Did IMF short-change Jamaica?
The International Monetary Fund (IMF) has slaughtered the damsel of economic growth on the altar of austerity. No one says we should not have engaged the IMF to address the constipated economy. Austerity often spells a deflationary trap.
However, given the state of the economy and the programmes offered to other countries since the signing of the agreement, it will only make it more difficult for Jamaica to grow its economy at a reasonable rate to get itself out of its coma. The agreement is skewed towards reducing expenditure and little or nothing regarding the enhancement of revenue. Obviously, it is geared towards shoring up the fiscal account.
Prudence dictates that it is logical to borrow to invest rather than paying off debtors. Rather than prioritising investment in the economy, the IMF's preference is the satisfying of bondholders. Those who negotiated this agreement on behalf of Jamaica seem to have suddenly lost their ancestral gift for compassion. This agreement does not conform to the tenet of fairness. The havoc it is causing the man in the street is devastating. It is intrinsically unfair.
Strangely enough, in 2014, Jamaica paid $138 million more to the IMF than it received from it. We are constantly being told Jamaica passed the IMF test. Look at the punitive primary surplus imposed on Jamaica. At 7.5%, it is way above what is being asked of any other country in the IMF programme. It is 4% for Cyprus, 3% for Ireland, 3% for Greece, 3% for Portugal and a puny 1% for Ukraine. One has to wonder why Jamaica is being treated this way.
Remember that while Jamaica had an external debt to GDP of 96%, Cyprus was 330%. In 2013, the Cyprus economy declined 8.7%, while in 2014, the Ukrainian economy declined 7.5% and Greece, 8.9% in 2011. Greece, Ukraine and Cyprus were in worse shape than Jamaica when they signed their agreements.
A primary surplus of a reasonable 3% would have given Jamaica a lot more leverage to alleviate its economic malaise. That 4.5% of the Budget could have gone to building a more competitive workforce and enhancing the underperforming health-care system. It seems as if the IMF wants Jamaica to become the pantomime villain.
The Ukrainian economy is projected to decline by 9% in 2015. Yet, it was given more favourable terms than Jamaica. One can conclude that the IMF wants to put Jamaica on the primrose path to oblivion.
Why wasn't a greater emphasis placed on the inefficient tax system? There is massive revenue leakage in the economy. It is estimated that 35% of taxes are not collected in Jamaica. I am sure the IMF was aware of this. It would make such a great difference if the IMF agreement had targeted a percentage of this, maybe 50%. Both the Cyprus and Greece agreements set specific tax-collection goals.
Jamaica needed a partial reduction on its foreign debt. The IMF facilitated a significant reduction of $18 billion in the Ukrainian external debt. Jamaica should have been offered a combination of write-downs, lower interest rate, interest rate holiday and an elongated grace period. Just as Ukraine was able to get terms which includes no payment until the economy grows at 3% and payment capped as a percentage of GDP, the IMF should have been vigilant in affording Jamaica similar terms. Less money should be spent servicing debt and more invested in the economy.
Without sustained demand
The IMF agreement has drained demand out of the economy. Remember that consumption is over 70% of the economy. Without sustained demand, the economy cannot grow.
This Government has a penchant for blithe optimism. It crows about the reduction in inflation, interest rate and the national debt. We must realise that optimism is contagious, but so is reality. Everyone is giving credit to the IMF and Minister Phillips for this improvement. Nothing could be further from the truth.
The massive reduction in the price of oil is the reason for these improvements. In 2014, Jamaica saved approximately US$400 million on its oil bill and is expected to save another US$600 million to $800 million in 2015. Going forward, the price of oil is expected to trade in the range of US$40 to US$60 per barrel, which should help the economy.
The myth that the current IMF programme is best for Jamaica has been comprehensively dispelled. What we are hearing is superlative-laden marketing hype. The multilateral has given Jamaica a dangerous cocktail of fiscal penury.
Unfortunately, Jamaica is exposed to the usurious moneylenders from the temple of international finance. The IMF could have given Jamaica a more realistic agreement. Jamaica is pregnant with opportunities. We just need a foundation to exploit these opportunities.
- Delroy Warmington is a global fund manager. Email feedback to columns@gleanerjm.