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Briefing

Briefing | Debt, exchange rate and the Fourth Industrial Revolution

Published:Wednesday | April 10, 2019 | 12:00 AMDr Andre Haughton

What is the value of Jamaica’s debt stock?

Total public debt at the end of fiscal year 2018-19 was an estimated $1.961 trillion, an increase of $8.9 billion when compared to $1.9521 trillion at the end of the fiscal year 2017-2018. Of the total, 61 per cent is foreign or external debt, while the remaining 39 per cent is central government domestic debt and main public bodies.

The depreciating exchange rate increases Jamaica’s external debt.

The increase in total debt was predominantly caused by an increase in foreign debt as a result of exchange-rate depreciations. The total central government external debt was estimated to be roughly $1.192 trillion at the end of December 2018, compared to $1.185 trillion recorded at the end of March 2018.

According to the medium-term debt management strategy, the increase was mainly caused by the depreciation of the Jamaican dollar relative to the US dollar. The central government US-dollar debt was also projected to further increase to $1.211 trillion at the end of March 2019. All the information is outlined in the Government’s Medium-term Debt Management Strategy that it prepares alongside the Budget each year.

 

What is the Medium-term Debt Management Strategy?

Jamaica’s strategy summarises the Government of Jamaica’s debt management objectives, strategies and quantitative targets over the medium to long term. The Medium-term Debt Management Strategy is important because it allows the Government to plan exactly how much money the country will borrow, and solicit this amount at a low interest rate and low risk.

 

What are the costs and risks associated with our debt stock?

There are market-related risks and costs that affect either the total value of the debt or the costs of debt servicing. According to the debt-management strategy, the main market risks are exchange-rate risks, interest-rate risks and risk associated with inflation. Given the central government’s inflation-targeting strategy, inflation risks are expected to be low. Interest-rate risks are those associated with the debt portfolio’s exposure to interest-rate changes similar to exchange-rate risk, which alters the dynamics of the debt stock and debt-servicing requirements as the exchange rate changes. There is, however, the potential for an increase in the effect of interest rates, as well as the exchange rate, but the Government has a medium-term debt plan.

What are the medium-term debt-financing strategies?

Although the debt stock remains high, Jamaica estimates that nominal debt-to-gross domestic product (GDP) ratio should be reduced to 96 per cent of GDP by the end of fiscal year 2019-20. The Government has outlined five alternative medium-term debt-financing strategies. These are:

1. Increase the proportion of domestic financing in the debt portfolio; also, make majority of these fixed-rate financing instead of flexible rate with longer-term maturity.

2. Increase the proportion of domestic financing in the debt portfolio, also make majority of these fixed rate financing instead of flexible rate with mainly short-term tenors.

3. Increase the proportion of domestic financing in the debt portfolio; with majority variable-rate financing with mainly short tenors.

4. Mainly external financing, with majority fixed-rate financing instead of flexible rate with longer-term maturity.

5. Mainly external financing, with majority variable rate with shorter-term maturity

What is important?

A distinction must be made between the stock of debt, the debt-servicing requirements and the debt-to-GDP ratio.

The debt stock is the total amount that we owe, broken down into domestic and foreign currency amounts. The debt-servicing requirements are the amounts we pay back per month, per year, or at maturity, to the bodies from which we borrow.

The debt-to-GDP ratio is the total debt divided by GDP. Although the debt-to-GDP ratio might be falling, Jamaica’s stock of debt is meandering around $2 trillion, and the foreign-currency debt servicing keeps increasing when the currency depreciates just the same. More efforts must be taken to reduce the amount Jamaica borrows on an annual basis, as well as to explore more income-generating, productive sectors that the Government might be able to earn revenue from instead of borrowing. Although efforts are being made to increase the ratio of domestic to foreign debt in the portfolio, the foreign debt-servicing requirements continue to increase. Curtailing risks associated with the exchange rate is paramount. Jamaica continues to play cautious and continues to follow through with traditional industries.

Efforts should be made to take greater advantage of technological innovation and the Fourth Industrial Revolution to benefit our children and the generations to come.

- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of The University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com.