Document ofThe World Bank

FOR OFFICIAL USE ONLY

ReportNo: 25181

IMPLEMENTATION COMPLETION REPORT(FSLT-70950)

ONA

LOAN

IN THE AMOUNT OF US$ 75 MILLION

TO

JAMAICA

FOR AN EMERGENCY ECONOMIC REHABILITATION LOAN

DECEMBER 19, 2002

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective November 29, 2002)

Currency Unit = Jamaican Dollars (J$)49.35J$ = US$ 1.00

US$ 1.00 = J$ 0.0203

FISCAL YEARApril 1 - March 31

ABBREVIATIONS AND ACRONYMSAIDS = Acquired Inmune Deficiency SyndromeBDRP II = Second Bank Restructuring and Debt Management ProgramCAA = Civil Aviation AuthorityCALP = Caribbean Anti-Money Laundering ProgrammeCAS = Country Assistance StrategyCFAA = Country Financial Accountability AssessmentCCT = Conditional Cash TransferCDB = Caribbean Development BankCPAR = Country Procurement Assessment ReportERL = Economic Rehabilitation LoanFMIS = Financial Management Information SystemGDP = Gross Domestic ProductHIV = Hurnan Immunodeficiency VirusICR = Implementation Completion ReportIMF = International Monetary FundMEOYC = Ministry of Education, Youth, and CultureMLE = Ministry of Land and EnvironmentMOFP = Ministry of Finance and PlanningNEPA = National Enviromnental and Planning AgencyOPR = Office of Revenue ProtectionOUR = Office of Utility RegulationPSMP = Public Sector Modernization ProjectQAE = Quality at EntryQAG = Quality Assessment GroupROSE II = Second Reforrn of Secondary Education ProjectSMP = Staff Monitored PrograrnSTATIN Statistical Institute of JamaicaSTIP II = Second Short-Tern Investment ProgrammeVAT = Value Added Tax

Vice President: David de FerrantiCountry Manager/Director: Orsalia Kalantzopolous

Sector Manager/Director: Danny LeipzigerTask Teamn Leader/Task Manager: David Sislen

JAMAICAJamaica Emergency Recovery Loan

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 106. Sustainability 117. Bank and Borrower Performance 118. Lessons Learned 129. Partner Comments 1210. Additional Information 19Annex 1. Key Performance Indicators/Log Frame Matrix 20Annex 2. Project Costs and Financing 21Annex 3. Economic Costs and Benefits 23Annex 4. Bank Inputs 24Annex 5. Ratings for Achievement of Objectives/Outputs of Components 25Annex 6. Ratings of Bank and Borrower Performance 26Annex 7. List of Supporting Documents 27Annex 8. Current Economic Situation in Jamaica 28Annex 9. Coping with Shocks In the Specific Context of the Jamaican Economy 32

Project ID: P076830 Project Name: Jamaica Emergency Recovery LoanTeam Leader: David N. Sislen TL Unit: LCSFU

ICR Type: Core ICR Report Date: December 23, 2002

1. Project Data

Name: Jamnaica Emergency Recovery Loan L/C/TF Number: FSLT-70950Country/Department: JAMAICA Region: Latin America and

Caribbean RegionSector/subsector: Central govemment administration (36%); Law and

justice (18%); General education sector (18%);Health (18%); Other domestic and internationaltrade (10%)

KEY DATESOriginal Revised/Actual

PCD: 11/15/2001 Effective: 12/21/2001 12/21/2001Appraisal: 11/15/2001 MTR:Approval: 12/20/2001 Closing: 06/30/2002 06/30/2002

Borrower/lmplementing Agency: GOVERNMENT OF JAMAICA/MINISTRY OF FINANCEOther Partners:

STAFF Current At AppraisalVice President: David de Ferranti David de FerrantiCountry Manager: Orsalia Kalantzopoulos Orsalia KalantzopoulosSector Manager: Danny Leipziger Danny LeipzigerTeam Leader at ICR: David N. Sislen John Stein and Neeta SirurICR Primary Author: Albert Amos and Rashmi

Shankar

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UTN=Unlikely, HUN=HighlyUnlikely, H{U=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: MBank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

Introduction

The emergency Economic Rehabilitation Loan (ERL) was prepared at a time of uncertainty following theevents of September 11, 2001 and the expected impact that a downturn in Jamaica's tourism industry would

have on macroeconomic balance and Jamaica's continuing reform efforts. Despite high investment rates,active development partner engagement, and high levels of Government support to the social sectors, theGovernment faced significant challenges on both the economic and social fronts. A severe financial sectorcrisis in the mid-i 990s overshadowed the Government's reform efforts and imposed significant economiccosts, and the events of 2001, which included political violence, natural disasters, and a sharp decrease intourism, combined with uncertainty as to the extent to which pressure on the tourism industry mightcontinue from continued terrorism-related activity, led the Govemment to request the Bank's assistance forfiscal support.

The US$75 million ERL was not a traditional adjustment operation which identified a structural reformprogram as condition for Bank resources. Instead, the operation built upon the Government's ongoingoverall development agenda across those sectors most relevant to buffering the impacts of exogenousshocks beyond the control of the authorities. The operation was designed to address the emergency needs ina flexible and responsive manner, and the conditions of the loan supported the existing policy agreementsbetween the Bank and Government, codified in the CAS of 2000. The ERL aimed to enhancemacroeconomic stability with fiscal support to maintain social expenditures, while continuing the sectoralreform efforts initiated by the Government to support the tourism industry, reduce the vulnerability of theeconomy to natural disasters, protect the most vulnerable through improvements to the social safety net,alleviate employment pressures through increased labor market flexibility, improve the efficiency ofinfastructure services, and strengthen the efficiency, accountability, and transparency of the public sector.Importantly, the ERL allowed the Government to maintain its development trajectory without displacingirnportant actions; as a result, the CAS period was extended an additional year, and operations contained inthe 2000 CAS were subsequently delivered in 2002.

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The emergency ERL supported the Government's efforts to maintain a sound macroeconomic program andcontinue its progress towards achievement of sustainable economic growth and further poverty reduction inthe face of multiple shocks which affected the economy, especially the decline in international travel andinternational tourism to Jamaica following the events of September 11, 2001. In the context of theGovernment's medium-term reform program, the operation aimed to: (i) support the maintenance ofmacro-economic stability by bridging part of the fiscal gap generated by external shocks; (ii) addresspoverty and social pressures, especially those arising from the emergency; and (iii) support theGovernment's efforts to improve the transparency, efficiency, and accountability of the public sector.

3.2 Revised Objective:The objective was not revised during implementation.

3.3 Original Components:The ERL was a single tranche adjustment loan, disbursed in its entirety shortly after effectiveness. As anadjustment operation, it was not divided into components per se, but rather supported the achievement of aprogram of policy reforms, a number of which were completed as conditions of Board presentation. Thepolicy agenda supported by the operation included (a) an emergency response program, which aimed tosupport macroeconomic stability, maintain social protection efforts through core investments in humandevelopment, facilitate a rebound in tourism, and improve disaster preparedness and mitigation and (b)efforts to support public sector governance, efficiency, and accountability, which focused on areas ofpublic sector fiduciary management, including procurement, financial management, and the transparencyand accountability of the financial sector.

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3.4 Revised Components:The components were not revised during implementation.

3.5 Quality at Entry:The ICR finds the quality at entry (QAE) to be satisfactorv based on (a) the consistency of the operationwith most recently prepared CAS (October 2000); (b) the ERL's policy linkage to other Bank operations;and (c) the demonstrated capacity of the authorities to maintain a consistent policy program along the linesof that supported by the operation.

The 2000 CAS outlined four "pillars" for a sustainable poverty reduction: (i) restoring economic growth byrehabilitating the financial sector, consolidating fiscal policy, and strengthening the framework for privateinvestment; (ii) the protection of the poor and ensuring inclusion by enhancing the efficiency andeffectiveness of social safety nets, improving educational access and outcomes, improving health services,and stimulating labor-intensive growth; (iii) the improvement of governance, efficiency, and effectiveness inthe public sector by divesting from commercial activities, improving management and information systems,and reforming public management and incentives; and (iv) fostering sustainable development throughimproved synergies in the environment-economy relationship, stimulating sustainable agriculturaldevelopment, linking tourism and sustainable development, improving disaster preparedness. The ERLlargely supported all four pillars and included lending conditions that supported the achievement of theseobjectives. The ERL also supported ongoing and planned activities by the Bank in public sectormanagement, the banking and financial sectors, and the social sectors, including HIV/AIDS, social safetynets, community development, and education. Table I lists the specific Bank projects with policy reformactions supported by the ERL.

