accelerating from about 4.5% to about 5.5%. At the same time the economy experienced major structural changes. Mining, alumina production and tourism, all supported by large private capital inflows, expanded, while agriculture stagnated and agricultural exports, notably of sugar, declined. This shift in the production pattern was accompanied by rapid urbanization, and by the emergence of severe and persistent unemployment and of sharp disparities in income distribution. Large-scale emigration during the decade resulted in the loss of significant numbers of skilled and semi-skilled workers; the consequent shortage of technically qualified personnel has been aggravated by deficiencies in the academically oriented educational system. 4. As a result of its limited resource endow-ment and the small size of its domestic market, Jamaica has a very open economy heavily dependent on the external sector. Until 1972 a widening current account deficit in the balance of payments had been offset by substantial private capital inflows for expansion of the bauxite/alumina industry. These inflows fell off sharply in 1972 with the completion of major investments in alumina capacity. Partly as a consequence, but also due to some weakness in monetary and fiscal programs, Jamaica for the first time since independence experienced serious balance-of-payments difficulties. Corrective action taken late in 1972 and early 1973, including devaluations, the imposition of import restrictions and a tightening of credit policy, was successful in temporarily reversing the reserves drain during the middle of 1973. However, subsequently exchange reserves have fallen again and by the end of 1973 were down to about one month's imports. The situation has been aggravated by the tripling of petroleum prices at the end of 1973 which will cost Jamaica about US$90 million extra in 1974, equivalent to about 13% of 1973 export earnings. To conserve foreign exchange reserves the - 2 - government in early 1974 took additional measures including an increase in gasoline taxes, further restrictions on imports and credit availability and an increase in interest rates. Jamaica has recently obtained increases in the prices of its sugar and banana exports to the United Kingdom and in M1y of this year announced increases in taxes and royalties on the U.S. and Canadian- owned bauxite companies, estimated to yield an additional $155 million in a full year. The greatly increased revemnes in prospect from bauxite taxation would provide substantial relief to Jamaica's balance of payments during the rest of 1974 and in ensuing years. The larger revenues should offset the higher cost of oil and other commodity imports and enable Jamaica during the next 2 to 3 years to restore a reasonable level of foreign exchange reserves following their depletion during 1973 and early 1974. The current account is still likely to remain in deficit reaching on average over $200 million per annum through 1979, although to offset this deficit substantial inflows of capital are in prospect (see paragraph 8). 5. The government action to increase taxes and royalties followed the failure to reach agreement with the companies on a renegotiation of the tax clauses in the original company contracts. The companies have objected to the tax increases announced and indicated that they would take legal action; three US-owned corn- panies have requested arbitration before the International Centre for Settlement of Investment Disputes (ICSID). The requests for arbitration have been registered by the Centre. The next step will be the constitution of arbitral tribunals. The Convention creating the Centre establishes rules for the constitution of tribuhals, including rules for the appointment by the Centre of arbitrators in case of failure of the parties to act. * intend to follow developments in this matter closely. In addition to the issue concerning the taxes and royalties, there are other out- standing issues (such as land ownership, government participation in companies, and guaranteed supply of bauxite for companies), on which the companies and the gorernment are negotiating. 6. Over the last 18 months or so there has been a sharp increase in Jamaica's domestic price level which during 1973 increased by an average of 19% over the previous year. By April 1974 the consumer price index had increased by about 29% over April 1973, owing in part to recent increases in world prices and higher import prices resulting from devaluation. However, under the pressure of active trade unions, wage settlements in recent years have outstripped increases in productivity and have been particularly high during the last few months, reaching 25% in the construction industry and even higher levels in other sectors. The government is considering the adoption of an incomes policy which would be related to increases in productivity and which, if effective, would help Jamaica retain its international competiveness. The government is keeping under review the level of interest rates, which have become negative in real terms as a result of recent price inflation. Higher interest rates would encourage savi.ngs, and help reduce the present incentive to invest funds abroad rather than in Jamaica. 7. kithout a sustained rate of economic growth of about 7% annually it will be difficult for the country to achieve its principal objective of a significant reduction in the high rate of unemployment, currently about 15%. The need for increased job creation will become even more acute in the years ahead since the growth rate in the total population of working age is expected to rise from 0.5% to 3% during the period to 1980 due to falling emigration and an increase in the birth rate in the 1950s. For the immediate future the potential for increased growth and employment is encouraging. In agriculture, a compre- hensive review of the sector has recently been undertaken with assistance from the Bank. Government initiatives are already under way to rehabilitate the important sugar industry; other government plans to revitalize the sector include land-use reorganization to increase productivity and employment, and measures to stimulate other export crops and domestic food production. In the mining sector, bauxite and alumina output should increase substantially as a result of recent investments. A substantial investment in an oi- refinery is in prospect with the possibility of associated investments in petro-chemicals; and in manufacturing, there is potential for increased contribution to export growth. Further growth in tourism (the country's second largest foreign exchange earner) may also be expected after present uncertainties about the energy situation have been resolved. However, the extent to which Jamaica's agricultural and industrial growth potential can be realized will depend in large part on how successful the government is in implementing policies to improve Jamaica's competitive position. 8. The increased rate of growth necessary to make a significant impact on unemployment will require substantially higher inflows of private and public capital than in the recent past. Such inflows are in prospect over the next few years and given continued progress in public policies, it is likely that they could be maintained for the rest of the decade. The source and direction of commitments of external public loans (including government- guaranteed loans) from 1965 to 1972,which have averaged over $hO million per annum, are given in the table in Annex I. For the five-year period 1974-78, public capital inflows, including guaranteed loans to the private sector, could average nearly US$100 million a year. From existing indications, about 60% will be raised from official sources - the Bank, IDB and bilateral aid sources - while the remainder would consist of medium-term loans from suppliers and financial institutions. Jamaica will also need to mobilize increased domestic financial resources, both public and private. It will thus be necessary for the government to take measures to restrain the growth of government current expenditures and to achieve a further growth of revenue relative to GDP. A recovery in private sector savings can be expected only if the government maintains fiscal discipline and discourages consumption by the appropriate use of monetary policy.

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