Table 1: World Bank Lending Program to Jamaica Supported by the ERLLoan US$ Board Date

million Approval EffectiveDate

Public Sector Modernization Loan 28.4 9/3/1996 4/7/1997Social Safety Nets Project 40.0 11/4/2001 2/28/2002HIV/AIDS Prevention and Control 15.0 3/29/2002 8/9/2002Second Bank Restructuring & Debt Mgmt. Program 75.0 10/24/2002 11/4/2002(BDRP 11)Reform of Secondary Education (ROSE II) 39.8 10/24/2002 N/ANational Community Development Project 15.0 10/24/2002 N/A

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The overall outcome was satisfactorv.

Maintailing macroeconomic stability. The operation supported the ability of the Government to maintainmacroeconomic and fiscal stability despite the multiple shocks that took place in 2001 -- violence inKingston in July, the downtum in tourism following the events of September 11, and extensive floods inlate November that damaged one-fifth of total crop acreage. The Jamaican economy had continued on apath of gradual recovery, and, despite some major concerns regarding the aggregate amount of outstandingdebt, is now in much better shape than has been since the financial crisis of 1996, in large part because ofthe Government's comprehensive efforts to resolve the financial crisis. After four years of negative growthfollowing the financial crisis, real GDP is estimated to have risen by roughly I per cent in 2000/01 and

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again in 2001/02. Single-digit inflation, a key macroeconomic objective of the Government, was achievedfor the sixth consecutive year, largely through tight monetary policy. Significant improvements in privatecapital inflows and govenmment borrowings from successful intemational bond issues in May andDecember 2001, led to a rebuilding of net intemational reserves to US$1.9 billion (about 23 weeks ofgoods and services imports) at end-March 2002, an increase of over US$650 mnillion (reserves wereUS$1.6 billion at the end of November 2002).

The ERL intervention served to improve the country's overall debt profile though the provision of new debtat lower financing terrns and a reduction in the size and number of large repayments. In addition, theoperation had an immediate and significant impact on the Govemrnment's ability to access extemal anddomestic capital markets, providing a positive signal to investors that the Govemment's finances and thegeneral macroeconomic conditions were in order. Early signals indicate that the Govemment's overallpolicy efforts were well received by the investment community, including: (i) the reaffirmation of theGovernment's long term debt and currency ratings by extemal credit rating agencies in the early part of the2001; and (ii) the issuance of US$300 million in sovereign debt in June 2002 at 10.75 percent yield and a15-year term, a bond issue which was heavily oversubscribed.

The overall fiscal position weakened in 2001/02, in large part due to the combined effects of the extemalshocks to the economy, with the central government budget deficit rising to 5.7 per cent of GDP (comparedwith the revised SMP target of 4.1 per cent). Though the central government primary surplug declined to8.0 per cent of GDP in 2001/02 from 11.8 percent in 2000/01, it nonetheless reflects a significant fiscaladjustment effort. The Government has also maintained tight monetary policy which kept inflation at lessthan 7 percent for 2001/02. While the current account deficit is expected to increase to 8.2 per cent due tohigher oil prices and a slower than anticipated recovery in tourism, net intemational reserves remain high atUS$ 1.6 billion at end-November 2002 (18.8 weeks of imports of goods and services). In July 2002, a newStaff Monitored Program (SMP) was agreed to between the Govenmment and the IMF for 2002/03,signaling the Govenmment's commitment to fiscal discipline during an election year. Annex 8 reviews thecurrent macroeconomic situation in Jamaica at the time of the ICR.

Protecting the Vulnerable and Maintaining Core Investment in Human Development. While thedevelopment impact of the operation's support in the areas of social safety nets and the health andeducation sectors will only be known in the medium-term, since the effectiveness of the operation, theGovenmment has maintained real expenditure in key social sectors and appears to be on track to continue itspolicy trajectory. Aggregate budget expenditures, including capital and recurrent costs in health andeducation, increased by approximately 6 percent from 2001/02 to 2002/03, roughly in line with inflation(figures are fiscal year estimates as the fiscal year runs through end-March). Non-recurrent expendituresfor basic education are summarized in Table 2.

Table 2: Non-recurrent Expenditures for Basic Education for 2001/02 to 2002/03 in J$000Non-salary recurrent expenditures 2001/2002 2002/2003 % ChangeClass Materials 79,866 65,389 -18.1%Maintenance of Buildings & Equipment 42,664 35,801 -16.1%Estimated Expenditures on Textbooks 250,696 262,002 4.5%MOEYC Assistance for School Fees 163,194 186,001 14.0%Examination & Special Subsidies 23,530 47,540 102.0%Total 559,950 596,732 6.6%Source: Ministry of Education, Youth, and Culture (MOEYC).1. Fiscal 2001/02 was used as the base year.

In addition to maintaining aggregate levels of socially-focused expenditure, the Government has continuedcore subsidy programs and taken some steps to improve the effectiveness of social expenditure. Annex 9

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provides the general framework to understand the impact of external shocks and rnitigation efforts.

Further improving governance, efficiency, and accountability of the public sector. In addition toproviding a mechanism for maintaining macroeconomic stability and social expenditure, the ERL served asan important vehicle for providing a consistent Bank approach in the areas of public sector managementand governance, especially as regards core fiduciary issues of procurement and financial management. TheERL specifically supported initiatives being implemented during planned or existing lending operations,and while the medium-term development impact of efforts to enhance the transparency and accountabilityof the public sector are not yet clear, progress to date in the implementation of the procurement, andfinancial management reforms, specifically, has remained on track.

4.2 Outputs by components:Overall implementation of the main policy actions supported by the ERL is rated satisfactory. In additionto the implementation of the reforms required as conditions of Board presentation and effectiveness, theGovernment has both implemented a variety of non-conditioned reforms and maintained the overall policytrajectory in the areas supported by the ERL.

Policy Area A: Emergency ResDonse Program

Maintaining macroeconomic stability. The impact of the downturn in tourism revenues and, importantly,the uncertainty which followed the events of September 11 and potential for future terrorism-relatedtourism shocks, combined with the necessity to stabilize inflation and exchange rates, high debt overhang,and large current account deficit required both fiscal support in the short-term and a policy commitment tomaintain fiscal discipline and a sound macroeconomic framework. After the ERL was made effective anddisbursed, though the Government entered into a new SMP with the IMF and made significant efforts toachieve fiscal balance -- as reflected in continued high primary account surpluses -- the continuedvulnerability of the economy to shocks, evidenced by both recent flooding and the continued malaise in thetourism sector, has undermined some of the progress at improving the overall macroeconomic picture.

Social Protection and Human Development. The ERL supported four areas of policy action related tobuffering the impacts of the fiscal crisis on the Government's social protection and human developmentefforts:

(a) Protecting the most vulnerable population groups from catastrophic income loss via safety nets.The downturn in the fiscal accounts threatened the Governnent's options to protect the most vulnerablesections of society from the impacts of the economic crisis and needed structural reforms. The ERLspecifically supported the Government's efforts and ability to maintain spending and social safety nets, andto date the Government has done so. In addition to increasing expenditure levels for social safety netprograms, the Government has continued its efforts to consolidate and rationalize existing programs.Formerly under the moniker of the United Benefit Program and now known as the Program ofAdvancement for Health and Education, the Government has increased the provision of monthly conditionalcash transfers (CCT) for health, education, and social security benefits from JM$250 to JM$300 in March2002. Further, the Government is on track to increase the CCT to JM$375 and JM$500 in FY2003 andFY2004, respectively. In addition, the pilot efforts in St. Catherine's Parish to streamline the CCT programhave been successful, and the Program is expected to be scaled up nationally in December 2002. In doingso, CCT transfers will be extended to roughly 236,000 beneficiaries, 220,000 of whom have alreadyregistered for benefits.

(b) Addressing high unemployment through increased labor marketflexibility, and improved

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protection for the unemployed. As an action undertaken prior to the presentation of the ERL to the Board,a "Green Paper" on more flexible work arrangements was completed, and a more detailed draft "WhitePaper" has since been prepared and is under review by the Parliament's Legislative Committee. Despitesome initial union concerns regarding overtime payments, the new Cabinet is expected to review the draftlegislation in 2003. Other legislative efforts to address employment issues have also been undertaken,including amendments to the Labor Relations and Industrial Disputes Act (March 2002), which increasedprotections for workers.

(c) Maintaining basic health care services and mount a more intensive effort to combat AIDS.Expenditures on immunization and key maternal and infant/child health program have been maintained atleast at 2000/01 levels. In addition, an HIV/AIDS Strategy and work plan has been approved by Cabinet,which focuses on: (i) improving the level of advocacy at the highest levels of governments, includingimproved inter-ministerial coordination through a Steering Committee; (ii) increasing AIDS prevention atthe community level; (iii) improving treatment by increasing the number of hospital beds and reducingtreatment costs; (iv) extending social services programs for HIV-positive Jamaicans; and (v) increasingsurveillance efforts, including the preparation and dissemnination of quarterly statistics. As part of theGovenmment's efforts, negotiations with a number of phannaceutical companies have resulted in thereduction of the cost of key anti-retroviral drugs by some 85% (from US$ 10,000 per annum to US$1,800).The Govemrnent's overarching HIV/AIDS program is being undertaken in conjunction with an ongoingBank operation, the HIV/AIDS Prevention and Control Project (Loan 7112-JM). The Government is alsoactively working with the private sector and representatives from civil society to extend the treatment ofAIDS.

(d) Maintaining efficiency and outcomes in educaton. Fiscal year 2002/03 non-salary recurrentexpenditures for basic education have increased by 6.6 percent in real terns. In addition, the Governmenthas lived up to its policy commitment to provide textbooks to all students, including the 20 percent that donot pay education fees, and will continue to subsidize the cost of taking examinations in basic subjects. TheBank is further supporting education sector reform and efficiency through the recently-approved SecondReform of Secondary Education Project (ROSE II).

Tourism. As previously noted, the events of September 11th and riots in Jamaica severely affected tourismand related sectors, and have constrained the fiscal stabilization effort. Tourist arrivals for stopover visitorsdeclined by 7.6 percent in 2001/02 compared to a growth of 6.3 percent in 2000/01, and net tourismreceipts are estimated to have declined by almost 12 percent in 2001/02, though there is limited dataavailable regarding the revenue impact during 2002/03. Based on data available to date, 2002/03 monthlytourist arrivals, including cruise passenger arrivals, have decreased from the previous year. Though2002/03 data do not yet reflect the peak season (during the late fall and winter months), the Govermmentestimates that tourist arrivals will remain at or below last year's levels. In summary, the negative impact onJamaica's tourism sector foreseen during the preparation of the ERL became a reality during the first partof the 2002/03 fiscal year.

To address the anticipated decline in tourism as a result of September 11th, the Government prepared andis implementing an action plan for tourism promotion, "Operation Grow". In October 2001, the budget fortourism promotion increased from US$5.0 million to US$13.0 million with the objectives of increasingoverall tourism, attempting to attract more upscale visitors, and increased diversification beyond its coremarket of North America to attract more visitors from Germany, Italy, the Netherlands, and the UnitedKingdom. Though the effectiveness of Jamaica's tourism promotion efforts are yet unclear, tourismpromotion has involved using traditional and non-traditional dissemination channels as well as closecooperation with the private sector.

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Although a strategy laying out clear criteria for phasing out temporary relief measures to the hotel industryis underway, it is unclear whether these incentives will be phased out completely. Under the SecondShort-Term Investment Programme (STIP II) that was approved in October 2001, the Government imposeda moratorium on value-added taxes (VAT) and corporate taxes paid by hotels and tourist businesses. Thismeasure was undertaken-in order to assist small hotel operators, which were particularly hard hit by theexternal shocks as well as minimize layoffs and potential economic dislocation in the country. The STIP IIis scheduled to terminate in April 2003, but hotel operators can still access benefits from this program foran additional 2 years after the subnission of their application or until April 2005. The Government iscurrently assessing if it will extend this program for another I to 1.5 years.

The Government has also made progress towards implementing the plan for improved airport security atthe two main international airports which was required as a prior action for the ERL. The new securitystandards, closely aligned with requirements set by the United States Federal Aviation Authority, arerelatively stringent to address issues of contraband and drug smuggling. In recent months, the CivilAviation Authority (CAA) has added and trained staff as well as purchased more sensitive equipment. TheCAA is in the process of a comprehensive organizational restructuring as it transitions to a policy-settinginstitution.

Disaster preparedness and mitigation. Jamaica's susceptibility to the natural disasters, particularlyhurricanes and floods, represents an important national challenge. As part of the ERL, disasterpreparedness and mitigation was cited as an area for reform due to the flood damage caused by HurricaneMichele in November, 2001. While Jamaica is ahead of many other countries in its disaster managementcapacity, there is still need to formulate and implement a more comprehensive national policy for disastermanagement planning, including linking risk mapping to land development planning. The Government hasidentified a number of potential disaster mitigation efforts in its National Environmental Action Plan, butimplementation to date has lagged. Nevertheless, a preliminary impact assessment of the floods in Portlandand the integration of hazard mapping related to storm surges, which was undertaken on a pilot basis in theMontego Bay area in the St. James Parish, has been completed. Hazard mapping activities along the twomain rivers is ongoing. In the medium-term, the success of the Government's approach to integrate hazardmapping on a more systemic basis will be contingent upon greater coordination between national levelinstitutions and the increased involvement of decision makers at the local level, who are often responsiblefor land use approval.

Policy Area B: Public Sector Governance, Efficiency, and Accountabilitv

Public Sector Efficiency and Governance. The ERL supported policy efforts linked to both the CountryFinancial Accountability Assessment (CFAA) that was prepared in April 2001 as well as the ongoingPublic Sector Modernization Project (PSMP, Loan 4083-JM), which supported the establishment andinstitutional strengthening of a number of semi-autonomous executive agencies. The core areas of policyeffort which were prior actions for the ERL included:

(a) The Public Bodies Management and Accountability Act. The Jamaican Parliament approved thislegislation in 2001, designed to improve the operations and tracking of expenditures of all publicentities. This legislation established sizable sanctions for failure, including holding accounting officersresponsible for non-compliance.

(b) Acceleration ofprivate participation in infrastructure. To increase private participation ininfrastructure, the ERL included (as a non-conditioned prior action) the Government's efforts to select

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and begin negotiating with concessionaires for the private management of Sangster InternationalAirport in Montego Bay and Kingston Port. A US$200.0 million concession contract has been awardedto public-private concessionaire for Sangster International Airport, and financial closure is expected tobe reached in early 2003. The concession contract has a 30-year term with renewal options every10-years.

Linked to the evolving role of the private sector in airport management, the Government has alsocontinued its path towards institutional and regulatory reform in the sector; the CAA has been grantedgreater authority to oversee economic regulation for air transport and has established separatedirectorates for administrative and regulatory activities. Such efforts have been undertaken in part toensure that the regulation of the publicly managed Norman Manley Airport and the four airdromes donot receive preferential treatment. Over the medium-term, the Government has expressed its intent toevaluate options for extending the private management model to include the Norman Manley Airport inKingston as well as the Port of Montego. Moreover, the government has also put to tender the building,operation, and ownership of a major toll road linking Kingston and Montego Bay and the privatemanagement of the railways. The latter would lead to the resumption of rail service, which has closedsince 1992. To oversee increase private sector participation in other sectors, the Government, withsupport from the Caribbean Development Bank (CDB), is in the process of strengthening theinstitutional and technical capacity of Office of Utility Regulation (OUR), a multi-sector regulatoryagency for power, water, sewerage, and road, rail and ferry ransport.

(c) Rationalization of the Structure of Government Agencies. As part of the Public SectorModernization Project (PSMP), a number of efforts have been completed and are underway to improvethe effectiveness and efficiency of a variety of Governnent agencies. Efforts to date have included (i)the Jamaica Information Service (JIS) has been restructured into a dedicated and coordinated singlenews service for Government communications; (ii) the National Enviromnental and Planning Agency(NEPA) was created in April 2001 as a single executive agency for environmental issues, and NEPAassists the Ministry of Land and Environment (MLE) with the development and planning ofenvironmental policies, the preparation of legislation, and parish-level land use planning; (iii) an actionplan has been prepared to rationalize the structure of Statistical Institute of Jamaica (STATIN), butthere has been lirnited progress to date, in part due to limited funding, the need to hire and trainqualified staff, and the delays in the ongoing process of consolidating its two offices; and (iv) theProiect Analysis and Monitoring Companv was formally reintegrated with the Ministry of Finance andPlanning (MOFP) on November 1, 2002, a step expected to reduce administrative costs in themedium-term and support synergies in financial and project planning.

(d) Improving Financial Management within the Government. The ERL included prior actions and amedium-term policy agenda for strengthening management and accounting capacity of the Government.Efforts to date have included:

* The Transfer of the Financial Management Information System (FMIS). The FMIS systemwas transferred to the Fiscal Services Ltd, but the FMIS remains outdated and isinadequate to meet the information needs to track expenditures. Although PSMP hassupported efforts to improve the FMIS, options for strengthening information collectionand reporting systems are currently under review by the Government.

* Establishment of Accrual Accounting in 8 Executive Agencies. Efforts have beenunderway to support the Government's transition from a cash-based to an accrualaccounting system. These efforts have improved accounting reconciliation and reduced the

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backlog in the preparation of financial statements and through commitment accounts as anintermediate step toward establishing genuine accrual accounting. The impact of theseefforts remain unclear, in part because of the linkages to the modernized FMIS system.

* Improving Audit Quality and Independence. The ERL supported efforts aimed atimproving financial management and transparency through the strengthening of internalaudit capacity with training and technical assistance, improvements to the capabilities ofthe Auditor General's Office, and through the establishment of Audit Committees in fiveGovernment ministries. While progress has been made in the acquisition of equipment andprovision of training, further work is needed, especially as regards computer assistedaudits to be carried out buy the Auditor General, in improving technical capacity of localstaff.

(e) Strengthening Public Procurement. The Government remains on schedule regarding theimplementation of procurement policy reform actions agreed under the ERL. Most recently, the MOFPhas prepared a policy paper, approved by Cabinet, which updated the existing legal and regulatoryframework for public sector procurement in an effort to clarify institutional arrangements, strearnlineprocedures, and improve cost, quality, and sustainability. Moreover, MOFP and the Bank haverecently discussed a new Country Procurement Assessment Report (CPAR), which includesrecommendations for additional improvements to the public procurement system. The Bank will updatethe CPAR and send it to the Govermment for final comments and agreements on the proposed actionplan. It is expected that a final draft of the CPAR will be completed and approved in early 2003. Thesechanges will be incorporated within the Handbook on Public Procurement, which is updatedcontinuously by the National Contiacts Commission. Nevertheless, MOFP will need to ensure thatthere is sufficient funding to implement this action plan and provide the necessary training.

Financial sector transparency. As prior actions for the ERL, the Government introduced amendments tolimit tax evasion and the financing of terrorist activities in compliance with United Nations SecurityCouncil Resolutions #1373 and #1377. Legislative review of these amendments remains underway by theAttorney General's office within the Ministry of Justice as well as by other relevant entities. There appearsto be significant interest in passing the legislation, which was initiated by the Cabinet from the previousadministration. There has also been considerable progress in regard to improving enforcement of the MoneyLaundering Act, approved by Parliament in 1996. The Attorney General's office reports an increase in thenumber of money laundering trials during 2002, related, in part, to the recent amendments to the legislationthat better targets money laundering through remittances and money wiring. The ability of prosecutors hasalso been improved through the provision of technical assistance and training through the CaribbeanAnti-Money Laundering Programme (CALP). In addition, the Government has established the FinancialCrimes Unit, which is being merged with the Office of Revenue Protection Revenue Protection Department,to investigate and prosecute money laundering offenses. The OPR has received technical assistance fromthe Financial Sector Reform Program, including the provision of training and study tours to Canada.Although the Unit currently reports to the Ministry of Justice, it is in the process of being transferred to theMOFP.

The Bank continues to remain engaged in the areas of financial sector accountability and transparency. TheSecond Bank Restructuring and Debt Management Loan (Loan 71 50-JM) was approved and madeeffective in late 2002 and supports (a) the resolution of financial institutions; (b) phase-out of the crisismanagement agency; (c) the restructuring and management of the public debt arising from the resolution ofthe financial crisis; and (d) regulatory, and supervisory reforms in the financial sector, and improvements inthe financial infrastructure for renewed bank lending.

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4.3 Net Present Value/Economic rate of return:Not applicable.

4.4 Financial rate of return:Not applicable.

4.5 Institutional development impact:The institutional development impact of the project is rated as being modest. Because of the very nature ofthe operation -- as an emergency intervention which counted on ongoing policy reform efforts underway bythe Government -- the ERL did not specifically support medium-term institutional development.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:The ERL was designed to mitigate the macroeconomic impact of four key factors outside the control of theGovermnent:

* Exogenous shocks. The ERL directly responded to exogenous shocks related to the events ofSeptember 11, 2001 and the domestic economic impacts to a foreseen (and realized) drop on tourismrevenues.

* General economic slowdown. The general slowdown in the world economy, particularly the economicdownturn in the U.S., has dampened the number of tourist arrivals and decreased fiscal revenues. Ingeneral tenns, perceived travel risks regarding air safety in the U.S. and threat of additional terroristattacks has also constrained growth in tourist travel.

* Floods. The November 2001 flooding was an added factor that necessitated the preparation of the loan,and heavy rains and additional flooding in St. Elizabeth's and St. Andrew's Parishes have continued.

* Civil Disturbances. The operation was prepared in the wake of civil disturbances in June 2001.

Since the disbursement of the ERL, the Government's ability to fully realize the impacts of the fiscal andfinancial sector reform efforts it has undertaken have been stymied by some of the same problems:continued global and regional economic malaise, the continued irnpact of terrorism on the tourism sector,and further flooding and natural disasters which have required fiscal mobilization on the part of theGovernment.

5.2 Factors generally subject to government control:The government was responsible for the satisfactory fulfillment of the prior policy reform actions agreedduring the preparation of the ERL and has maintained its overall policy trajectory, with no backtrackingand significant progress towards the areas of medium-term policy refonr identified. In addition, the ERLhas supported the establishment of a constructive dialogue with the Bank which has furthered reform andlending arrangements in other sectors.

5.3 Factors generally subject to implementing agency control:As a single tranche disbursement, there were few factors under the control of the implementing agency afterloan effectiveness and the complete disbursement of the ERL.

5.4 Costs andfinancing:Not applicable.

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6. Sustainability

6.1 Rationale for sustainability rating:The sustainability of the reform program supported by the ERL is rated as likely. All indications point to acontinued path of fiscal discipline and sound macroeconomic management, but the continued vulnerabilityof the economy to exogenous shocks could undermine the Government's adjustrnent efforts.

6.2 Transition arrangement to regular operations:Nearly all the policy reforms delineated under the loan had been in progress prior to the approval of theERL and comprise aspects of the strategic objectives of the Government within each of the affected sectors.A number of policy reform actions are supported by ongoing and planned Bank sector interventions.

7. Bank and Borrower Performance

Bank7.1 Lending:Given that the operation intended to address urgent fiscal needs and reflecting the extremely short period oftime in which the Bank team was able to operationalize the Government's reform activities, Bankperformance during preparation is rated as highly satisfactory. In order to be responsive the client's needsto mobilize resources in the aftermath of the events of September 11, the team fielded a mission inmid-November, presented the operation to the Bank's Board of Directors on December 20, and theoperation was made effective on December 21 and immediately disbursed. The operational documentationis of high quality, despite the compressed timeframe in which preparation took place. Further, the teamevaluated a series of instruments, including an investment operation and an Emergency Recovery Loan, andin retrospect, the choice of instrument was the appropriate one given the objectives of the operation.

7.2 Supervision:Bank supervision is rated as satisfactorv. Since the intervention comprised a single tranche creditsupporting important aspects of the Government's overall development agenda, preparation of the CASprogress report and sectoral operations took the place of specific supervision of the ERL.

7.3 Overall Bank performance:The Bank's overall performance was satisfactorv. This rating is based on the responsive and rapid supportto the Government and the important impact that the operation had on ensuring that the Government wasable to maintain its development agenda and avoid major deviations in the areas of policy action supportedby the Bank. In large part as a result of the ERL, the Bank prepared a CAS progress report in September2002, extending the period of the 2000 CAS by one year and ensuring that the remaining areas of Banksupport to the Government development agenda be delivered.

Borrower7.4 Preparation:Highly satisfactorv. The Borrower acted quickly to identifying its needs, clearly articulating its view of thesuitable instrument for addressing its macroeconomic and fiscal imbalances, and working with the Bankteam to put together this operation in an extremely short time period.

7.5 Government implementation performance:Satisfactory. The Borrower has satisfactorily completed nearly all policy reform actions, especially inregard to maintaining social sector expenditures, has not backtracked on important reform measures, andhas made significant progress in a number of areas towards the medium-term policy actions identified in theERL Program of Action Matrix.

7.6 Implementing Agency:Not applicable.

7.7 Overall Borrower performance:

Given the policy reform track record and overall macroeconomic conditions, overall borrower performanceis rated as satisfactory.

8. Lessons Learned

Suitability of instrument type. During preparation, a critical issue centered on the type of lendinginstrument to support the Government during its period of fiscal pressure. A multi-year investment loanwas considered and rejected due to the need for a fast-disbursing mechanism that would provide theGovernment with adequate resources to meet its budgetary needs. An Economic Recovery Loan (preparedunder the auspices of Operation Policy 8.50) was also considered, but the the instrument selected providedthe Government with greater the financial flexibility to ensure that social spending, especially in health andeducation, would not be reduced during the adjustment period.

Appropriateness of lending conditions. The loan delineated a number of policy reform "prior actions"across a number of sectors -- some of which were indicated as conditions of Board presentation and otherswhich were not. The ICR finds that most of these actions were appropriate and consistent with theobjectives of the operation, though the breadth of the reform program (which ranges from HIV/AIDS toprivate sector participation in the airports sector to a hazard mapping pilot) in some ways detracts from thecore message and objective of the operation, to support macroeconomic stability and maintain socialefforts. Future operations might consider a less comprehensive set of prior actions, especially those whichare not considered requirements of Board presentation or Effectiveness, and give the impression of"window dressing". Nonetheless, the operation achieved important results not necessarily envisaged at thetime of preparation, and became as a useful mechanism to further reform efforts supported by other Bankoperations and to pace the way for future engagement in areas of Public Sector Modernization, forexample.

Adequate coordination with other IFIs. At the time of the loan, the Government of Jamaica could haveobtained additional resources from the IMF, but the entry of the IMF at the time might have providedinvestors with a negative signal, indicating that the macroeconomic and fiscal situation was much worsethan anticipated. Notwithstanding, the IMF extended its Staff Monitoring Program for a third consecutiveyear, which it normally avoids without a larger financial involvement. This program has had the positiveeffect of creating the environment for more rigorous monitoring of the macroeconomnic framework, whichhas helped limit possible excesses that may occur during an election year.

9. Partner Comments

(a) Borrower/implementing agency:EMERGENCY ECONOMIC REHABILITATION LOAN

IMPLEMENTATION COMPLETION REPORT(Loan No. P7493 JM)

I. BACKGROUND

Between 1997 - 2001 Jamaica made considerable progress in stabilizing the economy andundertook many needed structural adjustment programmes. This was reflected in the strong

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efforts that were made in fiscal year 2000/01 which resulted in the stabilization of the debt6/GDPratio levels, a resumption of growth and increased confidence in the Jamaican economy bydomestic and international investors. Macro-economic developments up to September 2001 wereconsistent with the achievement of more rapid growth in GDP, improving fiscal operation andeasing of monetary conditions. The strong fiscal effort was accompanied by prudent monetarypolicy, which led to the maintenance of single digit inflation and facilitated an orderly adjustmentof the exchange rate. Public sector reform initiatives continued and there was further restructuringof the financial sector.Satisfactory progress was made in the calendar year.

However this was to be short-lived, as by the summer of 2001, Jamaica was faced with a series ofunanticipated shocks, which considerably complicated the economic situation. Amnong these were;the dramatic decline in travel and tourism following the tragic September 11 events in the UnitedStates, the extensive damage done to critical infrastructure (roads) and crops as a result of heavyrainfall and floods associated with Hurricane Michelle and the negative effects associated with theJuly riots in Kingston.

These shocks affected key economic variables and this meant a forecast decline in governmentrevenues and an increase in expenditures as the Government attempted to deal with the falloutof the shocks. The shocks were also far more severe than had been expected when theGovernment was laying out its economic programme for fiscal year 2001/02.

To address these challenges the Jamaican authorities designed and embarked on an overallrecovery and rehabilitation plan to put the economic programme back on track. As part of theplan the support of the World Bank was sought, this led to the Emergency EconomicRehabilitation Loan.

II. LOAN OBJECTIVES

The main underlying objectives of the Emergency Economic Rehabilitation Loan Program was toprovide support to the Government of Jamaica's efforts of (i) bridging the fiscal gaps generated bythe shocks, (ii) maintaining spending in key social programs and rebuilding damagedinfrastructure (iii) supporting private sector led tourism and related economic activities and (iv)improving overall governance in the country.

More specifically, the loan was intended to support the Government of Jamaica' s EmergencyRecovery Program of actions in the medium term, in the following areas:

(1) Maintaining Macro-economic stability - maintaining internal and external balance despiterecent shocks (economic and climatic)

(2) Protecting the most vulnerable population groups from catastrophic income loss via safetynets;

(3) Addressing high unemployment through increased labour market flexibility and improvedprotection for the unemployed;

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(4) Maintaining basic health care services and mount a more intensive effort to combatHIV/AIDS;

(5) Maintaining efficiency outcomes in education;

(6) Enhancing Jamaica's competitiveness in the tourism sector;

(7) Reducing the vulnerability of the impact of natural disasters;

(8) Assisting communities affected by recent flooding

(9) Improving Governance and accountability of public enterprises;

(10) Accelerating efficient private participation in infrastructure;

(11) Rationalizing the structure of Government agencies so as to improve both effectiveness andefficiency;

(12) Improving financial management within the Government

(13) Further Strengthening public sector procurement in accordance with the recommendation ofthe CPAR Action Plan

(14) Further Improving Financial Sector Transparency.

III. BANK SUPPORT:

Overall, the loan programme supported a centrally directed and demand driven approach, whichhas become characteristic of all World Bank projects administered in the 1990's.

Identification & Preparation: Pursuing a Staff Monitored Programme as agreed with the IMEprovided a solid macroeconomic underpinning in the formulation of the loan programme. and inobtaining a clear understanding of the components. Consequently, the Government of Jamaicawas able to work closely with the Bank in preparing the Project design.Close consultations and coordination were also held with the IADB, which provided a similaramount of fast disbursing assistance through modifications and advances of its operations forsocial safety nets and the financial sector. The Bank also coordinated closely with the CDB, whichprovided some measure of financing, along with other initiatives.

Appraisal: The Bank, the IMF and the IADB were involved in the appraisal process and suitableexpertise was provided during consultations. The appraisal and project design were sound. Theimplementation plan was detailed and contained achievable policy outcomes.

Supervision: Supervision by the Bank was adequate. This mainly involved having consultationswith the Ministry of Finance and Planning and receiving status updates/progress reports and/orclarification on certain issues.

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IV. ACHIEVMENT OF PROGRAM OBJECTIVES

(i) Maintaining Macro - economic stability

The Government of Jamaica continued to meet the targets as agreed under the Staff MonitoredProgramme.

(ii) Protecting the most vulnerable population groups from catastrophic income loss via safety nets

In order to protect the most vulnerable population groups in the country the Governmentcontinued to administer its main Social Assistance Programmes and maintained its level ofexpenditure in these programmes.

(iii) Addressing high unemployment through increased labour market flexibility, and improvedprotection for the unemployed

Remarkable progress was made in this area:

* Discussions continued by the Joint Select Committee of Parliament as it concerns theintroduction of Flexi- Work arrangements.

* Amendments to the Labour Relations and Industrial Disputes Act were passed andhave been incorporated into law.

* The Electronic Labour Exchange was made fully operational.

* The National Community Development Project was developed and it incorporatedemployment generation as a criterion for selection of projects.

* JSIF's 2002/2003 Operational Manual indicated that community based socialprogramme was being targeted to the most vulnerable, shifting focus to the 4thQuartile.

(iv) Maintaining basic health care services and mount a more intensive effort to combat HIV/AIDS

Programmes for maintaining basic health services (inclusive of immunization and maternal/childhealth programmes were maintained and initiatives continued for the implementation of aneffective HIV/AIDS strategy.

(v) Maintaining efficiency outcomes in education

In an effort to maintain the projected efficiency outcomes in education:

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* Expenditure levels were maintained for basic education;

* The ongoing programme of providing subsidies for examination fees for poor students wascontinued.

* The Govermnent introduced an initiative to pay the examination fees for all students sittingExaminations in any of the 4 subjects, English, Mathematics, Computer Studies and aScience Subject;

* Efforts were continued to provide for the expansion of secondary education;

* The Ministry of Education continued its distribution of foundation textbooks to schools.

(vi) Enhancing Jamaica's competitiveness in the tourism sectorThe Government continued to introduce initiatives to provide for the diversification of the touristbase and accordingly implemented a promotions campaign.

(vii) Reducing the vulnerability to the impact of natural disasters

Despite the failure to implement the action plan for the permanent relocation of communitiesvulnerable to natural disasters, some measure of progress was made in the area. Hazard mappingwas conducted for some of the disaster prone areas and action plans were developed.

(viii) Assisting communities affected by recent flooding

Based on the various impact assessments that were done for flood-ravaged communities, planswere developed to facilitate the rebuilding of infrastructure. Major roads and infrastructure(bridges) were also re-constructed.

(ix) Improved Governance and Accountability of Public Enterprises

The Government continued to enforce the provisions of the Public Bodies Management andaccountability Act, 2001 and undertook efforts to harmonize the Act with related legislation.

Activities were well advanced to facilitate private participation in infrastructure, I:e privatemanagement of the Airports and the Ports..

(x) Accelerating efficient private participation in infrastructure

Activities were well advanced to facilitate private participation in infrastructure, I:e private

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management of the Airports and the Ports..

(xi) Rationalizing the structure of Government agencies so as to improve both effectiveness andefficiency

Considerable progress was made under this sub-component

An Action plan was developed based on the recommendations of studies conducted under thePublic Sector Management and the Public Sector Restructuring Projects andrestructuring/rationalizing activities have commenced and are well advanced in the identifiedagencies.

(xii) Improving Financial Management within the Government

Under this sub-component, which provided for improved financial management within theGovernment, the following targets were achieved.

* Activities were undertaken to upgrade the accounting and Financial ManagementMethodology and introduce procedures/measures to encompass Accrual Accounting inCentral Government.

The activities to implement a standardized state of the art web-based Payroll System forCentral Government to replace the nearly two (2) dozen disparate payroll systems that arerun by Ministries and agences was well advanced. The standardization of Payroll willgreatly facilitate the usefulness of HRMIS and other HR-related initiatives.

In conjunction with the above, the details for FMIS consolidation with Fiscal Services are beingfinalized, so that Managers and Planners that require a consolidated picture of expendituredata may access FMIS data centrally.

* The Internal Audit capabilities of Central Government were strengthened in the followingareas;

- Courses were conducted for internal auditors.

- Audit command language (ACL) software packages and personal computers wereacquired and distributed.

- The use of Standard Working Papers was introduced and is being used. Internal auditmanual containing the new standards are currently being printed and will bedistributed by December 2002.

* The establishment of active audit committees in Ministries was well advanced.

(xii) Further strengthening of public sector procurement in accordance with therecommendations of the agreed CPAR Action Plan

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Under this sub-component the approved policy objectives have been incorporated into GOJ'spublic sector procurement governing documentation and disseminated service -wide.Implementation is on going through the provision of advice to procuring entities and the generalpublic, as necessary.

(xiii) Further improving transparency, accountability and financial health of bank andnon-bank financial institutions to strengthen the financial sector

Significant progress was made under this sub-component

* Bill was drafted to address the financing of terrorist activities in compliance with UnitedNations Security Council Resolutions 1373 and 1377.

* Measures were introduced to strengthen security at all ports of entry and the nationalairline tightened its security procedures.

* An Order was issued to designate remittance companies as financial institutions under theMoney Laundering act.

* A Financial Analysis unit/Financial Intelligence Unit was established within the FinancialCrimes Division.

* The Financial Crimes Division was transferred to the Ministry of Finance & Planning butliaises with the Director of Public Prosecutions to investigate financial crimes, Moneylaundering, crimes in financial institutions and to identify and trace assets derived fromPredicate offences.

* Amendments were made to various acts regulating financial institutions, as part of thereforms to strengthen the financial sector.

* A new non-bank supervisory authority, the Financial Services Commission (FSC) wasestablished to strengthen the supervision and regulation of non-deposit taking activities.

* FINSAC was wound up having completed its task of divesting assets.

V. MAJOR FACTORS AFFECTING THE PROGRAM

The Economic Emergency Rehabilitation Loan Program was affected by:

* The damage done to the island's infrastructure (road work network) and agricultural sectorby flood rain in May 2002 and September 2002 and the resulting need for the Governmentto reallocate the already scarce resources.

VI. PROGRAM SUSTAINABILITY

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The Government is committed to its medium - term economic programme that is beingmonitored by the IMF under the Staff Monitored Programme. As a result the programme has laidthe foundation for maintaining macroeconomic stability, which will create the balance needed toaddress poverty and social pressures, especially those arising from the emergency, and furtherimprove governance, efficiency and accountability performance of the public sector.

VII. BANK PERFORMANCE

Overall, the Bank's performance in all the stages of the project cycle was satisfactory.

VIII. ASSESSMENT OF OUTCOME

The Government of Jamaica is of the view that the major objectives of the Economic EmergencyRehabilitation Loan Programme have been achieved.

IX KEY LESSONS LEARNED

A properly executed programme of this kind requires oversight of top administrativerepresentatives who recognize the tremendous importance of the programme.

(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

-19 -

Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix Projecd In last PSR Actual/Latest Estimate

Not Applicable.Output Indicators:

Indicator/Matrix Projected In last PSR Actual/Latest Estimate

End of projectNot Applicable.

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Annex 2. Project Costs and Financing

Ptoject Cost by Comonent (in US$ million equivalent)Appraisal Actual/Latest Percentage ofEstimate Estimate Appraisal

ProJect Cost By Component US$ million US$ millionTranche Release 74.25 74.25 100

Total Baseline Cost 74.25 74.25Physical Contingencies 0.00 0.00Price Contingencies 0.00 0.00

Total Project Costs 74.25 74.25Front-end fee 0.75 0.75

Total Financing Required 75.00 75.00

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Budget Support 0.00 0.00 75.00 0.00 75.00(0.00) (0.00) (75.00) (0.00) (75.00)

Total 0.00 0.00 75.00 0.00 75.00(0.00) (0.00) (75.00) (0.00) (75.00)

Project Costs by Procurement Arrangements (ActuallLatest Estimate) (US$ million equival nt)

Procurement MethodExpenditure Category ICB NCB Other' N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00_________________ __ - -(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Budget Support 0.00 0.00 75.00 0.00 75.00(0.00) (0.00) (75.00) (0.00) (75.00)

Total 0.00 0.00 75.00 0.00 75.00(0.00) (0.00) (75.00) (0.00) (75.00)

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" Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.21Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in USS million equivalent).Pcrcentage of Appraisal

Cononent Appraisal Estimate ActuaVLatest Estimate-________ _ Bank (ovt CpF. Bank Govt. COF Baak Govt, CeF.

Budget Support 75.00 75.00 100.0

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Annex 3. Economic Costs and Benefits

Not applicable.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation Development

Month/Year Count Specialty Progress Objective

Identification/Preparation11/2001 Team Leaders

Economist 2Counsel

Appraisal/Negotiation11/2001

SupervisionN/A

ICR11/18/2002 - I Economist11/22/2002 1 Consultant

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ ('000)

Identification/Preparation 20 72.4Appraisal/Negotiation 9 31.0

Supervision 0 0.0ICR 4 25.0

Total 33 128.4

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

Macro policies O H *SUOM O N O NA?Sector Policies O H 0OSUOM O N O NA

0 Physical OH OSUOM ON *NAZ Financial O H OSU*M O N O NA0 Institutional Development 0 H O SU *M 0 N 0 NAEnvironmental OH OSUOM ON *NA

Social0 Poverty Reduction O H OSUOM O N * NA0 Gender O H OSUOM O N * NAE Other (Please specify) O H OSUOM O N O NA

• Private sector development 0 H O SU 0 M 0 N 0 NA• Public sector management 0 H * SU O M 0 N 0 NAE Other (Please specify) O H OSUOM O N O NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

• Lending OHS OS OLU OHUI Supervision OHS OS OU O HU

0 Overall OHS OS O U O HU

6.2 Borrower performance Rating

• Preparation OHS OS O U OHU• Government implementation performance O HS OS O U 0 HU• Implementation agency performance O HS OS 0 U 0 HU0 Overall OHS OS OU O HU

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Annex 7. List of Supporting Documents

1. Report and Recommendation of the President on the Emergency Economic Rehabilitation Loan (ReportNo. P7493-JM), December 7, 20012. Complete operation documentation / reports on file

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Additional Annex 8. Current Economic Situation In Jamaica

I. During the last fiscal year, the economy was hit by a series of shocks including an outbreak ofdomestic violence in July, the impact of September 11 terrorist attacks on tourism, and floods in Novemberand then again in May 2002 which caused considerable damage to agriculture and infrastructure. Despitean impressive policy effort, the Jamaican economy remains highly vulnerable. The debt to GDP ratio, atabout 133 per cent of GDP, remains very high, the exchange rate appreciated by 41 percent between 1995and 1998 and has remained largely unchanged since then, which has eroded competitiveness and growthprospects. Combined with the negative impact of crime and violence and the decline in tourism receipts, theeconomy remains vulnerable, with little room for policy maneuver. Continued lack of economic recovery inNorth America and the prospect of increased crime and violence traditionally associated with generalelections are a cause for concern.

2. The Jamaican economy has been continuing on a gradual recovery path, and, despite some majorconcerns on the debt front, has recovered considerably since the domestic financial crisis began in 1996.After four years of negative growth following the financial crisis, real GDP is estimated to have risen byroughly I per cent in 2000/01 and again in 2001/02, in spite of the multiple shocks of 2001. The fiscaleffort that began in 1998/99 has been sustained. Single-digit inflation, a key macroeconomic objective ofthe Government, was achieved for the sixth consecutive year (inflation was 7.6 per cent at end-March2002, a little higher than 6.4 per cent in March 2001), largely through tight monetary policy. The exchangerate is being used as nominal anchor to help stabilize inflation, though there has been some concern aboutthe resulting loss of competitiveness. Significant improvements in private capital inflows and governmentborrowings from successful international bond issues in May and December 2001, led to a re-building ofnet international reserves to US$1.9 billion (about 23 weeks of goods and services imports) at end-March2002, an increase of over US$650 million (reserves were US$1.8 billion at the end of June). Also, S&Pprojected a stable outlook based on the Government's maintenance of macroeconomic stability.

3. However, these shocks have severely affected tourism and its related sectors, and have constrainedthe fiscal stabilization effort. Tourist arrivals for stopover visitors declined by 7.6 per cent in 2001/02compared to a growth of 6.3 per cent in 2000/01. Net tourism receipts are estimated to have declined byalmost 12 per cent in 2001/02, a combination of heavy discounting and lower arrivals. A recovery intourism which was anticipated towards the second half of 2002/03, now remains quite uncertain and theeconomy continues to be vulnerable to economic conditions in North America

4. The achievement of long-run growth and stability is to a large extent dependent on successfulpublic finance management. The fiscal deficit deteriorated in 2001/02, owing to lower revenues as well asincreased expenditures relating to the shocks described above. The economy was growing at about 3 percent from April to September 2001, primarily due to a recovery in agriculture from the previous year'sdrought, resumption of bauxite and aluminum production after a disruption in a processing plant in the US,and growth in tourism. In the second half of 2001, three major shocks affected economic recovery --violence in Kingston in July, the tourism impact of September 11 (aggravated by the slowdown in the USeconomy), and extensive floods in late November, which damaged one-fifth of Jamaica's crop acreage.Also, heavy flooding in May 2002 damaged agricultural crops and infrastructure. The macroeconomicbenchmarks prepared at the time of the 2000 CAS were also off-target -- per capita GDP growth,anticipated to be 0.7 per cent for 2000/01 and 1.7 per cent for 2001/02 (as per the then SMP), in factturned out to be negative for both years owing to the shocks of 2001 and interest rates that were higher thanforecast. The debt to GDP ratio was projected by the Government's initial (2000) SMP to decline by 8 and9 percentage points respectively in the years 2000/01 and 2001/02 respectively. It actually declined by

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about 2 percentage points over the two fiscal years, assuming corrected initial starting points.

5. The strong fiscal adjustmnent effort since 1998/99 weakened in 2001/02 due to the combined effectsof the shocks that hit Jamaica. This is evidenced by the central government budget deficit rising to 5.7 percent of GDP, a substantial deviation from the revised SMP target of 4.1 per cent, and the original target of2.8 per cent. This was mainly due to lower revenues from taxes, and increased expenditure on security,tourism promotion and flood relief, wage settlements due earlier than anticipated, and higher interest Thecentral government primary surplus declined to 8.0 per cent of GDP in 2001/02 from 11.8 per cent in2000/01, still reflecting a significant fiscal adjustment effort by the Government.

6. Public sector debt declined from 134.4 per cent of GDP at end-March 2001 to 133 per cent ofGDP at end-March 2002, lower than the over 6 percentage points decline anticipated in the May 2001SMP projection. The smaller decline in the debt reflects, among other causes, the higher fiscal deficit, issueof additional government-guaranteed bonds to finance Highway 2000, and downward revision of theend-March 2001 debt data. The continued high debt and debt service is the biggest concern for theauthorities, even as they have managed to arrest the increase in the debt to GDP ratio. On the externalfront, the debt service ratio rose from 14.6 per cent of exports of goods and services in 2000/01 to 19.2percent in 2001/02.

7. There has been a downward trend in interest rates, with the six-month treasury bill declining from16.9 per cent at end-March 2001 to 14.3 per cent at end-March 2002, but have since risen, in large partdue to the Government's efforts to defend the exchange rate.

8. After a marginal depreciation in 2000/01, the real effective exchange rate appreciated by 4 per centin 2001/02-compared to 1995, the real exchange rate has appreciated substantially and has erodedJamaica's competitiveness and its prospects for growth, even as it has helped lower inflationaryexpectations. Lower export earnings (due to lower prices on bauxite and aluminum), a decline in tourismreceipts and increased investment income outflows have resulted in a widening of the current accountdeficit from 5.7 per cent of GDP in 2000/01 to 8.0 per cent of GDP in 2001/02. This occurred despite a 17per cent increase in remittances to US$986 million in 2001/02. The rising trend in the current accountdeficit is a cause for concern, since a very significant part is financed by foreign direct investment insectors such as hotels and telecommunications, where the investment momentum may not continue at itspresent pace.

9. The Government aims to accelerate growth to 2.5 per cent through continued fiscal consolidation,macroeconomic stability and structural reforms. The primary sources of growth include recovery inagriculture, tourism and mining as well as continued modest growth in services, particularly in theteleconimunications sub-sector. The Government has comnmitted itself to strong fiscal adjustments,including measures to improve tax compliance, reduction in waivers on taxes and fees, and restraint inexpenditures on wages and salaries. The central government deficit is projected to fall another 3 to 4 percent of GDP and the central governnent primary surplus to increase to 10.4 per cent of GDP (public sectorprimary surplus to 11 per cent of GDP). However, the overall public sector deficit is expected to remainhigh at 6.6 per cent of GDP (6.8 per cent in 2001/02), due to a projected increase in the Bank of Jamaicaoperating loss. Continued sources of economic fragility, reflected most directly in the fiscal deficit, haveincluded unanticipated expenditures in the wake of flood events, weaker than expected tourism receipts,election year spending, and revenue collection efforts which have no met expectations.

10. A tight monetary policy, and supportive exchange rate policy is to be maintained to keep inflationat less than 7 per cent for 2002/03. While the current account deficit is expected to increase to 8.2 per cent

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due to higher oil prices and a slower than anticipated recovery in tourism, net international reserves willremain high at US$ 1.6 billion at end-March 2003 (18.8 weeks of imports of goods and services).

Table 3: Outlook for Selected Economic Indicators under the Authorities' Program

Key Indicators Actual -------------- Projection -------------

(in % unless otherwise indicated) 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

OutputGrowth of Real GDP 1.1 1.1 2.5 2.5 2.5 2.5PricesInflation rate (CPI end of period) 6.4 7.6 6.5 7.0 7.0 7.0Interest rates (180-day T-bills) 16.9 14.3 14.0 14.0 13.5 13.0Average exchange rate (LCU/US$) 44.06 46.50 - - - -

Public Finance (% of GDP)Total public debt(netofintra-public- 131.9 130.6 125.5 121.3 114.7 106.9sector debt)

Total public debt/I 134.4 133.0 129.5 123.3 116.4 108.4Public sector prinary balance 12.2 8.6 11.0 11.1 11.3 11.3Central government balance (adjusted)/2 -5.5 -5.7 4.4 -3.2 -1.7 0.0ExtemalCurrent account/GDP -5.7 -8.0 -8.2 -7.6 -7.3 -7.5Net international reserves (USS m) 1286 1942 1600 1676 1784 1957Debt Service/Exports of G&S 14.6 19.2 30.1 19.3 23.8 24.21. Includes resolution of Bank of Janaica losses. See footnote 6 in the text.2. An expenditure of about 0.6 percent of GDP is anticipated to address the May 2002 flood damage. However, this has yet beenincorporated into SUP tagets for 2002/03. See footnote 4 in the text.

11. The key development challenge remains the resumption of sustainable growth and this will requiresustained policy effort on improving infrastructure services, labor market reform, tackling crime andviolence, imnproving agricultural productivity, reducing vulnerability to natural disasters, ensuringenvironmental sustainability and continuing progress on social sector reforms. A key factor in the successof the reforms thus far has been the strong ownership and commitment to the reform agenda on the part ofthe Government, which has allowed it to maintain its reform momentum despite external shocks and fiscalpressures.

12. Despite considerable policy effort, Jamaica has yet to realize its full potential for privateinvestment and growth. On the macro side, the Government's sustained policy efforts have stabilizedsomewhat the environment for private investment with single digit inflation, though the decline in interestrates has been modest and not at the levels targeted in the 2000 SMP. On the structural side, theGovermment has made very good progress on the financial sector agenda, but much remains to be done inthe other major areas of improving infrastructure services and labor market reform. One aspect ofinfrastructure reform is increasing private participation in the sector, which will assist in relieving somefiscal pressure as well.

13. Despite efforts to diversify the Jamaican economy, its dominant economic activities - bauxitemining, tourism and agriculture remain natural resource based. Periodic natural disasters, including recentfloods, highlight the critical importance of safeguards to protect the island's inter-dependent eco-systems.While Jamaica has made some progress towards achieving some of the internationally agreed goals relatingto the environment, a fairly significant agenda remains, in particular, flooding and soil erosion due to lossof forest cover, inadequate treatment of sewage and disposal of solid wastes, the deterioration of the coralreefs due to land based pollution and flooding due to blocked drains caused by illegal dumping in gullies,

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rivers and open lots.

14. Jamaica has had an impressive record of poverty reduction since it began monitoring livingconditions in 1988, in spite of an unimpressive growth record. After dropping very significantly to 19.9 percent in 1997, the poverty ratio has stabilized around the 16-17 per cent level, and was 16.8 per cent in2001, down from 18.7 per cent in the previous year. At this level, the ratio is below that of manycomparator countries, and part of the challenge for Jamaica would be to consolidate these gains in povertyreduction, strive to reduce rural poverty (much higher at 24.1 per cent) and reduce the incidence of extremepoverty. Social indicators for Jamaica are also comparatively high, reflecting sustained commitments tohealth and education. Life expectancy is about 75 years, enrollment in primary and lower secondaryeducation is near universal, and access to safe water and sanitation is about 80 and 99 percent respectively.Despite the positive record, Jamaica faces serious problem of social tension, with young people being themost seriously affected, both as victims as well as perpetrators. High unemployment and early schoolleaving among youth are strong factors.

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Additional Annex 9. Coping with Shocks In the Specific Context of the Jamaican Economy

1. The Jamaican authorities have taken proactive measures to redesign and refocus social securityprograms to improve efficiency in protecting the poor and vulnerable groups, especially necessary in thecontext of the shocks the economy to which the economy has been subjected over the last year and a half.Inplementation of these reforms, which began in 2001, include the merging of three social assistanceprograms, introducing a new household-based targeting mechanism, and improving program efficiency ofeducation and workfare programs. The Bank supports this reform through the Social Safety Net Project,and the initial pilot of the Conditional Cash Transfer to be implemented nationwide with about 236,000beneficiaries expected to be enrolled by mid 2003.

2. However, the economy's vulnerability to shocks, combined with the necessity to stabilize inflationand exchange rates, the high debt overhang and large current account deficit limit the Government's optionsto protect the most vulnerable sections of society from the painful adjustment necessary to achievestructural reform.

3. The Caribbean Economic Overview (2000) provides a rigorous framework in which to understandthe sources of different kinds of shocks, and the various options that can be used to address the negativeimpact of these. Without replicating the analysis, the three main options are market insurance,self-insurance and self-protection. Where all these fail, or are insufficient, outside support may becomeessential.

4. The model outlined below is an amalgamnation of many different kinds of hypotheses about howeconomies work: Hick's IS-LM, the Mundell-Fleming Model, and the monetary approach to the balance ofpayments. The idea is to demonstrate the impact of various policies on key macroeconomic variables, in acomparative static framework, and given the constraints imposed by the specific situation in Jamaica on theoptions left open to the policy makers.

Stabilization Policy For Jamaica

5. There are three components to any stabilization program. First, securing sustainable extemalfinancing; secondly, adopting demand restraining measures consistent with available financing and thirdly,proceeding with structural reforms to promote long run growth. In the Jamaican context, these goals are tobe achieved under the constraints of high indebtedness, a negative fiscal surplus, high current accountdeficit and the necessity to maintain exchange rate stability given the need to preserve inflation atsingle-digit levels.

6. Additionally, priority must be given to at least maintaining, if not increasing social spending.Jamaica has experienced civil disturbances as a result of the special vulnerability of the poor to externalshocks, and also faces high crime rates and unemployment, particularly among the young (see Youth andDevelopment in the Caribbean, World Bank, 2002). The second component of the typical stabilizationprogram need not be compatible with reducing the pain of the structural adjustment for the poorest andmost vulnerable, and providing an imnpetus to the important target of greater social equity.

7. The purpose of the emergency rehabilitation loan in this context, was therefore to provide thenecessary protection to the most vulnerable, or at the least, to ensure that social spending is not sacrificedto the long-run priorities of stabilization and structural reform. The economic rationale behind the provisionof outside support in the face of extemal shocks is outlined in World Bank (2002(a)) See the Caribbean

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Economic Overview: Macroeconomic Volatility and Household Vulnerability in the Caribbean, WorldBank, 2002..

8. To summarize, coping with shocks involves three main policy actions: insurance (market based, orself insurance), self-protection (in the sense of reducing vulnerability to shocks ex ante) and outside support(loans and grants from the intemational community). Given the nature of the shocks -- economic, as well asnatural disaster related - that hit Jamaica over the last year and a half, neither insurance nor self-protectioncould have been sufficient.

9. To understand the necessity of the World Bank support to the stabilization program, consider theeffect of a temporary shock, such as September 11, on tourism, and hence on output. The comparativestatics based on the standard model described below, suggests that as aggregate demand falls, the currencydepreciates. Given the use of the exchange rate as an inflation anchor, an expansionary monetary policywould be ineffective in the Jamaican context since it would cause the currency to depreciate further.

10. Typically, the less flexibility the policy maker allows in the exchange rate, the greater theeffectiveness of fiscal policy. An increase in government spending raises output and interest rates, andcauses the currency to appreciate back to its old level.

11. However a consideration of fiscal sustainability, and of the current account deficit complicates theanalysis. An increase in government spending that worsens the fiscal deficit and public debt, also worsensthe current account deficit by causing the exchange rate to appreciate. The increase in the interest rate, thetraditional "crowding out effect", hinders the recovery of investor confidence. Considerations of exchangerate stability must be tempered by the need to maintain flexibility given the adverse trade balance. At thesame time, targeted spending increases are essential to protect the poor from the worst consequences of theshocks.

12. This provides the rationale for outside support in the form of the emergency rehabilitation loan.Given the constraints on Jamaica, a combination of monetary and fiscal policy measures that leaves theinterest rate, inflation and exchange rate stable without throwing debt reduction off-track and cutting socialspending was unlikely in the absence of assistance from the World Bank.

The Standard Model

13. The standard equilibrium model highlights the links between macroeconomic policy tools, outputand the current account. As is typical with this class of models, prices are assumed to be short-run sticky.

14. Equation (1) is the standard fonnulation of output market equilibrium, with all variables in logs.

ys =y,d = Cs(yd5sp-e)+ i, +g +TB(e Ydap-able * Ydisposable) (1)

where y is output, c is consumption (a function of disposable output), i is investment, g is governmentspending and TB= x-m is the current account balance, which is a function of output and relative prices,P/P*. The * superscript refers to the ROW.

15. Equation (2) is the interest parity condition, predicated on a given nominal exchange rateexpectation and the no arbitrage condition, while equation (3) is the asset market equilibrium condition.

r = r* + (ee-e)/e (2)

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M'P = L(r,y) (3)

where r is the interest rate,e the exchange rate,L is the money demand function, andMs/P is the money supply.

16. Given relative prices between home and foreign, we can find all the points for which goods marketis in equilibrium, that is, equation (2) is satisfied. Similarly, given the expected exchange rate, for every y,we can find some e, such that asset markets are in equilibrium. The combination at which both marketsclear is the equilibrium for the economy. The current account deficit can be found as a function of homeincome, the exchange rate and foreign income.

ComDarative Statistics

17. Note that

dy/de=(dy/dTB). (dTB/de) > 0

i.e., an exchange rate depreciation improves the trade balance;

dTB/dyfd,,awle* >0, dTB/d Ysposable <0

18. Without assuming explicit functional forms, the government spending multiplier for the small openeconomy, can be derived as:

dy/dg = I/(c'-c't'+i'+TB') > 0

where" ' "refers to the first derivative with respect to income, and "t" refers to taxes, and c: t' are bothpositive and less than 1.

19. The impact on interest rates follows from the premnise that the increase in government spending isbond financed, and that government borrowing competes in the market with private borrowing, to drive upthe cost of loans, i.e., there is a crowding-out effect that forces up interest rates. At the same time, publicdebt increases.

20. As interest rates rise, some of the increase in output is reversed. At the same time, as exchangerates are assumed to be more or less fixed, they do not respond to re-equilibrate the current account: thereis further "leakage" due to an increase in imports. However the net effect on income is positive, thoughsmaller due to the trade balanced and crowding out effects. If anything, the impact on exchange rates isnegative, i.e., given exchange rate expectations, there is an appreciation in response to the higher fiscaldeficit, which further reduces the trade balance (or increases the trade deficit). This follows from equation(2), the interest parity condition.

21. Now assume that the government spending is financed through outside support. The increase ininterest rates is effectively eliminated or reduced, which minimizes the leakage of increased output Theincrease in money supply (which can be sterilized) exerts downward pressure on the exchange rate, whichis desirable given the need to maintain export competitiveness, though this has to be balanced against the

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necessity of using the exchange rate as nominal inflation anchor. The support, in the Jamaican context theUS$75 million Emergency Economic Rehabilitation Loan from the World Bank, can be used to cushion theimpact of the shocks on the poor, by enabling the government to stay on track with its fiscal targets,stabilize output without a firther increase in interest rates, and still not reduce social spending.

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IMAGWO

Repori No.: 25181Type: i¢R